Ladies and gentlemen,
The most anticipated report of the year has come out. Before you can read them, below is one of the conditions which you must adhere to:
You are not authorised to use or rely on the Report to arrive at any conclusion [PKA Report. PricewaterhouseCoopers Advisory Services Sdn Bhd. Accessed on May 28 2009]
PwC (or is it PKA), can you go to hell please?
Whatever the results may be for the gross domestic product growth rate for the first quarter of the year, let us be clear about one thing. The two fiscal stimulus packages have only insignificant impact, if not at all, to Malaysian economy in that period.
Any effort to paint the stimulus packages as having helped to cushion the impact economic slowdown we saw in the first quarter should be received with extreme skepticism.
One has to remember that, while the first fiscal stimulus package was announced by the Abdullah administration in November 2008, there was no real spending done even as February 2009 passed us by with the speed of a tortoise. The government at that time was still scrambling to distribute money to various ministries and not actually spending it.
This has been admitted by the Second Finance Minister himself. In early March, he was reported as saying that barely half a billion ringgit from a total of RM7 billion had been spent.
Two months later — by May 12 2009 — according to a website established by the Treasury to inform the public of the status of the two stimulus packages, only a further quarter billion ringgit was spent from the RM7 billion.
Given the horrifying demand gap caused by weakened external demand, actual spending derived from the first fiscal stimulus is very much irrelevant to the GDP growth figure for the first quarter of the year.
If one insists that the RM750 million did cushion the fall that certain Ministers claimed it would earlier in the year, perhaps I am obliged to share the following analogy: it is only akin to preparing a mattress on the ground with the intention of saving a person who has just jumped off from level 88.
One also has to remember that the second, much larger, stimulus package was only announced on March 10 2009, which was already close to the end of the first quarter. Furthermore, it is impossible to believe that the second stimulus package came into effect immediately, especially accounting for the kind of lag suffered by the first stimulus package.
How much of the second stimulus worth RM15 billion of government spending has been spent is unclear. The same website commissioned by the Treasury is coy about divulging the same information it shares when it comes to the RM7 billion stimulus package. Nevertheless, experience tells us to be rational and not to expect too much.
Consider this: if the government faces trouble in spending RM7 billion even after approximately 7 months have passed, how exactly does one expect the government to spend another RM15 billion within just over 2 months?
That skepticism should be strengthened further with the knowledge that the government only began to borrow massively in April. We know that the second fiscal stimulus needs to be financed through borrowings. And we know that April is not part of the first quarter.
The best hope of making the second stimulus relevant is the RM3 billion tax cuts as well as the loan guarantees attached to the second fiscal stimulus, or the mini-budget in the language of the government. Alas, information about that is not so forthcoming for us to move beyond mere speculation.
Hence, the effect of tax cuts and guarantees notwithstanding, the effect of the two government spending-based stimulus packages has to be largely discounted if we are interested in explaining the results of the first quarter for the year 2009.
What might make the two stimulus packages all the more irrelevant is the manner which the economy behaved in the first quarter. While the jury is no doubt still out there, early indications do not bode well for proponents of government spending as the heart of fiscal stimulus.
The reason is that the economy — as indicated by various indicators — is arguably performing better with each passing month since January, on the margin. It is better in a sense it has been less bad than before; to be precise, the change of sign of the second derivative.
This happens in spite of the lack of significant interference in the economic cycle as planned by the two fiscal stimuli. The significance of this is that it may prove to those who lack confidence in the market that the economy does not desperately need government spending. This also provides a damning evident that we do not need a third stimulus package at all.
So far, the best factor to explain possible turning of the economy may be the very factor that brought the economy to a tailspin in the first place: external demand.
It is hard to resist connecting the improved local condition with the health of the blessed Chinese economy. Even in the US — another major destination for Malaysian goods — talks of green shoots are aplenty.
