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Sakmongkol ak 47

ariff.sabri@gmail.com

Tuesday, 16 March 2010

Second guessing the High Income Economy.


Until it's outlined clearly, nobody knows about what we mean by a high income country. It's similar but troubling like the concept of 1 Malaysia. 
Everyone seems to have their own version of 1 Malaysia. Is 1 Malaysia for the taking by the economic elites? Is it 1 Malaysia that is to be divided between 'the players' whose sons and daughters made it to The List issue of last year Malaysian Tattler?
Just how do you become a high income earner? You need education first of all. The right education. We are producing so many Malay graduates who are unemployed. We created them without thinking of the absorptive capacity of the market. The market will absorb those talents which will help them become more competitive. It absorbs those who can add value.
You need an Ali to represent you which qualifies you to get those special share allocations? You pick the best of the crop. There are 100 bumis out there. You need how many? 10? Then you pick the best out of the uniformly standard issue. 
My point is this. Even in the Malay playing field, you have so many Malays to choose from- you dont confine yourself to a limited horizon. There's always the better Malayman- if you allow free competition, the best will emerge. The best will be those who have some advantage over the rest.
To earn high income, you have to specialize in a field which you have competitive advantage- that's the edge you have over your competitors. Some Malays excel in the arts, entertainment etc. They strive to be the best in that filed- a Latif Mohidin for example can sell 1 painting at RM 300,000 apiece. He needs to sell just 4 paintings a year to become a millionaire- that's high income. That's achievable BECAUSE he became the best in his chosen field and he cultivates himself to have an edge over his competitors.
Siti Norhaliza for example sings while commanding high fees. She specializes in her chosen field.
The principle of high income- be the best in a field where you have an edge over your competitors. Malaysia can become a high income by defining what it has advantage over its competitors and being the best in that filed. E.g. In producing/manufacturing of certain unique products perhaps permissible only by a uniquely Malaysian climate that is not found in other countries. Maybe?
This should be the guiding principle- find out what we are best at. Then excel in that field. We become a high income country.
The underlying principle is not a new just- thought- out idea by the Oracle. Listen:- the increase in dexterity; to the saving of time which is commonly lost in passing from one species of work to another; and to the invention of a great number of machines which facilitate one man to do the work of many.
Who in the hell said that? Why, Adam Smith of course. In plain English? its specialization. Be the best in that field. Perfecting that task. Leading to dexterity and output. Leading in turn to improved performance. This is the performance we should be going after. So, when PM mentions performance first- apa itu? Why is specialization and being the best in that a field vitally important?
Because-
Men are much more likely to discover easier methods when the whole attention of their mind is directed towards that single object than when it is dissipated among a great variety of things.
The Scotsman again.

29 comments:

Richard Cranium 16 March 2010 at 09:21  

Yes, we'll need to start all over. Fix the education system, with special emphasis on the hard sciences and languages. Everything else will fall into place. As long as this bloody government steps aside.

Then, in 20 years, Malaysia might stand a chance competing.

Anonymous,  16 March 2010 at 10:08  

Salam Dato,

But those all are suggestions,ideas talks which has been outlined for many years now.

I quote your piece -" To earn high income, you have to specialize in a field which you have competitive advantage- that's the edge you have over your competitors. Some Malays excel in the arts, entertainment etc. "

Thats the thing, are those above eventually ending up on Malaysian TaTTler or even Glam Mag then only consider we all an High Income Nation ?

YES. Education is the KEY of all, you dont surrogate certain ELITE school or bru-ha-ha-ha National School, Kebangsaan this and that. Go down the field and ask around how many so-called Private International school are presently approved by UMNO / B END which offering
O-Levels, K-1 so on and so forth.

Why may I ask? and these school are not cheapo - worse comes to worse per semester easily range from RM9k-20k flat Inclusive all per se.

Wait, here's the kicker folks - certain Inter School are required by the Ministry of Education some sort of Endorsement, YES Endorsement? and also I would like to ask why sir? why the necessity? Endorsement untuk apa? Malaysian Tattler is it?

So, makcik,pakcik, anak cikgu biasa, kerani biasa obviously will not afford this kind of education.
Sampai bila? Its True not everything Government can do for us normal "malaysians" but come on la
already 21st Century stop messing with the education sector.

According to the Oracle: Increase your motorskill; well, learning english also is Important especially during that Schooling-Age, it would be excellent if our students can talk multi-language not only Mandarin, Tamil, Malay but who knows Italian, Spanish even Arabic!

