I lament the end of Pakatan Rakyat. I truly believe the next most significant thing Malaysia needs to get to the next level is better institutions instead of more fluffy investment into malls, hotels and expensive condominiums on some reclaimed waterfront. At the top of the institution list is a sustainable two-party system to keep everybody as honest as possible. The logical end to that is a power change every so often to shake things up, especially since Malaysia has never experienced one at the federal level. At the very least, we need to test our institutions and make them robust.

Pakatan Rakyat was that key. The three-party coalition had functioned more or less perfectly in that regard. At one time or other, it was truly the government in waiting and if things had held, we would probably have a new government within five or 10 years’ time.

But that is not to be. The dream ended too early. The greed, hubris and stubbornness we saw during the so-called Kajang Move, along with soaring egos and the resulting ugly mudslinging between DAP and PAS broke up the coalition. PAS is still in denial about the existence of Pakatan but this is not Hotel California. PAS needs to wake up to reality.

Now there is talk about building a new pact comprising DAP and PKR, along with a splinter group from PAS made up of the progressives who fell out with the conservatives in the Islamist party.

A number of people think the new coalition without PAS will be stronger. I am unsure what they mean by stronger but if the word stronger refers to the ability to win the next general election, then I think they are sadly mistaken.

The reason Pakatan Rakyat was such a force at the ballot box was its ability to attract both urban and rural voters to sit under one roof. The now PKR youth leader Nik Nazmi Nik Ahmad once responded to my criticism of the confusing ideological mix within PKR back in 2007 that the multiracial Malaysia needed “big tent politics” to bring us together. Today, I believe so too and Pakatan was the embodiment of that thought.

PAS provided the rural voters ― at least in the Peninsula ― while DAP and PKR delivered the urban ones. Rural constituencies in Sabah and Sarawak are still hard to win over, making peninsular rural seats all the more important to keep.

These voters and the parties had their differences but the commonalities between both sides were strong enough that the pact held. Under the big tent was the desire to clean up the corrupt government by changing Putrajaya. The diapers were getting smelly and we needed to change it.

And so, I am disappointed to see Pakatan get undone before we got the chance to change the diapers.

The proposed new coalition would mostly be made up of urbanites and more importantly, urban seats. I stress urban seats because I have trouble imagining PAS giving way to a new party made up of its splinter in the Malay heartland. This means the anti-BN votes would be split and in our imperfect first past the post system, that would likely mean a win for BN.

And there is always a question of PAS not joining the coalition after the overly emotional spat it is having with DAP and with progressive Islamists. All that means there are lower chances for the new coalition to win Putrajaya.

As such, I have trouble seeing the new coalition winning rural seats. No rural seats, no Putrajaya.

The new coalition would be stable with consensus easier to build maybe, but a Pakatan without PAS will be weaker.

In a fairer world, winning the urbanites would likely be enough because of the rapid urbanization Malaysia is experiencing. But the map has been drawn too skewed by putting more weight on rural voters. The playing field tilts in favor the incumbent Barisan Nasional in Putrajaya.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on June 30 2015.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
nb — some people take this as a defense of PAS, implying the party is coming out stronger from the episode. But that is neither my intention nor what I wrote. I wanted to add into this article the idea at that PAS being alone would also be weaker and worse, risks becoming provincial. Without the progressives on its side, the party will be doomed to debate petty cultural-religious issues that the world outside would laugh at, and incapable of handling big issues which can only be addressed with skills from its professional members. But I always like simple, clear-message piece. I know my one message here and I stuck with it. In any case, please do not take this article as me saying PAS is coming out stronger instead of Pakatan. The only winner from the break-up of Pakatan, ceteris paribus, is Barisan Nasional.

There was a time capitalism and communism battled each other. I am of course simplifying the conflict by a whole lot but that was how most of the world saw it then and even now.

I was at the Tate Modern in London recently. Inside the museum, there is a room filled with communist propaganda material presented as art. I stood in the middle of the room thinking how complete the defeat of communism was. So complete, the free society that we (I?) live in now allows us to appropriate hard communist material extolling the masses to embrace communist values as merely an expensive artistic curiosity.

Forty or thirty years ago, these posters were part of a culture war, which itself was part of a real war. Now, well, they are something you sell on eBay, hang on the wall because it looks pretty, or even copy and mass produce them in the name of profit.

