What’s Blocking Malaysia to Reach High-Income Status?

 

Malaysia’s GNI per capita was at US$11,230 in 2019. The World Bank has projected Malaysia to join the club of high-income nations, but at a slower pace than its predecessors. What’s blocking Malaysia to achieve a high-income nation?

·       Malaysia’s total factor productivity lags behind most of its transitional peers.

 

Total factor productivity over time (1960=1)

 

·      Malaysia’s human capital is in line with what per capita income predictions, but it lags in quality of education and child stunting.

 

·  Malaysia’s institutional quality lags not just its aspirational peers, but also the expectations of its increasingly middleclass population. Malaysia does poorly versus its aspirational peers on international rankings of voice and accountability and control of corruption.

 

Worldwide Governance Indicators, 2018

 

     Inequality and poverty have fallen, but Malaysia remains more unequal compared to most peers. Economic growth in Malaysia has become less inclusive than in the past, compounding persistent disparities and fuelling a strong sense among the population that growth has not benefitted everyone equitably.

Inequality and income (2010-2017)

·    Malaysia’s fiscal policy is much less redistributive than those in high-income OECD countries and other comparators. Limited fiscal space prevents fiscal policy from being an effective tool for promoting shared prosperity.

In short, we need an overhaul of the education system, integrity in government/ private sector, less race-centric policies, better distributional mechanisms and a higher productive workforce to be a more competitive economy. Is there political will for this?

Reference:

Aiming High: Navigating the next stage of Malaysia’s development, World Bank Group, 16 March 2021

 

Is Malaysia Fading in the Covid Fight?

Competing companies, tardy procurement, low signup rates has plagued Malaysia in the fight on Covid, according to John Berthelsen of Asia Sentinel (April 16, 2021).

Early on, Malaysia was one of Asia’s leaders. Cases are now surging across much of Southeast Asia, for instance in Brunei, Cambodia, Thailand, and other countries although all are far behind Indonesia and the Philippines. With nearly more than 9,000 cases in the past week, Malaysia’s weekly rise has hit 35 percent during that period, according to statistics compiled by the website Worldometer.

Clusters reported from February 22 – April 2, 2021 were 314. There were 9,316 Covid cases from the reported clusters. Could we not focus on factories and construction sites for movement control rather apply it on a national basis? Furthermore, our incidence of Covid and the deaths thereto are very low compared to others in the region.

The Ministry of Health has been seeking to identify reasons behind low take-up rates and are considering steps to boost vaccine registration. Malaysia has vaccinated only 3.2 percent of its population. The government has only recently concluded phase 1 of the vaccination program, involving medical and nonmedical front-liners.

Some sources have blamed much of the other problems in combating the coronavirus on the Director General of Health, Noor Hisham, who initially was regarded as being instrumental in keeping cases down but who now is widely disliked in government circles for being dictatorial although his public image remains positive.

“In a totally dysfunctional cabinet made up of incompetent ministers, he dictates what should be done and what cannot be done,” the report said, adding that his critics say he held off approving the Pfizer vaccine until well after the European Union, the United States and the United Kingdom had recognized it. Now, with a long line already having obtained supplies including Israel, Bhutan, and Singapore, which has vaccinated at least 28.5 percent of its citizens, and with many more competing for it, Malaysia is described by a source as “at the back of the queue.”

In Malaysia, the latest vaccination rate is 26,523 doses per day, on average. At this pace, it will take another 4.9 years to cover 75% of the population. Why can’t we allow private hospitals, clinics or even pharmacies to do the vaccination? How else can we speed up the process? That assumes we have the vaccines to distribute!

The problem is that “rich countries have cornered the Covid-19 market,” said Khairy Jamaluddin, the coordinating minister for Covid-19 immunization, in a prepared statement and as reported by Asia Sentinel. “Some rich countries have bought enough vaccines for their citizens three to five times over. Many pharmaceutical companies give preference to rich countries for obvious reasons. That is also why Malaysia has had to balance our vaccine portfolio to include Pfizer, AstraZeneca but also those from non-Western countries like Sinovac.” But the key problem is incompetence and self-interest.

 

Reference:

1.     John Berthelsen, Malaysia Fades in Covid Fight, 16 April 2021, Asia Sentinel

2.     Where Are Covid-19 Clusters Found In Malaysia? 7 April 2021, CodeBlue

State Capitalism, Market Socialism or Progressive Capitalism?