Uhmmmm...lets put this aside for a moment - I wanna ask, all this years "Dewan Bahasa & Pustaka" depa buat apa? launching buku panggil Minister tuh je ke? OK, not too offend anyone here who has/used to be with DBP - is "Teruja" "Canggih" the best work that they can come with?

I trust, the key for High Income Nation will be and will always be EDUCATION. This is nothing got too do with Moslems, Non-Moslems, Brown, Kuning Langsat, or Arang Hitam.

Dato, You should know what they say about Muhyideen flip-flopping the English-Malaysia Module right? well i'm just an average sardine joe and I dont want to comment indepth on that - why the rest of the commentator here in Kalashnikov response what do they think of How to be a High Income Nation.

Stop being a JAGUH KAMPUNG,MENANG SORAK JE. ZAMAN SEMI-PRO dah Habis.


-Ikan Tongkol-

Anonymous,  16 March 2010 at 10:08  

Dato'
Memang tepat sekali Pak!!!
Mr. PM has the big picture and he is trying to tell the loyalists ministers to differentiate between the forest and the tree but instead his ministers come out with another bigger picture-so how and then sesat dalam hutan bakau in the lake of the FROG!!! ? Look what his deputy and the rest of the ministers when they open up their mouth with the brain not thinking.
To make thing worst, here come the king frog who is talking through his A$#&H*le...aye aye Perkasa here I come, make me relevant!!!
Keep it up and pray to ALLAH that thing will change for the better, Insya'ALLAH Dato' but still UMNO need a lot more bashing!!!!

Wenger J. Khairy 16 March 2010 at 12:19  

Well in a way Richard Cranium is right, definitely that is the right long term approach, and unfortunately it could take as long as 20 years, unless of course a certain young leader becomes the Government. Then it could be done in around 7 years.

But I think a couple of months back I did a BOE (Back Of Envelope) calculation on this High Income Hulabaloo. That took a strict GDP growth point of view. The real growth was something like 10% year on year to achieve the initial target set by the PM.

Another way to look at it is to look at the kinds of jobs people do, a point mentioned by Dato. We have 2 million in the Civil Service - we can straight out eliminate this group from the High Income Economy. The reason is that if they were High Income, that means the rest of the group is taxed to achieve their High Income status. Its a strict logic argument.

DM apparatchiks should avoid the usual baiting in this regard.


Then we have the remaining 8 million workers. 1MPM6 should first start by defining which jobs would be the ones that lead to High Income status, a point correctly mentioned by Dato Sak. Then we can see whether or not
a) Whether we have the domestic demand for those jobs
b) Whether Deputy Minister of MITI may consider, finally one day in his tenure to actually try and open up new markets to supplement those jobs
c) The number of local/foreign companies producing goods and services that give rise to the job
d) Whether we have the necessary skills,labour to do those jobs
e) If not, what can we do to our local education tertiary sector to inject modules/training for those jobs

I think these are all logical steps that should be done. Since its logical, we can rest assured that it is not covered by the high powered consultants hired to create this High Income Halabaloo

Anonymous,  16 March 2010 at 15:25  

No lah. Malaysia need mindless labour and cannon fodder to work in the factories and plantation of the elites. Malaysia need labour that work and not think. It is too difficult to manage a thinking work force. Even more dangerous, they may copy and do better.

Of, course we want higher income, but for the elites.

Syed SP 16 March 2010 at 15:45  

Yes, first education is the key. Our education is enthralled with the notion that the more As you got, the better student you are. I have grown up and probably old enough to witness that the key to success is really creativity, hardworking, discipline, brilliance (just above average will do). It is not the number of As.

Secondly, there are still big perceptions that in order to succeed in business, you must have 'cable'. And in order to have good 'cable', you must learn to bribe, you should be be active in politics or at least, be friends to politicians which for me is a BIG waste of time. End up with govt tenders that cost more, but less job is done (and low quality too) and in general, shove cost of livings high. Because goods consumed are pricier than it should be, people get less salary than it should be.

And please, give the kelantan people the money they deserve.

umar,  16 March 2010 at 17:32  

Tuan,
Its all hype again :
Mahathir had his VISION 2020
Pak Lah had ISLAM HADDARI
Najib is singing 1Malaysia and High Income Economy !
They want the masses to sing along.
Look at the new thing annouced yeaterday. Stuents from Sekolah Berpretasi Tinggi can transfer credits to university upon entrance. Why are they messing again with education ?