I spent quite some time there feeling the same way I felt as if I had wandered the ruins of ancient ruins in Cambodia or Myanmar, or artifacts in the Met or the Lourve. It was a feeling of wonder of times so different from ours.

Appropriating Communism

The Department of Statistics has just released the 2014 Household Income Survey. I feel the survey is more comprehensive than the last one, although there are still a few improvements I would like to see made.

Anyway, with the release, I thought I should update an old chart I drew some time back.

Here is the latest household income distribution according to income brackets. One household comprises of 4.3 persons.

2009-2014 income distribution by income groups

I will not go deep into it at the moment but I am bit curious at the strength of income growth since 2012. Specifically, I am thinking of the pace at which share of the lower brackets has come down since the last survey.

I am less puzzled by the 2009 level because a recession happened that year. Growth tends to be stronger post recession, versus other times, under normal circumstances/recovery.

I am thinking of correcting the charts for inflation later. Maybe that would make the three-survey comparison better and make the distribution less surprising.

Yes, I know that the media has reported earlier that the median has grown to RM4,858 in 2014 from RM3,262 in 2012. But it was only after I saw the graphical representation that I realized how strong the growth was, which in turn, made me skeptical.

If you are interested in the full spectrum of the 2014 household income distribution, here it is:

HIS 2014 full income distribution by income groups

Big Brother misses a spot

London is almost always, almost everywhere under surveillance. But the authority misses a spot here. This is at the Seven Dials.

From time to time, economic statistics get revised. Usually statisticians require a lot of time to compile data and in that mad rush, certain data could left out first and included only later when everybody gets a chance to reflect. There is nothing structural about the revision. It is just about errors, corrections and business as usual.

Other times, the revisions are more structural. Some are structural only because of definition change like what happened with the concept “external debt” last year. Others include very deep changes. An example of that is the GDP rebasing exercise and it affects policy targets.

The Malaysian GDP gets rebased once every five years and the exercise consists of two parts: rebasing and revision.

The rebasing itself is simply a manipulation of index but the more significant part of the exercise is the revision that include/exclude of new/old sectors. Strictly speaking, the change in the composition of the GDP is not rebasing but instead, it is a structural revision. It is really the revision that makes rebasing such a big deal.

The revision is a problem for any policy with GDP-ratio targets as it can make such targets quickly irrelevant. Since Malaysia structurally revises its GDP once every five years (for instance, from 2010 to 2014, the GDP base year was 2005. For 2015 till 2019, the base is 2010), any GDP-related target formulated in 2013 for instance could become problematic in 2015 when a new GDP series is used.

Here are two examples.

First is the 55%-to-GDP debt limit that the Malaysian government maintains. Notwithstanding the off-the-budget spending criticism as well as the fact that the limit itself is a paper tiger and assigned arbitrarily, the government promises to keep its debt below 55% of GDP. Previously, a lot of people were worried that the government would breach the limit. Not so much now and this is largely because of the revision.

As you can see, the old GDP series (with the 2005 base) has the government cutting it close but under the 2010 GDP series, there is a lot of space still for fiddling around:

Effect of GDP revision on Malaysian debt limit

The implication? It gives the government more room to borrow just because the GDP statistics have been revised upward while allowing the government to keep to its words.

Another example is the fiscal balance of the federal government. You can see, the Malaysian fiscal deficit ratio is slightly lower under 2010 GDP series compared to the 2005 series.

Effect of GDP revision on fiscal balance

The ratio changes are not trivial from policy perspective.

In the case of deficit, previously thought to be a severe policy under one GDP series might not be so severe under the other after all. For instance, the federal government recently revised its deficit target from 3.0% to 3.2%. But 3.2% deficit under the 2005 GDP series is harder to achieve than it is under the 2010 GDP series. If the government sticks with the 3.2% target after the rebasing/revision, then the government could have higher absolute deficit and actually borrow more than it would have if there was no rebasing/revision exercise.

To put it simply, the goal post moves and it becomes larger.

This is part of the reason why I prefer to target deficit on government revenue instead of  on GDP.

I suppose the other way to correct for this is to tighten those targets every time there is a rebasing exercise.

And there are other policies beside fiscal that look at GDP-ratio too.

I think the revision would become less of an issue if it is done every year. The problem with doing it once every five years is the sudden jump, which can throw a lot of targets into questions. Policymakers make targets simply on incomplete and dated data. In fact, any target made based on the status quo would be softer than it looks like.

