Malaysia's Budget 2013 - an overview

The more cynical of us would come to understand that economic policy is essentially economics mitigated by a large dose of politics. And in a crucial elections year (which have to be called by April 2013, against a resurgent opposition), the Malaysian government has increasingly dipped into the national coffers to offer a ‘people-friendly’ budget – in essence, dealing out cash and subsidies as political sweeteners.

In an expected move, the federal government has run a deficit budget again (for the 15^th consecutive year), chalking up a total federal debt of some half a trillion Ringgit, standing at 53.7% of GDP. The expected budget deficit of 4.5% ranks third in Asia, behind only Japan and India – both economies which have seen better days.

Against an increasingly uncertain global economic climate, such a high level of debt naturally raises some concern. Countries have gone bust almost overnight, and key trade partners are experiencing weak growth, if at all. Bearing in mind that Malaysia is an export-dependent trading nation, can the Malaysian government continue to service its debts and deliver on its promises to rein in government spending, or is it just a bust away from fiscal disaster?

Perhaps it would be fairer to consider what the government spends its expansionary budgets on. Significantly, four-fifths of this year’s budget is allocated towards operational expenditure, while only RM49.7 billion is channeled towards developmental expenditure. In essence, while the government spends a huge budget, it is not spending so much for the future, as much as meeting present commitments. The multiplier effects and capacity-building is thus small despite a large expansionary budget being tabled.

Besides the continuous spending on expansionary budgets (the government has run deficits for the past 15 years, since the 1997 Asian Financial Crisis), the government’s revenue stream is also some cause for concern – around 45% of this comes from Petronas, the national oil and gas giant. Oil and gas prices are still high, but will it remain so, given that the world economy will probably remain weak for the foreseeable future?

There is an insidious addiction and overreliance to petroleum revenues, which has been likened by critics to leaning more and more heavily on a crutch that is getting shorter and shorter – oil and gas reserves, after all, are finite. 

Besides the addiction to petroleum revenues, Malaysia is also addicted to subsidies – these, covering everything from fuel to sugar, make up a significant portion of the huge operational expenditures. Quite simply, there has been no political will to reduce the subsidy bill, as well as broaden the government’s revenue base by implementing an unpopular but deeply needed Goods and Services Tax. Similarly, efforts to restructure and reform the economy to promote greater competitiveness and efficiency, as well as to plug leakages from corruption, have been half-hearted and lacklustre.

There is an increasingly pressing need for the government to be decisive in implementing deep cuts and structural reforms, that while painful now, will save the country from traumatic pain further on especially as dark clouds drift over the economic horizon. These are essentially politically unpalatable but economically necessary measures that hopefully will be carried out by the  government after the elections.

There indeed have been murmurs of a possible credit downgrade by Fitch and Standard & Poor if the government does not exercise fiscal discipline and stop trading economic prudence for short-term political expediency. As of now, chilling comparisons have been made between Malaysia and its more debt-laden A- peers, notably Italy.

Among the weak Southern European economies, Malaysia’s problems also bear a resemblance to Greece’s, with a bloated and relatively inefficient public sector, and its corresponding wages and pensions to be paid out. Spain’s propensity for mega-projects that become white elephants is also shared by Malaysia’s ruling classes. 

Having run a decade and a half of deficits budgets, the government clearly has not saved while the going is good, even as oil prices soared to new heights during that period. This lack of fiscal discipline could come back to haunt the government in these uncertain days. 

As conventional investing wisdom goes, when everybody is greedy, be fearful; when everybody is fearful, be greedy. The Malaysian economy, which can only be described as ‘gravity-defying’, as the Financial Times have, is not a cause for jubilation but rather concern. The relatively weak fundamentals in a state-dominated economy, dulled competitiveness and uncertain global economic outlook are not reflected in the present 5.2% growth rates, leading to the unpalatable question that has to be asked – is this a Potemkin economy, propped up by state spending, and is this sustainable?

As of now, there is still confidence that the Malaysian economy will continue to grow and the debt, which is held mostly domestically, will be serviced. However, in an increasingly volatile global economic climate with huge financial flows, where even advanced economies are just one crisis away from disaster, perhaps it is wiser to err on the side of caution.

