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Economics

[2988] Malaysia’s 2024 sweet spot for growth

After years of economic disruptions and wild growth swings, the Malaysian economy is now in a sweet spot. Strong GDP expansion rates in the past two quarters show us as much: 4.2% year-over-year in the first quarter and then 5.9% yoy in next. Lest somebody points to base effect playing a role (indeed the large variability is still a problem), adjusted quarter-over-quarter numbers are robust as well: 1.5% qoq during first and then 2.9% qoq in the second quarter. These qoq figures are respectable because the post-Covid-19 2021-2024 median qoq rate so far is 1.4%-1.5%.

The government is quick to claim credit. To some extent, it is deserving. The Malaysian government of all colors (2018-2020 PH, 2020-2021 PN-BN, 2021-2022 BN-PN and the current PH-BN-GPS) has been trying to capitalize on fraying global supply chain. Malaysia understood of the need to move quickly as early as 2019 (or possibly earlier). But political crisis (coupled with a health and economic crises) led to policy paralysis and that crisis only ended in 2022 with PH returning to power with unlikely partners. The stability plays an important role in sharpening the minds beyond domestic partisan survival, which allows us to pursue new tech investment opportunities and boost Malaysia’s role in the global manufacturing and technological services (it is not without concerns, especially with the influx of data centers which create little jobs and consume tremendous amount of water and electricity which could push out other manufacturing industries that are not necessarily low-tech).

But in some other ways, it is also about the stars aligning involving sectoral syncing and growth normalization. To understand this, we need to go back to 2020 when many parts of the world hunkered and locked down in response to the pandemic. Yes, the pandemic remains relevant four years after it spread.

The year 2020 was the ground zero, which everything in free fall. By 2021, the pandemic was still a concern but things were improving. Yet many could not move around freely. Services—a labor-intensive sector—had a weak growth and an incomplete recovery. In contrast, the goods sector experienced a surge and production surpassed pre-pandemic levels: XBox, IPhone and a whole lot of electronics were bought and sold to keep everybody sane at home. Afterwards when the economy opened up in 2022 with all the tangible stuff that could be bought were bought (notwithstanding orders unfulfilled due to the then supply chain disruption which kept the goods sector going), goods demand growth took a break in return for heightened services: tourism, restaurants and other related sectors boomed. That is more or less the story for Malaysia, as can be seen from the goods-services growth chart below:

Some rights reserved. Hafiz Noor Shams

The Malaysian cycle for goods and services almost synchronized at the top in 2022, which in return led to the synchronized whiplash a year later. From 8.9% growth in 2022 thanks to complete reopening of the economy, 2023 GDP rose by only 3.6%. The 2023 goods market was so bad and that was reflected in Malaysian industrial production and export figures. Only the almost complete tourism recovery helped the overall 2023 economy from doing worse.

What makes 2024 a sweet spot is that it is likely a proper normalization amid further synchronization. Normalization because the gyration of growth since 2020 is finally stabilizing for both sectors. Additionally, that normalization and stabilization are bringing balanced growth since both goods and services are expanding faster at the same time (so far).

Normalization, synchronization and balanced expansion. The government under Anwar Ibrahim has done well in adapting to changing global environment and lucky at the same time. Not only has growth been firm. Global prices have been kind to Malaysia as well, leaving inflation benign. Job creations are going well. In short, economic conditions are good. I would argue this leaves the government with a lot of leeway to commit to reforms.

The question now is if the great conditions brought by the cycles would persist. There is some hope (and bad news too) for that but we cannot run on hope that much this time around. With cyclical normalization from here on and definitely in 2025, the government would have to depend less on luck and more on its own initiatives.

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Books & printed materials Pop culture Society

[2987] Outsiders, disruptions and mainstreaming

The central theme of Michiko Kakutani’s The Great Wave is simple. It is written on the cover: outsiders drive innovation and they have been the cause of various disruptions in human history. It is not a groundbreaking argument to make.

The unremarkable observation would have made the book an uninteresting read for me, except she manages to pull me back in with her comment on arts and culture, an area where she is clearly an authority. Kakutani formerly worked as a book critic at the New York Times.