A yearly revision would solve that and make any GDP-ratio target more robust.

I had a short consulting stint once long ago with a small firm. I think I can say that a lot of consultants like sexy terms but the one phrase that comes to my mind today is “analysis paralysis”: the analysis goes on and on in an infinite loop, leaving no space for action at all.

Analysis paralysis is becoming an excuse to do nothing as we face a refugee crisis in the Andaman Sea. Since the crisis is complex, there are so many questions begging an answer.

Should we let them in? Where would we house them in Malaysia if we do? How long should they stay? Should Malaysia bear the cost alone? Should they be allowed to work in Malaysia? Should someone else take them later? Should we not put pressure on Myanmar to stop persecuting the Rohingyas, to accept the Rohingyas as equal and thus address the issue at its root cause? Would more come if we let the refugees reach our northern shores? Are most of them legitimate refugees? How do we get to the smugglers? How do we prevent this from snowballing?

Not all answers are forthcoming. As a layperson, I definitely do not have the answers. Even those in power struggle to provide any.

In the absence of clear answers, shamefully our default action is doing nothing except for turning the boats back to the open sea. Casually reading the news, we know that there are deaths as governments stand still with doors shut. They have nowhere to go as their food and water supply dwindle.

Our own government is under pressure to open up but sadly they can take heart from some members of public – be they columnists, letter writers, activists or just a voice on the internet – suffering from analysis paralysis. They want all the questions to be answered first before we do anything else beyond turning the boats away, leaving the weak and the oppressed to the sharks.

How long it will take to answer the questions, nobody knows. These Malaysians, paralyzed by questions, are so afraid of making mistakes that they must have their certainties. Do not be emotional, they would say. “Think, think!” shout the Vulcan-wannabes, effectively telling the government to stay on course.

The truth is that there will be nothing to think about when all the refugees die. Solutions that come too late are no solution at all. So I charge these Malaysians as lacking urgency.

They are those in the exam halls wanting all the time in the world to complete their papers. Think however much you want. Take your time. But when the time is up and the sheet is empty, you will get an F.

We are a relatively rich country, even as the corrupt powers that be brew their financial scandals in Kuala Lumpur and Putrajaya, even as we have poor of our own. And we are perpetually in need of workers. Our country is young and we need all the manpower to build our infrastructure. We can afford to have the refugees in while we find a solution to the mess.

But I feel the issue is never about money. Instead, we are short on humanity.

All of that analysis paralysis is just a way to hide our heartlessness.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on May 21 2015.

The idea that Malaysia needs to graduate from low-tech, low-skill sector to high-tech, high-skill sector is well-rehearsed. If you have been reading my blog long enough, you will know that I am not a fan of such narrative.

I consider it as a feel good rhetoric as if there is a switch somewhere that turns everything low-tech to high-tech where most if not everybody is a high-tech workers. I also think the narrative appeals to our xenophobia, peppering ugly racism with some kind of economic rationale as if it would make it less racist.

Recently, I came to think of yet another reason why I am opposed to the low-tech, high-tech story.

When you think of it, many low-tech sectors are the base of high-tech sectors. Without the unsexy low-base supply chain, the high-tech sector just cannot exist because these high-tech sectors depend on input of these low-tech firms.

Consider Penang with all of its Intel, National Instrument, Dell, Honeywell and many other so-called high-tech anchor companies. What support them are the smaller guys producing relatively unsophisticated components. Without these smaller guys, which are low-tech (admittedly, not as low tech as spinning cloth or harvesting the paddy field or palm oil, but low-tech nonetheless), these famous names would not be here in the first place.

If you forcefully kick these so-called low-tech out, the question is, where would the high-tech guys source their inputs? If they have to source it from abroad, would that increase their logistics cost? Would the high-tech guys move to where the inputs are?

Sure, we have a global supply chain but in many cases, like the auto sector near Bangkok and the electronics sector in Penang, it is the hubs that draw on local resources before joining the global supply chain. The existence of the hub depends on whether the economy can support it. It does not exist in vacuum. And it is the unsexy low-tech sector that provides the support the hub needs.

A lot of people who favor the narrative of low-tech to high-tech also forget in many ways, the low-tech sector is the incubator for high-tech firms. Many high-tech firms were originally producing “stupid electronics”, the basic components that require only high school knowledge of physics, chemistry or general science. But they experimented later, turning themselves from dumb manufacturers through “trial and error” to high-tech ones with actual “research and development” arms.