If the trend continues, we may see a bottoming out soon enough even without additional government spending as allocated by the two fiscal stimuli. Indeed, the chances that the economy gets better before the full effect of the stimulus packages kick in are becoming brighter now than anytime before.
As it may turn out, the billions of ringgit of government spending may only increase our public debts. That will increase the cost of borrowing in the future and possibly later, the imposition of higher taxes for all, on average.
First published in The Malaysian Insider on May 26 2009.
Visiting the shopping malls of Kuala Lumpur can be a confusing experience. It is always full of happy people with friends and lovers. And probably businesspeople with their clients too.
As I patiently await my opportunity to take a break from this crazy country, I find myself with an employment that is physically located close to Midvalley Megamall, one of the largest shopping malls in Malaysia. This means I visit the mall on every working day.
I do not notice any let up on visitors to the malls. Amid talks of pessimism regarding the economy and ugly reports, the shopping does not seem to relent.
Perhaps, Midvalley Megamall is an aberration, filled with those belonging to a certain class that is by and large not affected by the economic pain even as experts are predicting that the economy could suffer as much as 4% contraction for the first quarter of 2009. After all, the main victims of the ongoing economic slowdown are those from the manufacturing sector. Most frequenting the mall do not seem to belong to the manufacturing sector.
But I can never be sure without data. It could be that I am looking for pattern that I want to see, even if it is not there.
The Department of Statistics today confirms that the trend in Midvalley Megamall is neither aberration nor isolated. I am not dreaming. Based on year-on-year comparison, the retail trade sector actually grew by almost 8%, in defiance of other sectors.
RETAIL TRADE
1. Sales Value
The retail trade sub-sector posted an increase of 7.8 per cent from the comparative quarter of the previous year. The main catalyst was the group of non-specialised retail trade in stores (such as department stores and supermarket including hypermarket) which registered a double-digit growth of 44.4 per cent and retail sale of food, beverages and tobacco in specialized stores of 16.2 per cent. On a quarterly basis, this sub-sector contracted 1.3 per cent.
2. Employment and Salaries & Wages
The number of persons engaged rose 8.4 per cent from a year ago followed by a 9.9 per cent expansion in salaries & wages paid out. A marginal increase of 0.7 per cent in the number of persons engaged and a 3.3 per cent in the salaries & wages was recorded quarter-on-quarter. [Distribution Trades First Quarter 2009. Department of Statistics. May 26 2009]
I think the growth is likely caused by MNC hypermarket retailers’ aggressive expansion nationwide. As a person once employed in the supply chain industry, I can say with certainty that that expansion is true. The expansion of TESCO for instance and especially, was amazing. Their latest expansion plan includes a superlarge distribution center in Bukit Beruntung.
Indeed, the retail sector has been the most impressive and resilient sector so far. In the fourth quarter of 2008, it grew by over 15% based on year-on-year comparison.
It is true that based on quarter-on-quarter comparison, there is a decline but I think that is mostly due to seasonal effect.
It might have been likely that if there was no expansion, there might be a contract in the retail sector. Expansion in a way opens new market. This expansion may have overwhelm any reduction of sales faced by pre-existing outlets. In any case, this raises two questions: if the expansion factor is controlled for, would the retail sector suffer a decline in line with other sectors? Given the expansion, how good is the retail sector — which typically a good barometer of the real economy — in being an indicator of the real economy?
Regardless, that however does not explain Midvalley Megamall still. Perhaps, like I have mentioned above, class of profession plays a large factor as far as Midvalley Megamall is concerned, thus helping the sector to continue to grow in spite of the environment.