ASEAN - the next big thing?

While the Euro dream seems to be crashing down onto reality, could ASEAN – a disparate region of seemingly disparate economies and systems of governance, be on its way up?

Of course, as of now, ASEAN as a regional grouping carries little international clout or standing, unlike the European Union with its imposing common policies and army of bureaucrats in Brussels. ASEAN member states are also far from united, or even, similar – ASEAN spans a military junta in Burma to communist regimes in Indochina, to Singaporean-style democracy.  The same grouping also brings together one of the poorest– and tragically most bombed – nations on earth (Laos) and one of its richest (Singapore).

The statistics and news coming out of ASEAN recently, however, look promising, as opposed to the flow of bad news from the Eurozone. The Philippines, for example, has recently recorded the second highest growth rate in Asia, after China, while other Southeast Asian economies emerged relatively unscathed from the recent crises, perhaps all the wiser after the 1997 Asian Financial Crisis. Burma, in another surprising example, has set off a scramble by investors keen on its untapped markets and resources. Indonesia, of course, is still the fund investor’s emerging market darling. Malaysia grew at a very robust pace of 5.4% this quarter, propped up by government spending, while Singapore has recently been dubbed the ‘richest country on earth’.

Quite simply, ASEAN as a region, to quote a recent report, ‘is no pushover’. This should not come as a surprise, as is the statistic that the size of ASEAN’s economy is marginally bigger than that of India’s (at a combined GDP of US$1.35 trillion, compared to India’s US$1.3 trillion). ASEAN, however, unlike a stalling India and EU, is on an upward trajectory.

Other relevant statistics - ASEAN’s population stands at 600 million potential consumers (some 10% of the world population), with an emerging middle class. The region is also resource rich, with a young and increasingly educated demographic, and situated across some of the most important sea lanes in the world. For better or for worse, ASEAN is sandwiched between the twin giants of India and China, both of which have had much influence over the region historically. In an economic sense, it is for the better – trade and investment between ASEAN and these giants have hit an unprecedented high, and is expected to grow still.

However, even as China’s seemingly infinite pool of surplus labour from the countryside seems finally to be drying up and India stalls under political mismanagement, ASEAN still seems to be steaming ahead. Indeed, investors wary of a possible Chinese hard landing and rising costs have increasingly shifted bases to ASEAN.

Most of the economies, with the sole exception of Singapore, are still in the resource mobilisation phase, as opposed to a resource optimisation one which emphasises ‘productivity’ – in essence, getting more out of a fixed set of resources, to ensure continual economic growth. In other words, there is still much potential and space for growth ahead, at least until the veritable middle income trap is reached (where Malaysia, Southeast Asia’s 3^rd largest economy, is stalled at).

What lies ahead for the ASEAN community is a move towards greater economic integration, bearing in mind, of course, the lessons of the Eurozone. First and foremost is clearly the integration of markets and the dismantling of trade barriers to encourage greater volume of trade – time and again, economic studies, since David Ricardo in 1817, have shown that trade benefits countries much more than protectionism – which, while packaged as ‘nationalism’ is often just a thin albeit useful veil to protect elite interests. Malaysia’s pantheon of scandals involving its ‘nationalised industries’ ranging from steel to automobiles bear witness to this, and I am quite certain that it is not Malaysia alone that has sustained huge losses from supposed protectionist, closed-door policies, especially now in an era of globalisation and global flows.

The fixation on free trade, however, always seems to neglect its equally important counterpart – fair trade. Importantly, trade and the removal of tariff barriers have to done in a not just a free, but also fair manner, bearing in mind the differing levels of development of the member states, which Cambodian Prime Minister Hun Sen had just recently dubbed the biggest stumbling block to the realisation of the ASEAN economic community.

The age of small, export-dependent, Western-oriented economies booming seems to be over – the East Asian economic miracle that saw little dragons – Singapore, South Korea, Taiwan and Hong Kong flourishing, has been replaced by the era of the aptly named BRICs – large countries with sizeable resource bases, a young demographic and strong domestic consumption. Integration of markets and greater trade seem to be the only sure way for smaller countries to continue on the global growth trajectory, much of which will be driven by population growth and resource consumption.