She tells how those living on the margin of US society—blacks especially but also immigrant communities generally—were cultural innovators who eventually dictated mainstream tastes in music, movies, literature and comedy. They were innovators because they were less bounded by orthodoxy of the (white) majority and that the dual nature of their identity (that as a member of a minority community and as an American) allowed them to reach out to multiple sources for inspiration.

Kukatani cites a long list of authors and artists to show just how prevalent the outsider-turned-insider phenomenon is in the US. The list feels like a long must read recommendation that reminds me of another book of hers, Ex Libris, which is a list of 100 or so modern-time books that she believes worth reading.

While going through that cultural section of The Great Wave, my mind wanders to another book I read earlier this year. Chuck Klosterman’s The Nineties also has the outsider-insider theme, although it appears more implicitly within the context of the 1990s. Klosterman’s discussion is specific to the the evolution of the rock genre, which began as the favored noise among youth with marginal taste in music (in the 1950s if I recall correctly) and then turned into billion-dollar megabusiness that Kurt Cobain’s Nirvana rebelled against.

So, I find The Great Wave interesting in the sense that it is a companion to The Nineties. Kakutani provides a generalized theory that explains Klosterman’s specific cases.

Categories
Books & printed materials Politics & government Pop culture Society

[2986] Maybe it was Klosterman’s The Nineties

Klosterman’s generation may believe in something or they may not. But they more likely to believe in it, if not by too much.

That something could be almost anything and that is the attitude taken throughout The Nineties, a 2022 book written by Chuck Klosterman. That is not to say he takes no position on an issue. He does and I feel he understands the 1990s (from Gen X perspective) exactly through this prism: a prism that suggests disagreements during the decade (in the US) was never too big to matter by too much. This idea is repeated several times throughout the book but the point achieves clarity at the very end when he discusses the competition between George Bush and Al Gore during the 2000 US Presidential election.

Klosterman argues that in the run up to the election, both candidates were really standing on the same policy platform and that made it impossible for many voters to decide who should be voted in based on substantive matters. So difficult it was that Klosterman highlights that voters were deciding who to decide based on whom they prefer to have a beer with. The answer is Bush, who was more affable and less aloof than Al Gore. So similar were the two that a third candidate—Ralph Nader—became the credible second candidate, as Bush and Gore merged into one candidate in the mainstream consciousness.

Of course, things changed after the election and definitely after the 9/11 attacks. And that was really the last time politics were taken so unseriously by US voters, or so Klosterman argues. Differences since began to become so big that that kind of ambivalence during the 1990s could not exist anymore.

But the book is not primarily about politics. The Nineties mostly tries to capture the mood of the decade and that means multiple references to hit songs and major movies. While I regularly refer to Wikipedia or YouTube to immerse myself into a book, this the first time I went through Spotify to listen to songs while reading. Nirvana’s Smell Like a Teen Spirit gets an early mention as the author explains how the band from Seattle changed everything we understood about rock music. Yes, Nirvana is more grunge than rock, but Klosterman rationalizes songs such as In Bloom evolved as a rebellion against the overcommercialization of rock, which itself was pioneered by unruly teenagers in the 1950s. When rock stars of the 1990s wanted fame and wealth, Nirvana (and Kurt Cobain especially) represented a new breed of artists who despise those. It was uncool to be famous and wealthy. Feeling so guilty of his success, Cobain took a gun and shot himself in the head. There are several other songs that Klosterman goes in detail. Alanis Morissettte’s You Oughta Know. Tupac Shakur’s is another. Each has an outsized influence on the 1990s US.

Reiterating the ambivalence of the 1990s, Klosterman discusses Seinfeld in a segment of the book. It is a comedy sitcom famously about nothing. What follows is a discussion on television programming, on how many sitcoms received high ratings only because they were aired in certain prime slots and that those slots were in high demand because many viewers were too lazy to switch channels after watching something earlier. People were watching only because, to paraphrase Klosterman who in turn quoting George Costanza, “because it’s on TV”, in reply to the question why would anybody watch it. Not because it was good or anything else.

But not all fell into that logic. Some drove the market and were ‘Must See TV’. Friends did that. Here, Klosterman describes Friends in the ambivalent contradictory way: “None of the characters were supposed to be cool, so the audience didn’t need to be cool in order to understand why they were appealing.” And there is Frasier, described as “a white-collar show openly obsessed with intellectual sophistication. Characters casually joked about Jungian philosophy, Sergei Rachmaninov and Alfred, Lord Tennyson… But its dynastic grip on critics and Emmy voters galvanized a paradox: Frasier was seen as brilliant television because it focused on characters who would never watch television.”