Let market forces dictate everything. The moment the authorities intervene as Adam Smith called, 'invisible hand 'things get derailed . You distort the economic resources.Felda land scheme is a success story we should be proud of.The Late Tun Razak commissioned EPU to conduct this study on rural development. Credit should go to the last Dato Pathma who was in EPU then. The government didn't have to control the price of palm oil.Market decides. No one Felda scheme was a failure.The felda settlers were all almost Malays. Today , you visit any Felda land, you will notice each family has more than one car. Their children have higher education and successful in their respective fields. Today Indons and Banglas are working in almost all Felda schemes because the tuan is aging and his children don't want to work there. They have progressed. After paying for the outsourced labour, the landowners are rich with surplus cash. No wonder this Felda population are happy with the government of the day. Just look at pahang and Johor as proof.
On the other hand, when government intervened in rice-farming, controlled the price, LPN and later BERNAS policies on importing rice, monopoly on milling, renting of harvestors, tractors etc. The farmers got fed up. They didn't get their labour's worth. They left the fields to work in factories as security guards and operators. Today you see them voting the opposition in Kedah , Perlis, Perak. The reason ; rice farming was not profitable for the farmer but for the distributors and millers and some certain unseen hands. The malays can succeed without goverment help if only there is a level playing field.

walla 16 March 2010 at 19:06  

A good post, Dato'.

As an adjunct on batik potential, i just found out that it can be used to make quilts. When we realize that, something clicks. Because to the potential of batik in high fashion garments, we add its potential to the equally big home furnishing market. So, what about batik quilts for cushions in MAS flights? Or as exotic seasonal gifts for export markets?

There are plenty of ideas out there which can help our Malay community to tap their skills to earn higher income or venture into new enterprises which can reset their present positions.

Perhaps one of the things that can be done is to make transparent the data needed to crunch new business models. Often for lack of such operational numbers, it will be hard to see the interfaces between industries which can be analyzed and connected by IT and other technologies to create new business offerings, some of which can be exported as cost-saving applications, something relevant these days in many countries.

Maybe in this regard, the DOS can be expanded with a new unit that looks at what sort of new data need to be obtained from industries that can be used in new feasibility studies to build new types of businesses. This type of expertise, like looking around a corner, or delving into specific new applications that no one else has considered before, may yield additional income. It's also good for national planning and maximizing scarce resources.

And with the focus these days on greening, perhaps the MSTE can usher a new initiative which the Malay can participate quickly on what new recycling activities can be undertaken in rural areas. For instance, one of the biggest demands at the moment is for coconut husk for mattress stuffing or oil palm husk to make egg trays.

The basic thrust here is to think out what can be done enterprise wide in rural areas so that the rural Malays can straight away embark on them to earn additional income, thereby relieving their family members in the urban places from having to send more money home each month. That way, both places get uplifted until one can find new things for urban Malays to do which will add more income to what they are drawing now.

I guess every little bit helps.

This post, allow me to dedicate to En Idris and En Ikan Tongkol. Both of you, too kind!

Thanks, Dato.

Nik 16 March 2010 at 19:54  

Dato'

Right thinking leaders normally prioritize their policies according to the situation at hand...

Full employment is a priority....

Reduce poverty is a priority...

Upifting of standard of education is a priority...

Looks like DS Najib's and Wife have decided to bypass the above and go straight to their own priorities:

High Income is his priority.....

Only the Gifted and Specials is her Priority....i,e "Permata" whatever...

Where does that leave the rest of us?

nxforget 16 March 2010 at 20:29  

Well said Dato.

This 1Malaysia concept has been going on for quite some time until I heard "salam 1Malaysia" greetings in recent meetings with government department, must be some directive from the top. I surely would love this type of high income driver for the economy. Can I invoice, say, extra 10 per cent by saying such greetings ... LOL.

With all the hype I've seen and heard, I'm wondering what are those so called PM "think tank" been thinking. Are they telling all the previous PMs implemented a low income model, make people look bad so that you look good approach. But, they have yet to implement even a single short term initiative that shall propel the country into a high income society.

Perhaps, they are still thinking but time waits for no one. While other country like Indonesia and Vietnam are moving, we are still thinking.

What a sad state are we in.