Perhaps more pragmatically, beyond the idealism of a single ‘ASEAN’ community, Malaysia, Singapore and Indonesia would do well to integrate their economies, as these are at a more comparable level of development and also stand to benefit from historical cultural and trade ties. There is also a good mix of the much trumpeted ‘ingredients of development’ - capital, resources, human potential, consumer markets and decent infrastructure to really let the region take off.

While I would not count on paying for goods and services in ASEANs in the future, there certainly is much to be gained from greater integration and unity in the region, not just economically but also politically, to fend off the growing clout and assertiveness of China in a region it has long regarded as its backyard.

K-pop continues to thrive

What is the first thing that comes to your mind when the country – South Korea is mentioned? For the politically attuned, the spotlight will be on its relationship with its Northern neighbor. But not for me. South Korea’s stars aka Korean pop stars hog the limelight in my dictionary. The star factor has risen to such a great magnitude that a sub-culture is formed – ‘Hallyu’ wave and there is no stopping of its appeal. Judging by the looks of how the wave is sweeping rapidly across continents, one becomes curious on the origins of the ‘Hallyu’ wave, its creators and most importantly – factors attributing to the success of this worldwide phenomenon.

 My love for all things Korean caused me to first set foot on the land a year ago. The surreal feeling of stepping on Korean soil for the first time was like a dream come true! Walking down the streets in Seoul, it is hard not to notice, the flood of star-endorsed advertisements ranging from daily necessities to luxury goods. Every one of those celebrities has a big $ sign attached – cash cows to their companies. Though these performers are only in their early to mid twenties, they are highly talented and versatile – often wearing several hats such as acting, hosting, modeling, etc. The reason for the success of these pop groups is sheer amount of investment and sacrifices made. Appalling as it is, trainees in their early teens sign a contract of 7 to 10 years with the entertainment company – slave contracts in my view. A mental picture depicting a soldier serving military service comes to mind - tough but necessary preparation for stardom.

To those that survive the process of metamorphosis to debut onstage, the return on investment is generous for the individual and the company. According to the source, koreaboo.com, SM Entertainment – one of the big three companies that manages the 9 member girl group Girls Generation, the sunk cost incurred for their debut is at least US$1.8 million and the company is expected to incur about the same amount even after the group debuts. If you are thinking that is a huge negative figure for a start-up, you are spot-on. But looking at statistic figures from the Financial Supervisory Service’s data analysis retrieval and transfer system, the company is definitely getting the longer end of the carrot. It is reported that the girl group made a whopping KRW 68.811 billion (approximately US$ 60 million) from 2009 to the third quarter of 2011. With the group’s popularity fast gaining momentum globally, the profit and the entourage of followers will definitely snowball. This will in turn spawn another trend of following - the fashion styles of idol groups.

As long as the wave is still at its peak, the opportunities to spin money off these groups are endless. The constant question that the creators have is how do they maintain their stars’ global appeal and feed the bottomless appetite of Korean pop followers. Well, in my opinion, the ‘secret potion’ is knowing overseas music trends, chic styling, massive amount of publicity and building an ideal idol image and ‘poof’ - boy group, EXO is born.

Where is Starbucks in Italy?

 I have always wanted to visit Italy and its beautiful history. Apart from the architectural allure of the place, Italy as a country has always held a certain charm. I had read in books and watched in movies of the little coffee shops and espresso bars lining Italian streets. As a coffee lover and a serial café hopper, the strong coffee culture of Italy was very attractive to me. Naturally, when debating on where to go for a summer holiday, Italy (specifically Rome) was top of my list.

Rome did not disappoint. Walking amongst ancient ruins such as the Coliseum and the Roman Forum where early civilization was enchanting and enriching. The city itself was amazing and had innumerable sculptures representing its rich tapestry of history. The winding alleys and streets of Rome also held so many quaint coffee shops and espresso bars. I was in my element, and tried several shops (short of giving myself a caffeine shock). However, despite there being a decently strong American brand presence, one thing grew clear to me as I toured Rome. There wasn’t a Starbucks in Rome! Could it be that Italy, the country that had inspired Starbucks’ creation did not have even one of its own? 