Again, later on the author’s commentary on the Star Wars prequel that came out in 1999: “Movie critics disliked The Phantom Menace, but diehards hated it more… Lucas tried pretty goddamn hard to satisfy an entire generation of strangers who likely wouldn’t have been satisfied by anything he delivered. Did such a mean-spirited categorization bother him? Maybe. But not really.”

You get the drift.

I find the yes-no-maybe noncommittal construction as slightly offputting. Yet, beyond the noncommittal statements are brilliant assessment of the 1990s. Maybe, the decade was that complex that it is difficult to be sure what was really going on, unlike the decades after that seem to be governed more by black-or-white logic; either you’re with us or against us even in the face of ever more complex world.

Maybe, the possible lesson here is that in order to solve our contemporary divisions, we just need to be less sure of ourselves.

Categories
Economics

[2985] Malaysia’s EV policy risks running obsolete

The government has been incentivizing electric vehicle purchases and use as a way to boost domestic electrification trend. Those incentives come in the form of zero import duty, zero excise duty, zero road tax and non-tax on EV and/or related equipment, among others.

Whatever the early rationale behind these incentives,[1] changing global conditions are making these policies dated. Rising trade barriers across the world are affecting EVs adversely, especially those made in China. Regardless of the appropriateness of US and more relevantly European policy in response to China’s dominance in the space, these barriers would redirect Chinese EV volume from places with high tariffs to other economies without similar restrictions. These other economies—many of them are small-to-medium sized (like Malaysia)—might be the ones having to absorb oversupply. In other words, there is an EV oversupply coming our way.

Under a scenario where there are downward pressures on EV prices, would Malaysia’s set of incentives still make sense? I would argue no, especially for the retail side of the equation.

There are several reasons for the negative answer.

First, the downward pressures on prices caused by manufacturers’ need to reduce their inventories would likely be good enough to encourage domestic electrification on the road.

Second, the prospects of higher petrol prices caused subsidy rationalization exercise should already be a big incentive enough for road users to migrate from internal combustion engine to EV. This is of course depending on the government going through with the rationalization exercise.

Third, the coming oversupply would be an opportunity for the Malaysian government to shift the burden of encouraging EV from the public towards private manufacturers. After all, these are private EVs we are talking about, not public transport. And even better, the burden would be shifted towards foreign manufacturers, which many of these manufacturers originating from China.

Fourth, the government faces fiscal pressures and the migration towards EV would be a chance for Putrajaya to reap the migration dividend in the form of more duty and levy revenue. This does not mean raising those duties and levies to punitive level. It could mean just normalizing it (i.e. undo the incentives). That additional revenue could be used to either finance electrification facilities, or other pressing needs in education, health or even defense… or finance public transport projects instead of boost private vehicle ownership.

If it were up to me, I would quickly cut short these incentives. Immediate reversal of policy is likely too disruptive to be good and that suggests undoing it by end of 2024 sounds reasonable.

Otherwise, these EV incentives do have sunset clauses. I would recommend letting them lapse. But waiting until 2025 might be too long for Malaysia to benefit for changing global landscape.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Given early (still?) focus on luxury electric vehicles and the government being overly focused on retail side of EV supply chain, the policy might have been captured by what I would call hobbyist lobbyists, i.e. rich men who take electric vehicle as a symbol of prestige.

It definitely didn’t help with the perception when early major lobbyist was an association named Malaysian Electric Vehicle Owners Club.

If the policy had not been captured, it would have focused early on the mass market, allowed leeway for cheap but reliable Chinese brands instead of the likes of Tesla, and also would provide better stress on industrial rather than retail.

Categories
Conflict & disaster Politics & government Society

[2984] A list of challenges for Malaysia

I have been thinking about how fragile Malaysia could be lately after remembering episodes when the country looked brittle. The 1965 breakup when Singapore became independent is an example but there are other times that fit the bill: the Emergency, the 1969 riots and possibly even the crises of the late 1990s.