Bleacher,  16 March 2010 at 21:46  

Dato Sak,

Malaysian education entering the Abyss not knowing which direction it is heading. The public deserve explanation from Minister himself how he plan to bring-up the standard of our education.

It is bad enough to talk about High Performance Schools when bench marking is done compared to other average schools. We have heard the term "Juara Kampung" too often that we tend to believe it already.

I had the opportunity to enroll my children to international schools during my posting, and I can see vast different between what international schools and malaysian education system. Without going too much detail, I can sum up that international schools about building characters and encourage pursuit of knowledge.

This is where Malaysian education system is either slacking or refuse to acknowledge. There's too much of political bickering at the expense of our children future.

To end let ponder this quote:
The genius of our ruling class is that it has kept a majority of the people from ever questioning the inequity of a system where most people drudge along, paying heavy taxes for which they get nothing in return. - Gore Vidal

Anonymous,  16 March 2010 at 22:16  

You are soooo right. each race should specialise and capitalise on their strengths. Each race the Chinese, the Indians and the Malays have their specialities.

The Chinese with their business connections by by their race can easily handle China, South East Asia and global markets. and the Indians the global Software markets with India. and the Malays take on Indonesia.

Each supported to their top levels of expertise... wow such ideal situation..

But at las .. the entire opportunities have been hijacked by the likes of Perkasa.. and they want it all. They want others to work for them and be their workers while they own everything... ohh.. because they said they were sooo kind to give citizenships 50 years ago to their fathers..

They expects the best to work always under them ..

Fat hopes.. these expertise are mostly in China, or India or Singapore ...etc. and more to go.

Really the "talibans" have the upper hand now. Just compare to the times of P.Ramli.. what a difference. Guess too many have gone to Madrasahs in Pakistan and return to take over.

There is littel hope Malaysia can become a high income country. The impediments are just too many from the work ethics to everything.

Moreover have we seen any Muslim country considered developed today inspite of all the oil? So how can Malaysia be different with dwindling oil and high income capable people (except lots of rent seekers)?

We just have to accept it, there is just no way we can become a high income economy. No way as long as the country is entire run by a single race (rather than multiracically run) .. that is not noted for business acumen.

Yes, Ibrahim Ali wants to make the majority race have higher income than the minorities .. then he would be satisfied.

Hope a few nuts can explain how can he do that?

Given up.

Anonymous,  16 March 2010 at 22:26  

Dato'

I quote you,

"We are producing so many Malay graduates who are unemployed. We created them without thinking of the absorptive capacity of the market."

I am a non-Malay. My son is a graduate of NUS and UNSW and he now works in the global office of an international bank based in Singapore. His annual income is about S$90,000 now and he has not even celebrated his 30th birthday.

Now, thought there are definitely some Malays who can match my son's , however, his case is very ( I stress VERY) common among non-Malays who are quite fed-up with the local situation and are now contributing to foreign corporations based off-shore.The brain-drain of young talents with top intellectual abilities is definitely putting a serious damper on the country's purported mission of achieving a high-income economy. I say 'purported' because I feel that this is mere a rhetoric and sloganeering devoid of any intention to walk the talk.

Meanwhile other countries are miles ahead of us, capitalizing on Malaysian talents who are 'rejected' for the mere reason of the colours of their skin.

kuldeep 17 March 2010 at 00:36  

Anon 16 March 2010 22:26

I guess not too many sub 30 years Malays earns Sin$90k in Malaysia..in fact not many sub 55 Malays...

The glass ceiling for non Bumis >> i guess if it exist it will be in Govt..and believe me they don't pay too well there.

GLCs...lots of non Bumis..just read thru CIMB Annual Report..

I think there is lower % of top Bumis in YTL,Hong leong,Berjaya,Genting,IJM etc ..of cos thats PRESUMED as true meritocracy.

A little note about High income >>does it also mean High Cost?Isn't there another measure that relates to the gap between cost and income?
Sure won't be good to pay RM8 for a litre of water even if my salary goes up by 75%..

thanks

Anonymous,  17 March 2010 at 00:44  

Yes we must concentrate in economic areas where we have the competitive advantage. Certainly our car industry is not one of them. Proton survive only because of exorbitant tax imposed on other cars.

As a percentage of an average income earner, car prices in this country is the highest in the world. Proton became "jaguh kampung" as it simply does not have the competitive advantage to compete in the world autobile business.

Proton is just a glamour project of TDM with little economics benefits to the nation except to enrich those politically connected vendors supplying sub-standards materials/parts.