If you think of the exports as the first link in the causal chain, the resulting pile of Chinese savings is the second. Much of this savings has been by the corporate sector, which is subsidized by the government in all sorts of ways (an undervalued currency, low interest rates, cheap energy). The economic boom brought big profits, and companies held on to much of them. The government has also increased its savings in this decade by collecting more taxes and, until the financial crisis, running a budget surplus. And households increased their own savings in the 1990s, in reaction to the dismantling of many bloated state-run companies and the cradle-to-grave benefits, known as the ”iron rice bowl,” they once provided to their workers. When a Chinese citizen is rushed to the hospital after a car accident today, the first stop for the victim’s family is often the cashier’s window. Many hospitals won’t admit patients until they have paid, and many families have no health insurance. Instead, they insure themselves, by saving. [Will China still bankroll us? David Leonhardt. New York Times. May 13 2009]
Leonhardt’s article suggests that lack of social safety net encourages saving. It makes sense.
The reversed relation is interesting: does availability of safety net discourage savings?
Indirectly, this asks how does that affect consumption? Does it increase consumption?
Implicitly, this may suggest that people may be less judicious with their consumption and more happily go into debt to spend with the presence of safety net. This is so when one contrasts the situations without social safety net in China and the availability of one in the United States as described by Leonhardt; massive savings in the former and large debt in the former on individual level, on average.
I really think I want to explore this when I finally get back to school. Ah, approximately 72 days before school begins. I just cannot wait.
Read the mainstream press and it is hard to miss that the Economic Planning Unit and the Ministry of Finance are trying to market a new economic model to replace old ones. I fear that this new model is misguided and will lead Malaysia down the wrong path.
Read the mainstream press and one will find that it is popular these days to state that Malaysia needs to go up the economic value chain. Almost always accompanying that is rhetoric calling for Malaysia to graduate from its addiction to low-wage, low-skilled workers which, by and large, refers to dependency on cheap foreign labor.
Policy-wise, this has been translated into restriction on recruitment of cheap foreign labor. As proof, an astronomical levy on recruitment of foreign workers was imposed as part of the second stimulus package.
In time of economic slowdown, that particular action does not make sense and luckily, the Najib administration understands this and has decided to postpone it indefinitely. But even without a slowdown, that is no way to move forward due to uncertainty of any country’s development path.
Nonetheless, it is true that Malaysia needs to move up the value chain. We have been benefiting massively from early adoption of a liberal economy but other recently liberalized economies like India and China are finally catching up with Malaysia, and at an amazing pace.
Rapid reduction of poverty and continuous registration of high economic growth are testaments of how fast these countries are catching up after abandoning flawed economic models that ignore the importance of private property as a basis of a society.
Not only are they catching up rapidly thanks to liberalization, with their overwhelmingly larger and cheaper supply of labor, they are crowding out Malaysia and its peers like Thailand and the Philippines from the low-wage, low-skilled and labor-intensive niche. Penang, for instance, is already seeing multinational corporations migrating out from the state to Vietnam and China. This trend occurs because, among other reasons, of the availability of cheaper and larger supply of labor.
From this perspective, Malaysia is indeed losing its competitiveness; Malaysia is unable to compete in a low-wage model. If Malaysia fails to react, challenges from these low-cost countries have the potential to wreak havoc on the Malaysian economy. Fearing being pushed to the margin in the global market, Malaysia seems to be left with nowhere to go but up in the value chain.
Going up does not automatically mean actively restricting recruitment of cheap foreign labor, though. Cheap foreign labor still has roles in the Malaysian economy, even as its importance continue to diminish and even as other countries are able to excel at low-wage, low-skilled industry better than Malaysia.
This point is all the more tenable since in the long run, price equalization will happen to bring some kind of equilibrium between Malaysia and other competing countries.
The new equilibrium for low-wage, low skilled industry — perhaps especially for manufacturing — for Malaysia may be below its current level but the requirement for such industry will still exist since it provides goods or services which are hard if not impossible to trade. Somebody will have to do it.
Restriction on recruitment of cheap foreign labor is doubly unhelpful if the locals themselves refuse to take up low-wage low-skilled jobs. The restriction will create upward pressure on prices which include wages, pushing up the cost of living unnecessarily high when access to a large source of cheap labor to stabilize prices is available in the region.