With the world changing rapidly, I do not think the idea of Malaysia remaining as a country could be taken for granted. Whether we survive as a country depends on how we identify and navigate various challenges. These challenges do not necessarily lead to a national breakup, but could lead to the diminution of the country in terms of economics or prestige.

Many of these challenges are actually interlinked and solutions would have to be thought through multidisciplinary lens.

For my own benefits, I am listing down those challenges here:

  1. Territorial integrity.
    1. Loss of control over the waters of Sabah and Sarawak. This concern comes from China’s presence in the area. Unlike other Asean claimants, China is special due to its aggressiveness, expansive claims and refusal to abide by rules all Asean claimants largely adhere to. A significant loss of territory would involve a significant loss of petroleum revenue to all Malaysian parties, leaving revenue claims between the federal and state governments a moot point. And unlike Malaysia’s previous dispute with Singapore with respect to areas surrounding Pulau Batu Puteh, or with Indonesia with respect to the seas around Sipadan, the China trouble would likely involve the use of force and violence.
    2. The balkanization of Malaysia, with Sarawak and Sabah exiting the federation as having the highest probabilities. There has been growing secession calls based on years of unhappiness relating to unequal partnership between the federal government and the two states. One positive aspect from this is without the Borneo states, Malaysia would likely stop having serious disputes with China and that would free up the rump Malaysian state from a tricky geopolitical problem. But this would also mean that smaller Malaysia would lean towards China more.
  2. War in Asia-Pacific. A war that matters would likely involve China and the US. In this war, it would be hard to stay neutral.
  3. Foreign political influence in Malaysian society. Foreign influence is inevitable for a small, open and diverse country that Malaysia is, with a largely free and democratic environment. But with risks of international conflicts rising (prime examples include geopolitical rivalry between the China and US, wider conflict brought by Israel in the Middle East which would inflame sentiments in other parts of the world, war in the Taiwan Strait and conflicts involving non-state actors particular those relating to jihadist and adjacent groups), foreign actors would attempt to sway domestic public opinion, domestic elections and through that, political decisions that Malaysian national leadership make. There have been domestic corruption cases with links to foreign governments and high offices had been penetrated or compromised by foreign agents before. Additionally at the societal level, this could further reduce trust between ethnic groups who generally would be affected by certain international issues differently.
  4. Fragmentation of the global supply chain. This could go either way. Malaysia for the longest time has been deeply embedded in the global supply chain and this had brought the Malaysian industrial revolution of the 1970s-1990s. But it also caused the 2000s premature deindustrialization following China’s entry into the WTO in 2001. At the moment, Malaysia is benefiting from changes brought by heightened China-US rivalry (plus their respective allies) but the way Malaysia is handling it—playing both sides and creating an imperfect balance—might risk a blowback from one side or the other. We have already seen certain Malaysian companies slapped with sanctions by the US, which spells doom for those specific businesses. There are chances that Malaysia needs to choose which supply chain we want to participate in, and lose access in the other.
  5. Fiscal challenges. To address changes in the global economy and global politics (along with the retreat of the free trade consensus), the Malaysian state needs to have the necessary capacities and capabilities in various fields: education, health, defense, infrastructure, energy, various industries, etc. To develop and maintain those capacities and capabilities, the state must have the required fiscal firepower. But Malaysia has a weak-to-okay fiscal space owning to the federal government’s reluctance to address taxation issues decisively while facing growing decentralization demand along with rising expenditure requirements. This reluctance is primarily due to electoral considerations, and not so much the inability of the economy to generate such revenue. I would go as far as claiming that this fiscal challenges are partly the cause behind Malaysia’s inadequate measures in tackling other challenges cited in this list. The longer the reluctance lasts, the harder it would be to address those many challenges as those challenges do grow over time.
  6. Decentralization among Malaysian states. Many have long sought decentralization away from Putrajaya as a means to provide check-and-balance to federal powers. But recent decentralization has brought several new challenges (and amplified preexisting ones) to a small country like Malaysia. There are at least four challenges from the top of my head.
    1. Loss of revenue for the federal government. This goes back to concerns over fiscal pressures the central government faces and from there on, national capacities and capabilities. This eventually would hurt the beneficiaries of decentralization as they likely would have to pay for the same services the federal government finances, but possibly without the benefits of economies of scale.