It turns out that the CEO of Starbucks, Howard Schultz, has been asked that very question countless of times. His response has always been that Starbucks will eventually go into Italy’s market, which brings up the question – What is it about Italy that has preventing Schultz from entering even up till now?

There is a huge difference in the original Italian coffee culture and the inspired Starbucks one. Italians pride themselves on uniqueness and diversity, whereas Starbucks is ultimately an American model that pursues growth through franchises. More fundamentally, Italians and Americans drink different types of coffee, namely espressos versus the American drip coffee. Italians also drink their espressos in the café itself, whereas the working American population is rarely seen without a cupboard cup of coffee in hand aboard the subway. Such differences, while seemingly insignificant and small, could seriously hamper a Starbucks foray into Italy.

Furthermore, could you imagine the humiliation if Starbucks were to venture into the Italian market, only to fail? Should the Italians stamp a seal of disapproval on the Starbucks brand, it would be a very embarrassing situation for the international coffee powerhouse. Coffee in Italy is extremely readily available and it would prove a daunting task for Starbucks to establish a coffee franchise there. It is no wonder that Schultz has hesitated for so long in bringing Starbucks to Italy.

Despite such reservations, there is potential for the Starbucks model in Italy. Italians are normally quick about drinking their espressos because it tastes the best when it’s fresh. Starbucks, on the other hand, has managed to create a café culture in America (and influenced many other regions of the world, including places like Singapore and China). Rather than competing directly in the market for quick coffees, Starbucks should capitalize on its strengths, which is creating comfortable environments that serve yummy coffee for people to leisurely interact with one another, but with an Italian touch. By carefully presenting a different way of enjoying not just Italian-type coffee but also American-style coffee, Starbucks could very well succeed in the country that inspired its birth. Judging by the success of McDonald’s “McCafe” in Italy, Starbucks should have more confidence that its brand will do well there.

However, of course, such things are always a lot easier said than done. Penetrating the Italian market will require a lot of careful strategizing to get it just right. We will just have to see when Howard Schultz decides its finally time to return “home”. 

Prince of Persia – Iran is not an American videogame

In recent days, with more immediate and practical concerns over a possible “Grexit” and Spain’s floundering banks, Iran may have slipped out of the global media spotlight for a while.

Just as fickle – and oftentimes cruel – as the media spotlight, is the expedient and capricious nature of global power interests and foreign policy-making, made painfully apparent as in Iran. Nowhere else has America’s supposedly benign and benevolent foreign policy been so brutally exposed. Above all, it has failed miserably, unless some Machiavellian machination of creating a convenient bogeyman has secretly been the goal of American foreign policy in the Middle East all along.

First things first - it is not a push to say that the Americans had a hand in creating the Islamic Republic. The call for democracy against an autocratic and repressive regime in Iran may be a genuine plea, but one also cannot selectively ignore facts and history. It has been the Americans that propped up the highly unpopular and increasingly autocratic Reza Pahlavi, Shah-an-Shah, King of Kings (a hardly democratic title) against his democratically-elected premier Mohamed Mossadegh in a blatant coup, Operation Ajax, during the tumultuous days of the Cold War. Perhaps then we should not be so surprised that the populist backlash came in the form of Ayatollah Khomeini’s Islamic Revolution.

Further along the timeline, which most of the developed world and its policy-makers have conveniently forgotten, there is the horrific Iran-Iraq war, where the Americans, along with other major Western powers, backed Iraq – the aggressor.

In more recent years, most have also forgotten the US-led invasion and occupation of Afghanistan and Iraq with no clear mandate from the rest of the international community, and, in the latter, on false claims.
It is perhaps only reasonable that Iran would feel threatened - the encirclement of Iran by American military interests in Afghanistan, Iraq and the Naval Fifth Fleet in the Persian Gulf at Bahrain, and the close proximity of nuclear-armed Israel is enough to make anyone jittery. Why should we then feign surprise, misunderstanding, or even outrage when Iranians start to think, ‘we’re next’, and start taking precautionary measures? As an old Chinese strategist, Wu Zi mused, even animals when cornered will fight savagely – how much more still will man?