 

The Biden administration has unveiled a US$ 2 trillion in infrastructure spending package. It is a wide-ranging bill that includes roads to R&D. This is in a way sets the stage for the U.S. to compete with China.

How is it funded? Raising the corporate tax to 28% from the current 21% (previously it was 35%).

The world needs this large fiscal stimulus to help global recovery from the pandemic. The OECD estimates up to 1.5% increase in global growth based on the U.S. stimulus package.

Will there be inflation? The short answer is No. Why? So long as there are subscribers to the U.S. debt issuance and China restrains price increases, inflation will remain benign.

Andrew Sheng in a recent Starbiz article (Saturday 10 April 2021) remarked state-owned enterprises (SOEs) contributed to China’s growing net national wealth to US$ 88.6 trillion. The state owns one-quarter of such wealth, ample reserves to address modernisation without higher taxation. Chinese SOEs are best labelled as “social enterprises” – achieving social goals through business methods – not wholly for profit.

In contrast, U.S. shareholder capitalism and political requirements, cause formidable obstacles and delays in implementing infrastructure projects. The bulk of public infrastructure in the U.S. is in private hands. China has SOEs to own infrastructure but allows private sector to innovate and compete on the basis of usage rights.

How then to deliver performance without corruption, concentration and social injustices? Free markets have made the top 1% in the U.S. increase concentration of wealth and power. So, is it state capitalism or more market socialism? That’s for the U.S. Congress to decide.

In Malaysia, the boundaries between business, politics and state have been blurred so it is difficult to distinguish between “rent-seeking” and “productive” or progressive capitalism. Has Government initiatives since the NEP raised new entrepreneurs or fostered more rent-seekers? Then there are state-owned enterprises (or GLCs) in almost all sectors of the economy that competes with private sector entrepreneurs of all ethnicities.

In terms of countries with the highest SOEs or GLCs, Malaysia ranks fifth in the world. Total assets of these GLCs amount to 51% of GDP as at end 2015 (Jayant Menon, IDEAS). Its debts amount to 15% of GDP and its revenue about 25% of GDP. The Government estimates GLCs employ 5% of the workforce, and accounts for 36% of market capitalisation on the Bursa Malaysia. GLCs are most dominant in utilities (93%, before sale of Edra) and in transportation and warehousing (80%). GLC’s share is greater than 50% in agriculture, banking, information communications and retail trade. The heavy presence of GLCs in the said sectors seem odd when they are neither monopolies nor strategic to the nation. Wan Saiful Wan Jan (2016) remarked that the Government’s share in the KLCI increased from 43.7% in 2011 to 47.1% in 2015.

Menon and Ng (2017) found that GLC presence in general has a discernible negative impact on non-GLC investments in Malaysia. Their research also determined that where GLCs account for a dominant share (60% or more) of revenues in an industry, investments by private firms in that industry is negatively impacted. This is the crowding-out effect!

There is a legitimate role for Government in an economy – especially in provision of public goods and/ or facing market failures. In Malaysia, the state is widely and deeply involved in business. Good governance and quality leadership are then compromised. And when massive bailout drains our limited resources, the question is whether the political or social cost to be incurred is even higher.

To move forward, there is a need for divestment by the Government of its interests in GLCs and an acknowledgement (that with the GLCs) the NEP has been firmly met. Issues of income distribution can then be addressed through divestment and restructuring of state enterprises.

 

Reference:

1.     Government-Linked Corporations: Impacts on the Malaysian Economy, IDEAS

2.     Andrew Sheng, Adopting state capitalism to compete against China, 10 April 2021, The Star

Inter-state Travel Ban Impacts the Economy

 

The continued ban on both interstate and international travel means that a fast economic recovery will certainly be delayed, say Carmelo Ferlito from the Center for Market Education (FMT, 12 April 2021).

The Government’s move to restrict movements and certain economic activities, as well as holding off from convening Parliament, was an overreaction to the Covid-19 situation. In setting policies, the Government should be looking at the country’s very low fatality rate of 0.37% rather than the number of cases.

https://www.borneoecotours.com

 “In Malaysia, the survival rate if you get Covid-19 is 99.6%. This is a lot higher than a lot of other illnesses. “In fact, Malaysia’s death rate from Covid-19 – the proportion of cases that prove fatal – ranks among the lowest compared to regional neighbours and other countries with similar population size, and is far better than the global average of 2.02%.”

Ferlito said measures from lockdowns to continued travel restrictions are greatly damaging the economy and that the consequences such as higher debt, inflation, and so on have largely been left out of the conversation.