Anonymous,  17 March 2010 at 03:18  

the malay fondness of sandiwara and obsession with
concepts that are far fetched is akin to the episode
in 'The Huchback Of Notre Dame' where the reader is introduced
to a piece of thetre made for the benefit of the people
of Paris. In kuala Lumpur ,we have the 'pecinta bahasa'
wanting to make belief that bahasa malaysia would be
the language of the world in one corner and a group led
by a retard Berahim that the chinese is the leading
cause of economic problem of the malays. Berahim's
movement can be compared to Hitler's youth movement who blamed the jews for the economic woes of Germany then.


I have always maintained that it is the malays themselves
who are keeping the malays shackled in the yet to be universally
accepted bahasa malaysia. By having population that are
well versed in English and another that are not, we have
created an artificial class distinction. Those who
can communicate well in English can get jobs with the
commercial sector and multi nationals whilst the malays
find themselves unemployed though they are graduates from
the local universities. The situation is made
worse because big government departments like TM and TNB
suddenly became privatised and assume commercial cultures .And malay speaking graduates
became less employable.


There must be honest politico-civil servants
who can call a spade a spade to be member of a committee
to come up with a workable solution for this problem.
All over the world people are clamouring to study
english and here 'pecinta bahasa' wants to go back in time
and start a fake image that bm can be international
like the japanese and chinese.

If only they would open the japanese internet sites and
see how many high qualty english newspapers they have
in Japan. They will not be owning CBS and many US
conglomerates if they keep speaking Japanese!

This infatuation with the idea that bm can be world class
must be put on the 'back burner' . But for today
the education sytem must be back in english. However to
appease the 'pecinta bahasa' malay schools can be arranged
for rural areas and some laid back states where the
population demands a teaching in that language.

notoktok

hishamh 17 March 2010 at 09:05  

Dato',

With respect I have to disagree with your analysis and most of the comments made here. Neither education nor competitive advantage are necessary preconditions for a high income economy, although they are for an individual to attain "high" income status.

Education is important in starting the process of development, but less so when transitioning from a middle income economy to a high income economy. I read the same complaints in the UK and the US about their education systems, as I read here in Malaysia. Giving broad-based tertiary education to everybody simply means that like the Phillippines we will have degree holders driving taxis and serving as maids.

Competitive advantage should not be confused with comparative advantage, which is what actually drives welfare benefits from trade and what actually matters for development.

If you examine it closely, the doctrine of comparative advantage means that while specialization is important, it does not mean you have to be better at something than everybody else, you just have to be only relatively good at something to reap the benefits.

What truly differentiates high-income economies from those below them is, empirically, their price level and the balance between their tradable and non-tradable sectors. "High income" economies are also "expensive" economies.

You have to think in terms of a two-good open economy model, where one good is tradable and the other is not. Tradable good prices will be determined on international markets, while non-tradable good prices will be determined on local markets.

Since you have to compete with every Tom, Dick and Harry (China, Vietnam, India) in world markets, returns to labour fall to the world average - hence generally low labour incomes. Labour incomes in the non-tradable sector will be determined by localised demand and supply conditions - they are free to rise if demand and output rise.

In a high income economy, material goods prices will be generally low, but non-tradable goods prices generally high 9hence the higher price level).

Rebalancing the economy towards more non-tradable output is the key to driving income increases in Malaysia. That's why there is so much pressure to open up the services sector, as services are generally non-tradable.

hishamh 17 March 2010 at 09:09  

Two other factors should be considered:

1. Since high-income economies are also high-cost economies, we have to be really sensitive about income inequality and problems for the low-income groups, as they will be hit the hardest by the changes.

2. Malaysia has yet to go through the demographic transition that others in the region have undergone. We are still a "young" country, with a population median age in the mid-twenties, while Singapore for instance is "middle-aged", and quickly getting old. This "demographic dividend" (increasing share of the population actually working), will be a big factor in pushing growth up for the next two generations.

sakmongkol AK47 17 March 2010 at 11:20  

hishamh

i am indeed talking about competitive advantage which i think in todays world is more relevant that just old school comparative advantage. i am looking at ways whereby you have an edge over your next competitor, that sets you apart and thereby allows you to sell at a premium. thats the secret of high income.
some countries produce expensive goods and services and yet do not suffer decerase demand simply because of the value internalised in the goods and services.