In an open economy, that pressure will attract cheap supply of labor to act as a counterbalance. If that source is unavailable locally at the right prices, it will come from abroad.
That is already happening in Malaysia and the same trend is observable in the United Kingdom, where Eastern Europeans are taking up low paying jobs which the locals are reluctant to do as cheaply as the immigrants are willing. The same is true in the United States but instead of Eastern Europeans, they are from Mexico or other parts of Latin America.
A restriction on foreign labor will prevent that from happening, forcing prices and wages to go up. I feel this point must be stressed and hence, I repeat, that will inevitably cause the cost of doing business to increase.
The upward pressure on wages has been suggested as a tool to attract talents into Malaysia as an effort to take Malaysia forward beyond low-wage low-skilled economy into the realm of new economy.
This, however, confuses an increase in nominal wealth with an increase in real wealth. What is the point of being paid higher wages when the cost of living goes up accordingly, or higher?
In other words, the restriction which drives nominal wages up really makes no difference in real terms.
It must be noted that any increase in real wealth is largely due to productivity. This is not a mere opinion. Rather, it is an economic fact.
If one is less willing to believe mainstream economic theory due to the unfavorable popular reputation that economists currently suffer, then do refer to any econometric model on the matter; the correlation is strong and the causal relationship is enticing. Any effort at moving up the value chain must take this into account.
By moving up the value chain, it inevitably means greater application of science and innovation to increase productivity. A highly educated workforce will be required if the economy is to enjoy higher productivity.
In light of this, the question is not whether our addiction to cheap labor is a barrier to take the economy to a higher plane.
Instead, the questions that demand answers are: does Malaysia have a highly educated workforce; does Malaysia have the talents to fulfill the prerequisite of a high-value economy?
With a minority of its population holding a graduate degree and with an education system that seeks to brainwash its students rather than encourage critical thinking, it is a stretch to answer the questions in the positive.
That, by no means, is a reason to throw in the towel but it can help to refocus our energy from wrongfully vilifying low-skilled foreign labor to educating Malaysians better.
What is needed is an education system that demands the biggest effort from all. Schools, colleges and universities need to be liberalized to encourage development of competitive, thinking and open minded workforce, not yet more groups to be goaded for political purposes.
While these workforce is being developed, foreign talents should be welcomed and even offered citizenship.
Furthermore, just as the argument that low-cost giants are crowding Malaysia out from the low-wage, low-skilled niche, what actually guarantees that Malaysia can break into the high-value, high-skilled niche already filled with countries that with highly educated workforce?
Somehow, the rhetoric and the central planning action by the government which lead to curbs on foreign labor seems to suggest there is heavy competition in low-skilled industry but not in high-skilled industry.
”It’s crowded here, let’s move over there. Simple.” Well, it is not. While the pay off from a high-value economy is huge, it is naïve to think that there will be no competition.
Just imagine how much resources will be required to reverse the serious brain drain Malaysia has been experiencing for so long. Malaysia is way behind the curve in competition for talents. Compounding the issue is unfair practices by the government that make certain groups of Malaysia unappreciated.
If restriction of employment of cheap foreign labor is used as a stick to force Malaysia up the value chain, the danger is that Malaysia might fail to break into the high-skill niche and then finding itself with a largely dismantled low-skill industry.
With a serious lack of talent in the local economy, Malaysia might not only find itself entrenched in the middle-income trap, it might fall behind in comparison with its peers.
Unnecessary hostile position against cheap foreign labor might cause Malaysia to not have a fallback position if there is an error of judgment.
It is therefore, in my humble opinion, imperative that we ensure the ledge on the other side of the gully is properly secured before we make the jump across rather than chipping off the ledge we are still on. If we find ourselves in mid air only to realize that the ledge on the other side cannot support us, the next place we will be is at the bottom of the gully.
First published in The Malaysian Insider on May 4 2009.