Globetronics for instance used to produce just LEDs and ICs for Intel in the old days. I do not think anybody would dare call LED high-tech but it went on to support higher-value products for Intel. Now, Globetronics produces multiple components more complicated that ICs and LEDs, feeding other higher-value electronics manufacturers all around the world.

This is not only applicable to the electronics industry. I cited electronics because it is a large component of the Malaysian economy.

Other I can probably cite safely is the rubber industry, specifically glove manufacturers. I have never visited these manufacturing plants and you would think making rubber gloves are so low-tech, but I know equity analysts covering several Malaysian glove manufacturers and the name Hartalega pops up as a high-tech glove manufacturer, focusing on automation and productivity.

Also, there is a reason why these glove manufacturers are in Malaysia. Southeast Asia – Indonesia, Malaysia and Thailand – are the largest producers of rubber in the world. That is such a low tech.

In Sarawak where I was several months back, without passing judging on the politics there, many big local contractors were merely cheap builders meeting Cahya Mata Sarawak’s needs. Now, firms like Shin Yang, Naim and KKB are more than just that contractor some big guys would call for petty civil work. They are not exactly high-tech but the point is that they have graduated to do more complicated structures.

Like I said, low-tech is the incubator for high-tech sectors.

Besides, it requires a big investment and experience to run big high-tech. These people, a lot of people want to run before they learn to walk. We do not have to crawl and take a hundred years to get things right but these low-tech sectors are where we can do our trials and errors, before doing our “research and development”.

Among those who oppose the TPP in Malaysia, the US is on their crosshair, always. The opposition is so US-centric that I wonder whether they are anti-TPP, or anti-US. Malaysia has signed several other FTAs in the past years and negotiating more but you do not hear any complaint against those. Among the pro-TPP too, whether it is about trade or involving some kind of geopolitical babble, more often than not, it is about the US and sometimes about Malaysia too.

Yet, Malaysia is negotiating the TPP with 10 other countries and there is hardly any question asked about what these countries want out of Malaysia and what Malaysia would get out in return. Judging from various reports, it is quite clear that what Japan wants is very different form what the US wants, never mind the exemptions requested by all countries to accommodate their domestic political reality. But there are not many questions asked on this front.

Granted, Malaysia has active FTAs with six other TPP countries — Australia, Brunei, Japan, New Zealand, Singapore and Vietnam — through the Asean trade system. There is even one between Malaysia and Chile. The TPP could very well replicate those existing FTAs. But the question I would love seeing asked and answered is how TPP would change the existing ties. Is there any new special request between these countries?

And we know, the TPP has more depth than any of the previous FTAs Malaysia has signed.

What about others that we do not have a treaty with, like, besides the US, Canada, Mexico and Peru? We would have to discuss with them from the ground up. No, there is no question asked here too.

During the Malaysia-Singapore Retreat earlier this week, Singaporean PM Lee Hsien Loong mentioned the TPP. In this video, he mentioned it at 1:11:

That was a chance to ask specific Malaysia-Singapore issues within the TPP. But nobody asked them there. I do not even see any analysis about the TPP coming from the annual retreat.

So, I think this is the area where the debate in Malaysia at least should spread out to.

There are always chatters in the background how Malaysia is growing slower now compared to years ago, mostly with the 1990s in mind. The general sentiment and popular line parroted is that country is stuck in the middle income trap as growth is too slow for Malaysia to break from the middle pack and become part of the developed world . For good measures, some would cite Indonesia and the Philippines as growing faster now, though that is not strictly true all the time.

So, the idea is that we are in for a bad time in some quasi-permanent way. Growth is slacking behind some preferred rates. Some have courageously applied the term secular stagnation, as if the troubles faced by the US, Europe and Japan are the same as Malaysia’s. I dislike using the term within domestic context.

But I have wondered for a long time now. Is Malaysia really in a trap or is it merely the plain old convergence brought by the forces of diminishing returns as explained by the orthodox growth theory.

I am leaning towards the latter answer.

An economy can never grow at a high rate forever. At the heart of the mainstream growth theory taught at most respectable universities is the idea of diminishing returns (even with the AK model and its variants, which are a step up from the famed Solow one, you can see diminishing returns given some parameters). Beyond the savings, (human) capital, technological progress and population growth that complicate the models, at the center is the idea that growth will slow down eventually as an economy becomes bigger and richer: this is diminishing returns.