 “Clearly the risks outweigh the benefits but the government does not speak about this. So there is a great contradiction,” he said, adding the reality was there were no “zero-risk” situations in life, be it vaccines or the economy.

“If you want to look at the real costs of the restriction on jobs, just look at the data on the number of people who started doing Grab, Foodpanda, and other gig-economy jobs. Then you would know how many people more would be jobless if these jobs didn’t exist.”

 “Children can go to school, people can go and watch football games, but we are not allowing people to travel. So areas outside of the Klang Valley and other big cities especially are going to suffer more than others, the tourism and retail sector is going to continue to suffer.

“What is the logic in allowing a mall in Selangor to be packed but not allowing people to travel to Melaka for a holiday?”

Excessive caution impacts the economy. Many hotels, retailers and businesses suffer because inter-state travel is not allowed. If the SOP is being followed, pray why then do we restrict travel and domestic tourism? Couldn’t we be more imaginative?

With vaccines being rolled-out it is time for the Government to relax inter-state travel, at least for now.

 

Reference:

Travel ban crush hopes of quick recovery, say think tank, Robin Augustin and Imran Ariff,

(https://www.freemalaysiatoday.com), April 12, 2021

 

Sleep: How Much Do You Need?

Among the most rested countries surveyed by Sleep Cycle, an app that tracks how much shuteye people are getting, New Zealand comes top with the average Kiwi clocking in excess of 7.5 hours per night.

Finland, the Netherlands, Australia, the UK and Belgium all rank highly for sleep, too, with Ireland close behind.

But not all developed economies rest well; South Korea and Japan are the world’s worst countries when it comes to getting a good night’s sleep. People in Saudi Arabia, the Philippines, Malaysia and Egypt are also some of those most likely to be sleep deprived. Singaporeans sleep 6.6 hours on weekdays and 7.3 hours on weekends.

The problem of sleeplessness in Japan is well-documented, particularly in relation to the phenomenon of karoshi – death caused by lack of sleep.

Thankfully, cases of karoshi are relatively rare. But long before a person’s health and wellbeing are critically endangered, sleep deprivation will eat away at their ability to do their job.

The cumulative effect of compromised productivity adds up to the equivalent of a slew of working days being lost. According to Rand Corporation, the US loses the equivalent of around 1.2 million working days per year due to people not getting enough sleep. In Japan, around 600,000 working days are lost per year, while in the UK and Germany it stands at around 200,000.

All these lost days have an unavoidable effect on a country’s economic output. The US loses approximately $411 billion a year, or 2.28% of its GDP. For Japan, that’s around $138 billion a year (2.92% of GDP). In Germany, it equates to $60 billion (1.56% of GDP) and in the UK it’s $50 billion (1.86% of GDP).

To Sleep, Perchance to Dream

The fact that small improvements in sleep can be amplified into much larger economic gains is something of a wake-up call.

If everyone in the US who sleeps fewer than six hours a night got between six and seven hours, there would be a $226.4 billion boost to the economy. All that from what is, effectively, less than an extra hour in the land of nod each night.

This level of improvement could add around $75.7 billion to the Japanese economy, a point that hasn’t been lost on the owner of a Tokyo-based wedding company called Crazy. Last year, the firm’s CEO, Kazuhiko Moriyama announced a cash-bonus for employees who were getting at least six hours sleep a night. “You have to protect workers’ rights, otherwise the country itself will weaken,” he said.

The American National Sleep Foundation recommends that adults get between seven and nine hours a night.

Reference:

1.     Sean Fleming, Which Countries Get the Most Sleep? https://english.cw.com.tw/

2.     Khoo Bee Khim, Nearly 6 in 10 Singaporeans aren’t sleeping well because of COVID-19, study confirms, 18 Mar 2021, CNA

Household Debt to GDP: When Does It Become Critical?

 

Malaysia’s household debt-to-Gross Domestic Prod­uct (GDP) ratio surged to a new peak of 93.3% as at December 2020 from its previ­ous record high of 87.5% in June 2020, ac­cording to Bank Negara Malaysia (BNM).

BNM said this was mainly because growth in the nation’s household debt had nor­malised to pre-pandemic levels in the sec­ond half of 2020 (2H20), but the GDP remained below pre-Covid-19 levels. “A concern over high household debt is that it may lead to a rapid deleveraging by households in the aftermath of a cri­sis, thus dampening or derailing economic recovery,” BNM warned in its Financial Stability Review for Second Half 2020 re­port released on 31 March 2021(Emir Zainul in TheEdgeMarkets.com reviewed the report).