    2. Loss of capacity caused by transfer of authority of specific issues. This depends on the power and not all transfers are negative nationally.
    3. Loss of policy cohesiveness which challenges the central authority to improve certain areas such as energy security. In other words, policies would likely see fragmentation. But again, this depends on the fields. Some fields may benefit from diversity of solutions but some others, not. I fear for many policymakers especially at the state level, they lack the competencies to see such a thing.
    4. The loss of Malaysian customs union, specifically, tax-based taxes that discourage national trade and weakens the common market. This is a threat for overall national economic growth as it would be a drag on trade growth.
    5. Weakening of the Malaysian identity, hence the loss of societal cohesiveness and further erosion to social capital.
  7. Climate change. Malaysia will require investment and spending to adapt to the new reality of climate change. These investments and spending include infrastructural like sea barriers, fresh water supply, shift of energy use, electrification and spending such as compensation for maintenance of forest cover, tree planting as well as expenditure to raise the capacity of health and emergency services. Without the necessary fiscal power, Malaysia would likely not able to mitigate some of the effects of climate change, and/or adapt as well as we need to be. This would likely need further expansion.
  8. Ageing society. Malaysia still has a young workforce, with the overall population median age at 30 years old but the situation will change in the next 20-30 years.
    1. This will require investment in health facilities made in the near future, which is dependent on the government’s fiscal strength. There is the private sector of course but it is unlikely to provide a comprehensive coverage at an affordable cost to the public that a universal public system could.
    2. The lack of a universal safety net will be a problem.
    3. An ageing society also would demand greater labor force likely through migration if the country is to grow economically further.
    4. Economic growth in such a demography would likely be weak, which raises the likelihood of social instability, given Malaysia’s low social capital that would work better with high economic growth.
    5. Pension crisis. This specifically about the government civil service’s pension through KWAP. Currently, there is a large liability gap and it is unclear it would ever be covered under business-as-usual scenario.
  9. Youth unemployment/underemployment and the danger of a growing underclass. One worrying trend is the demand for instant gratification by young adults in the form of reluctance to investment in education. They are attracted to the gig economy and they rationalize so by stating current gig income is more lucrative than going into debt for tertiary education. However in 10 to 20 years, these groups of youth would likely find themselves as an underclass as their real income stagnant and left behind by those with tertiary education rises, whose premium over those without would likely widen. The assumption of wage stagnancy for gig workers understates the problem: how would they compete with AI driven gig services? This kind of mass joblessness would create future social instability, especially as the society ages and relies on the young for tax revenue needed to fund societal needs.
  10. Political dynastic rivalry. Malaysia has only recently become a competitive democracy and we are beginning to see political dynastic rivalries that fall neatly along partisan division. There is a danger the rivalry becomes a zero-sum game as losers get prosecuted and winners get everything. In such a case, the losers would not necessarily go away peacefully or let go out power when they should. This could easily turn into a chaotic and violent equilibrium that has been witnessed in other countries.
  11. Race and religion. This is intertwined with political dynastic rivalry, but also dependent on economic growth. A weak growth along would likely raise the temperature as far as race and religion is concerned. I also think this is just a proxy to the low social capital that Malaysia has. This risk has proven to be an effective tool at derailing reforms needed to address multiple other challenges.
  12. Technological change. This is a wildcard because we do not really know how it would affect Malaysia. We still do not have a clear idea how 5G would change our lives (the way in the 1990s, we only had a vague idea how the internet would change everything). And even with AI is all the rage now, we still do not have a clear idea how it would change everything that we do. Malaysia could either ride the wave or miss the boat.
  13. Growing rich before growing old. Malaysia aims to be a high-income economy soon. Although definitionally it is easy to achieve, it might be harder to do so in a more substantive manner. It is also a race against other economies: recently China has passed Malaysia in terms of GDP per capita, which shows Malaysia is starting to fall behind.
  14. Immigration/refugee crisis. There are severe crises all around the world and the closest one is happening in Myanmar. Large waves of refugees could overwhelm the Malaysian system, which is already suffering from insufficient funding.

I would likely expand this later by putting them in timeline (to describe urgency), rough likelihood of these things happening and the degree/intensity of each problem.