The recent tightening of international sanctions, besides forcing Iran further into a corner, would also have hurt ordinary Iranians the most, while authoritarian regimes and their cronies more often than not have comfortable nest eggs carefully squirreled away.

Intervention may also not always be the best solution - NATO’s opportunistic adventure in Libya which ousted Gaddafi, who has been the most progressive and reform-minded of the so-called ‘rogue states’, has merely forced others to adopt a hardline approach – it may be just speculation, but Syria’s Assad no doubt realised he had no other way out than a brutal crackdown and a further shift towards countries of similar ilk, who are willing to look the other way. It comes as perhaps no surprise that Syria, Iran and Syrian-proxy Lebanon are now best friends in the Middle East. This demonisation by sanctions or direct intervention certainly does nobody any favours, not least the people living under such regimes, besides de-stabilising the Middle East even more and affecting innocent trade partners.

One cannot approach the Iranian issue without understanding the historical backdrop and local geopolitics – everything happens within a context, as sociologists have always stated. While politicians may come and go, and the priorities and whims of foreign policy may prove fickle, the people often have longer memories than that. The American public may not understand Eye-ran, but most Iranians still do remember the Americans.

One thing that has struck me while travelling in these states with authoritarian regimes and less-than-sterling human rights records is that their people are often able to draw a clear distinction between the government-of-the-day and the people – just as they hate their own oppressive governments, they expressly dislike the American government for its hypocrisy, and still the few Americans travelling in Iran after dark are often unable to get home – often they are accosted in the streets and invited back to someone’s house for dinner.
Whereas, most of us may have failed to see the difference between the Iranian government, and the Iranian people, and maybe this is why chanting the perennially popular foreign policy mantra of ‘engagement’ has not been as successful as if it had been done with a better understanding of historical contexts and the genuine grievances and needs of the local populace. After all, if we are indeed sincere about democracy, basic liberties and human rights, any real change has to come from within, and not as the collateral by-product of fickle superpower interests and power-plays.

In short, we have to balance between respecting the genuine security concerns of Iran, the fact that the cleric-led government has a poor rights record and is autocratic, and the fact that most Iranians do not quite see eye to eye with their government and yet suffer the most from isolationist policies and sanctions imposed by the US-led international community. Nobody said it was going to be easy task, but it at least represents a more genuine attempt at engagement, as opposed to the current trajectory we are on, which only portends war.

Corruption... a personal perspective

Recently, a friend who got back on a business trip from a developing country, stumped and frustrated by the loops of bureaucracy to be leapt through (and expectant palms to be greased in every turn) relayed this story about the local policemen. Apparently, once a month, the local chief convenes his subordinates for a meeting. Without a word, he passes each of them an envelope. In it is a small but significant stash of dollar notes.

In a word, corruption.

But it gets more complicated from here – Imagine yourself as a district policeman in the developing world - would you decline the envelope, and fall out of favour with the chief and risk your family’s livelihood? Chances are, the chief is just going to replace you with a more compliant underling. Make a report? Chances are, it won’t get past the chief’s chief, or even his chief for that matter.

Or would you say nothing, but pocket it anyway, just because – everyone else, even the chief, is doing it? And there is simply no better alternative?

Now we see corruption in a slightly more different light. It is at once a very major and obvious problem, crippling entire economies from their full potential, and a very minor one, stretching its tendrils all the way into our very personal lives. It is this perspective that allows us to glimpse its sheer breadth, the scale and depth of the problem – that corruption has almost become a culture, an institution and an inescapable fact of life.

Corruption seen this intimately and honestly is a serious scourge to countries, especially developing ones. Once there is an entrenched culture of corruption, once it gets passed down from the upper echelons, to buy favour and secure complicity, or even when there is a lack of will to tackle corruption (usually because the upper echelons themselves are complicit), you start to have a serious institutional rot, an institutional problem that will not be removed with one or two token arrests to placate the masses. And once our public institutions, first and foremost those under the executive and the judiciary, cannot be trusted anymore and become dysfunctional organisations serving the whims of those in power and wealth, civil society suffers. The foundations and safeguards of a healthy democracy will be greatly undermined. The rule of man, not the rule of law, will prevail. And far too often we have found that the rule of man is but a step from the rule of the jungle.

