The NEM: New Economic Model-Part 1

Many others and I have written about the burning issue at the moment. I am speaking of course on the issue of the Name Allah. For me personally, I have nothing further to add.

Let us direct out attention to a more earthly matter. It's the bread and butter issue of our economy. I have written a short article at the beginning of this year, hoping that a healthy debate would ensue. Unfortunately, a livelier discussion of our economy was overtaken by the tidal wave of the spiritual issue.

Nevertheless, my short article was able to draw out some thinking from others more qualified that I to gloss over this subject.

The blogger who calls himself Justice Wenger J Khairy, no doubt deriving some inspiration from Justice Oliver Wendell Homes, has written a more rigorous initial analysis of our economy. I am sure a more erudite exposition of our economy will be forthcoming from his remarkable mind.

Also as usual, the genius devil is in the details, Mr. Walla has continued to astound readers with his observations.

And so, I am privileged to be able to present the thinking of these two gentlemen:-

 

One: Justice Wenger J Khairy.

Let's put some numbers.
Right now our GDP Per Capita is ~$6,200. In 2020 we want it to be ~$16,000. So compound growth should be 10% per yr on this figure. To grow per capita, we have to explicitly grow GDP and watch for the growth in population. We assume that population grows at 1.66% (last yrs data). We also assume that the employment: population ratio stays constant at 41%

now the trick by how much we need to grow the GDP. We assume that since the end number is a USD figure, that markets perfectly adjust the inflation differential between USD and RM, so that thanks to the sugar price rise, if 2010 our nominal GDP grows additional 4% due to inflation, the exchange rate depreciates by a similar amount so there is 0 inflation created growth.

Now comes the figures.
GDP = Aggregate Hours * Productivity

What is Aggregate Hours
(for the benefit of readers of Sakmongkol)
Aggregate Hours
Well its simply the number of people employed * the number of hours worked per year.

So when we create 9-16 public holiday, we reduce this number, and reduces GDP.

Aggregate Hours in 2009 ~20 billion hrs. (Souce: McWenger Consulting. BNM does not bother to keep track of this)

In 2020, keeping the population growth, the average work week ( no new holidays!) and the employment population ratio constant the amount of aggregate hours in 2020 is approximately 23.2 billion, or a growth = to the population growth rate of 1.66% per year.

Now comes the Productivity element
Productivity = GDP/Aggregate Hours
In 2008, the figure is RM 35/hr.

If we indeed want to have a per capita number of $USD 16,000 in 2020, and keeping the aggregate hours growing as detailed above, the Productivity number should be something like RM 82/hr. At RM 82/hr, and with a population of 32 million, a labour force of 13 million our GDP will be a nice round number of RM 2 trillion.
Then our per capita will be USD 16,000++.

An RM 2 trillion economy?

Our implicit GDP growth rate to achieve that figure is 11% per year.

PM says that we can only grow at 6% per year. Let's assume it's real growth. (Muhahahahah)
Then in 2020, our GDP will be RM 1.2 trillion, and our per capita will be USD$10,000++. Our productivity will be RM 53/hr.

Obviously, the king has no clothes.

But a second more insidious thing has to do with what is the marginal wage and productivity of the new jobs being created?

Does our average worker contribute RM 64,000 to the GDP?

Obviously not! As our economy now is more than 70% domestic orientated and will shift to greater and greater domestic impact as our exports become less and less competitive, we can assume that in years to come, a worker will spend his entire pay check on subsistence existence while Dr. Mahathir's sons drive around in Porches.

So if your being paid RM 30,000 a year, you know that is the only amount of contribution to GDP that you can make. So in fact, our productivity will be start to decline as our export industry gets hammered whilst the Deputy Minister of MITI is busy entertaining himself with his Jom Pi Jerlun programme and his bloggers sprout rubbish 24 * 7.

So really, the situation is extremely worrying. The data is all out there, but Malaysians by and large are the gullible sort who will believe what is written in the papers.

I will refrain on commenting on DSAI for now. In 1996, he was my favourite leader. Right now, I can only look with sadness and pity as to how the obsession of 1 man to destroy his rival has really put our country in a jam.

TWO: WALLA

Using aggregate measures like per capita incomes can be deceiving. They don't signify real income distribution. A few may hold more income than the incomes held by the many but total income divided by few plus many will seem to say each and all get the same averaged ratio. The many don't and the rich will get richer. That's how GINI coefficients have spread so much.

A new economic model should be based on a thrust that while the rich can get richer, the poor shouldn't get poorer.

The baseline for that economic targeting should then be sectoral incomes divided by number of households ranged by some weighting. Then we will know things like the per capita incomes of households whose breadwinners work in the fishing, farming or subcontracting industry, for instance, in a particular location, and how those numbers will change as any new economic model phasally operationalizes from year to year in that location.

There is talk that a stronger ringgit policy will be used as a tool to achieve the new economic model.

How that will pan out remains to be seen. Maybe planners think that our export goods will continue to enjoy inelastic demand so that buyers overseas will happily absorb the higher forex from a stronger ringgit enough for us to still build export momentum and thus get fund inflows to pay higher wages and to buy more capital goods to modernize our production for the next cycle of economic recovery.

But whether the economies of our goods buyers overseas will not be facing a double-dip is itself moot at this point. Unless one places final bets on the regional China-Asean development.

The term vision 2020 has virtually disappeared from the local lexicon. And mercifully so because when it started it was bannered all over the place, even on top of your local warung. Now it's just the brand name for that weekend van collecting old newspaper.

In its place we now have a new economic model. If we put ourselves in the shoes of the planners and strategists in Putrajaya, that's as best as one can expect of them to do - how to jettison something which cannot be achieved and replace it with something else which appears to be new, and that's why it's called 'new...', which, fingers crossed, may be accepted by the rakyat to be an acceptable replacement of the original kickass vision.

But inflationary multiplier effects will start before the new model takes shape. Sugar starts the ball rolling, flour may come soon, petrol and transport costs, certainly, with electricity to follow even after the feds have blown half a billion compensating for the bakun dam. People are going to feel another hard pinch not just on their wallets before they can warm up to an embrace from the new economic model.

Where did we go wrong? We went wrong long ago. We didn't take care of the fundamentals of nation-building. That's about progressive and knowledge-savvy human resources, sterlingly upright and efficient institutions, and precise investments that bring direct and measurable returns. We blew all the money on parties. Sorry, the Party.

Now we want to achieve the impossible. It's like trying to drum up an unstoppable force to roll over an immovable object. Maybe we should commission the Joker instead.

So what will happen in ten years time? Simple. The goal post will be shifted again. For instance, aggregate income will be denominated in rupiah or yen and reproductive rates will be reduced by fearsome promotion of birth control. The '1' in 1Malaysia could be one-is-enough. Slyly that could also be to replace the rakyats' "enough is enough". Hard luck though.

Come to think of it, if we had pursued the seventy million population target, we be finito today, ain't that so, you think?