Why poorer countries tend to grow faster than richer countries? Why richer ones find it harder to grow in contrast? Poorer economies have an easier time at growing because of weaker diminishing returns factor. Build a bridge and you would grow the economy by a lot. For more advanced economy, you might need to build a lot more bridges to see some growth: the bigger you are, the harder is it to grow. In the same vein, you do expect a country to grow slower the richer it becomes.

Granted, there are challenges to the mainstream theory. The convergence predicted always needs to be qualified but it is still one reason why we should be careful with the idea of middle income trap. There are alternative, in fact I think stronger explanation, to the so-called middle income trap.

Through experience, most casual proponents of middle income trap narrative in Malaysia are ignorant about the mainstream idea of growth and its links to diminishing returns. With the belief that there is no alternative explanation given ignorance about mainstream growth theory, it makes it easier for them to take the slower growth rate automatically as the proof that Malaysia is in such a trap and so we need to do something to push growth higher and faster. A politically convenient story as well, if you know what I mean.

I do not think the rate is a proof in itself. There has to be something deeper to justify the allegation that we are in such trap (with secular stagnation) instead of just because the average growth rate now happens to be lower than those registered in the booming 1990s. Before believing in the middle income trap hypothesis, we have to ask ourselves, are there something causing economic growth to slow and stuck at a low rate, or is it a natural growth process – the diminishing returns – described by the orthodox growth theory?

Because of this, I have come to think the middle income trap is at best a heterodox side note to the orthodox growth theory and at worst, an irrelevant lemma: it is a “just so” statement that is true within the larger model to trivially prove the idea of diminishing returns, rather than being a special problem by itself.

When Najib Razak first became the prime minister, he introduced us to his transformation programs in 2010. It was the Government and the Economic Transformation Programs, easier called the GTP and the ETP if anybody cares to remember anymore. On the eve of the 2011 Malaysia Day, the prime minister announced another one and called it the Political Transformation Program, the PTP, though it really appeared as an afterthought, probably included only because the speechwriter thought it sounded grand.

On that September night, the prime minister proposed to remove all emergency declarations made during the fight against the communist insurgents, relax laws against public assemblies and repeal the much-abused Internal Security Act. There were several other promises too. Notwithstanding the ominous caveats, he fulfilled his promise. Later in July 2012 and probably encouraged by the progress he made, Najib proposed to replace the Sedition Act with something else, giving the idea that more liberalization was on the way.

Enter 2013. As the general election approached, Barisan Nasional ran on the slogan “Janji Ditepati”, meaning promises fulfilled. It was not long before the counter-slogan “Janji Dicapati”, a humorous wordplay meaning broken promises, made its way to popular usage.

The 2013 BN under Najib did worse than Abdullah Ahmad Badawi in 2008. Stung by the electoral results, the conservatives within his party questioned whether Najib’s liberalization was working for UMNO. Their opinion was firmly in the negative.

Najib, losing his resolve and political capital while fretful of losing power the way his predecessor did, gave way and made multiple about faces. Among those U-turns was the direction of the political transformation program. And so, instead of liberalization, there was a noticeable reversal and a steady increase in political persecution.

The promise to repeal the Sedition Act remains a promise and in fact, it is being used more religiously now it seems with the latest case involving the arrest of several journalists from The Malaysian Insider.

New harsh laws are being introduced at Parliament that made the earlier repeal of the ISA a farce. Meanwhile, government critics are sent to lock-up as the police mete out some kind of extra-judiciary punishment while at the same time, UMNO politicians get special treatment and are free from the same ill-treatment others have received. The double standard says a lot about the ongoing political persecution however much the government denies it while hiding behind race, religion and the monarchy.

Regardless whether we agree on its efficacy, all the transformation programs have one intention in mind or at least they promised to do one thing: To push Malaysia into the wondrous modern First World from the tired old middle income grouping.

Unfortunately, the political part is subverting it. The so-called Political Transformation Program is transforming Malaysia from the verge of First World to the Third World.

We have to remember that being developed — First World, high-income nation and whatever the preferred jargons are — should be more than merely about income. Development has to be holistic and includes the sociopolitical front. Else, what we have is another old forgotten: First World infrastructure, Third World mentality.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on April 2 2015.

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