According to BNM, household debt growth in 2H20 was mainly driven by car and housing loans, which expanded 6.1% and 7.4% from a year earlier respectively, lifted by strong response to sales and ser­vice tax exemption for the purchase of cars and various homeownership incentives.

BNM said that those earn­ing less than RM3,000 monthly remain stretched financially, with low financial buffers and substantially higher leverage. Borrowers earning less than RM5,000 monthly also appear to be showing signs of financial stress, as observed from the pro­files of those seeking repayment assistance.

In the short term, economists believe this high level of household debt-to-GDP ratio is manageable and do not pose that sig­nificant a risk to the country’s financial stability.

A Bank for International Settlements (“BIS”) study suggested that debt boosts consumption and GDP growth in the short term (over one year). But the long-run negative effects of debt eventually outweigh short-term positive effects. A 1% increase in household debts to GDP tends to lower output growth by 0.1% in the long run. BIS has determined the threshold for negative effects to kick-in is when household debt to GDP ratio exceeds 60%. The greater impact is when this ratio exceeds 80%.

An IMF study in 2017 confirmed that there is a trade-off between short-term benefits and medium term costs of rising debt. In the case of the IMF, it was observed that a 5% increase in household debt to GDP results in a 1.25% decline in real growth in three years into the future. And a 1% increase in debt raises the odds of a future banking crisis by about 1% point.

 

 

Mitigating the risks include better financial regulation and lower income inequality. Those economies with less external debt, floating exchange rates and are financially more developed seem better placed to weather any crisis.

BNM may find itself in a difficult situation in the present “high” ratio. Monitoring borrowings by the lower income group and early re-scheduling of debt will mitigate risks. Nonetheless, it is only in having higher incomes and better income distribution will we be able to resolve this ballooning ratio.

 

References:

1. Malaysia’s household debt-to-GDP ratio surges to new peak of 93.3%, Emir Zainul, theedgemarkets.com, April 1, 2021

2. Rising household debts: what it means for growth and stability, Nico Valckx, https://blogs.imf.org, October 3, 2017

Are Crowdfunding Platforms Getting Hot?

Venture capital and private equity fundraising activities declined by 41% last year as there were increased uncertainties caused by the Covid-19 pandemic. The amount raised amounted to RM11.7 billion last year, of which RM4.31 billion was via venture capital and RM7.39 billion via private equity (The Star, 20 March 2021).

But the reverse was seen for equity crowdfunding (ECF) / peer-to-peer (P2P) financing, which grew by 43%, raising RM631 million for the Micro, Small and Medium Enterprises (MSMEs), as reported by the Securities Commission.

Total capital raised through ECF in Malaysia grew by a whopping 457% to RM127.73 million last year from RM22.92 million in 2019. The campaign sizes in 2020 also shifted towards larger fundraising amounts, with 84% of campaigns raising more than RM500,000.

The top three sectors in terms of the amount of capital raised in 2020 were:

- the other services activities with RM38.88 million or 31% of the total amount of capital raised; - the professional, scientific and technical activities sector saw RM19.96 million (16%); while   - the information and communication sector raised RM18.27 million (14%).

P2P financing also saw total capital raised increase by 20% to RM503.31 million last year, from RM418.64 million in 2019. Wholesale and retail trade; repair of motor vehicles and motorcycles sector remains the largest sector served in 2020 at 52%.

ECF and P2P have proven to be viable financing options for MSMEs. Within six years, about 3,000 MSMEs have raised more than RM1.3 billion (as at end 2020) through ECF and P2P. Over 80% of the investors in the crowdfunding markets are retail and about 60% of them are under the age of 35.

More and more entrepreneurs and investors are acknowledging the benefits of crowdfunding. To entrepreneurs, the hinderances of long waiting period, collateral and creditworthiness track record in getting a loan approval now seem avoidable. But to investors, high returns will always come with high risks. Do your due diligence and make sure you diversify your investments!

 

Reference:

1.     SC Annual Report 2020, Securities Commission Malaysia

2.     B.K. Sidhu, Crowdfunding more popular, 20 Mar 2021, The Star

3.     Jagdev Singh Sidhu, Risen Jayaseelan, SC remains vigilant on emerging cyber risks, 20 Mar 2021, The Star