If you ever find yourself in a teahouse or coffeeshop in the developing world, and caught up in political chatter, chances are it is on the supposed corruption of the political elite, in its various guises – cronyism, nepotism, favouritism, graft...  Beyond what hardened cynics may scorn as liberal idealism, all this no doubt have a very real and dire effect as well on the national economy and its competitiveness, besides deterring investment and business activity as my friend’s plight amply demonstrates.

Public outrage at corruption as the root of the national rot is common, and last year, the year of the Protestor as TIME magazine dubbed it, we have indeed seen plenty of it. Surely, this must be the key reason why some countries are held back when others with significantly less resources and less favourable conditions have succeeded? Surely, this must be why the sheer volume of aid pouring into Africa has not been effective at all, or why a wealth in natural resources have still left most countries poor, but with stark income disparities?

Corruption is a bottomless pit – a veritable Faustian pact – once you’re in, there is no backing out anymore. Institutionalised corruption simply chases ever greater wealth, ever greater security of power, for further gain and avoidance of prosecution – the unholy alliance between wealth and power, between public institutions and ruling political parties, the enmeshing of interests, become almost inevitable and similarly impossible to unravel.

Once a significant majority across the branches of government is complicit and benefits from ill-gotten gains, institutionalized corruption becomes almost impossible to eradicate. Imagine pestilent weeds – if you just shear off the part you see, it grows back again in no time. The solution is literally to tackle it at its roots – you take a shovel and claw it out.

I will stick my head out on the guillotine and say it: If there is institutionalised corruption in a country, it starts right at the top.

Clawing out pestilent weeds, as anyone who has done it before knows, is an arduous and painstaking task - entrenched political parties, with their amply funded war-chest and complicit and compliant public institutions at their disposal, merely sweep into power each and every election as a formality. And that is if there are even elections.

We need an extra strong weed-killer sometimes, because, as we are all too clear, the real cost of corruption is on democracy, individual rights as equal citizens before the law, a functioning and competitive economy, and a better quality of life. 

Mighty oaks from little acorns grow

People often look to big businesses with a mixture of awe and distaste. While it is always impressive the way a huge company or brand name comes to exist, it seems that you can’t get huge without stepping on more than a couple of toes. Growth strategies of huge corporations that involve gobbling up the little guys have led to negative impressions in the minds of the public. It also certainly did not help their reputations when the massive banks got taxpayers shelling out wads of cash (that a lot of them did not have) during the banking crisis. So actually, you can’t really blame the public can you?

However, with our economy stuttering along, is big business what we need? Small firms have often been lauded for their high creativity, flexibility and adaptability whereas big firms are often criticized as being cumbersome and clunky. While there are indeed some big firms that do live up to that, there are also a lot of big businesses out there that should be better supported for the good of the economy.

Despite being unlikable, many big firms have gotten big by being highly efficient. Well-run big companies know how to fully utilize their resources, which is a skill that this economy seriously needs to learn. They have plenty of advantages – the ability to reap economies of scale, bringing a greater variety of products to consumers at lower prices (hence improving standards of living) and for having the cash clout to invest in R&D that eventually leads to innovations and further growth for the economy.

Even though big firms have a lot of advantages over small ones, they have a lot to learn from the little guys. It is true that when a company grows in size, it naturally becomes more bureaucratic and ungainly. This is where the small firm mentality comes in. The leadership of the firm must continue to think like a small firm in terms of being creative and fluid in doing business. There should be a cultivated company culture that thinks on its feet and is deft in maneuvering. Impactful and truly inspiring companies like Apple and Google are well-known for maintaining a small business attitude internally despite being massive entities, and I daresay that it has contributed greatly to their incredible success.

If big firms were able to develop that sort of spunky attitude, it would be adding an incredibly powerful weapon to their already impressive arsenal of business weaponry. By taking advantage of that, hopefully they will be able to kick-start this stubborn economy and wake it up.