Anonymous,  17 March 2010 at 13:58  

If the standard of the universities is maintained and "political expedient' policies are not imposed, good graduates will result. You can be sure the graduates will not need to drive a taxi or work as maids.

The red dot is not sitting still. It has ample supply of young qualified people from Asean, India & China clamouring to live there. It is setting up a fourth University and a higher institute to train graduates from the 5 polytechnics. Does anyone seriously think that education is not a pre-requisite to a higher income economy ?

It is all about innovation, creativity and productivity. Doing everything better than your neighbour unless of course you have oil in your backyard. Even then, oil can run out. One of the red dot ministers sums it up as " The cheap become better and the better become cheaper." Fool around any longer and you may just feel your living standards comparable to the worst in Africa. Get back to basics first before trying to run the marathon.

Ex

hishamh 17 March 2010 at 14:57  

Ahh Dato', you've just given me something to look forward to this weekend. I will try and dig up some of the data and see if you're right.

You are no doubt thinking of countries like Germany and Italy? It is possible to follow that kind of strategy, but that requires all the priors you talked about (education, specialisation) being in place. And the benefits of that strategy will only fall on the industry in question, and not to the broader economy.

If you look at the countries actually classified as high-income, competitive advantage isn't an obvious differentiator. The list includes manufacturing powerhouses, oil exporters, and more than a few that have no obvious competitive advantage at all (e.g. Estonia, Israel, Slovenia, Malta, Greenland, Iceland etc).

In the context of the model I described, your competitive advantage can be explained by nontradable inputs into tradable goods e.g. R&D. But again, this does not mean that the high income earned will accrue to the rest of the economy.

I did a literature search on competitive advantage - it's an interesting idea, but all of the research is at the firm or industry level. I don't see anything that relates it to economy-wide income improvements.

hishamh 17 March 2010 at 15:34  

Ex,

The economic literature on the impact of primary and secondary education on development and growth is pretty clear - they're important.

For tertiary education, the empirical evidence is inconclusive. I'm not saying it's not important (if only for the impact on R&D), but it's not a precondition for high income status.

If by red dot you mean Singapore, they are facing some pretty strong structural headwinds. The working age cohort of the population is expected to start shrinking from 2016 onwards; the ratio of pensioners to the working population is expected to double between 2010 and 2020, and double again between 2020 and 2030.

I'm not surprised they're doing something, or else they're in deep dodo. Singapore won't suddenly slip from high income status, but growth is another matter.

The recent restrictions on immigration is a huge mistake IMHO, Singapore badly needs an infusion of new blood.

walla 17 March 2010 at 16:57  

for sak and hishamh:

http://is.gd/aLCgW

(patience is a virtue)

hishamh 18 March 2010 at 02:30  

walla, thank you. You've saved me the trouble of collating the data myself. I was going to gather services sector shares in high income economies to prove my point.

From the executive summary:

1. The competitiveness of sectors matters more than the mix;

2. To generate jobs, service sector competitiveness is the key;

3. Policy impacts nontradable sector competitiveness directly - in tradable sectors, getting policy right is more complicated;

4. Competitiveness in new innovative sectors is not enough to boost economy-wide employment and growth.

I especially like pgs 28-30, which covers the data on points no. 2 and 4.

This McKinsey study also hits some of the points that I've talked about in my own blog - service-sector based growth strategy, encouraging part time employment etc. And they referenced Dani Rodrik, too!

I'll add two other factors that are specific to Malaysia - first is the demographic issue I commented on earlier, which has the potential of adding an additional 2% annual per capita income growth over the next 20-30 years (IMF estimate). Malaysia's demographic dividend from a larger work force may be sufficient on its own to put us into the high income category by 2020 (my baseline estimate is 2021).

Second (and this is something the government MUST do), is encourage greater female participation in the work force by whatever means necessary - day care centres, flexible working hours, mandated family leave, I don't care.

The current level is scandalous - fully a quarter of our current potential labour force is not participating in the formal economy (and thus don't turn up in the national accounts statistics). If they can get this righted, we might actually hit the target a few years before 2020.

walla 18 March 2010 at 09:20  

Thanks, hishamh. I've concluded as much.

One aspect of going for a high-income economy is what happens to the earning power of the poorer masses. And that question can only be answered if the definition of hardcore poor is updated first. Looking at the cost of living these days, the cut-off point is too low which implies the poverty group is actually bigger than what has been officially portrayed.

My thinking is that higher income from higher pricing should be from export activities which can contribute higher than before to some aggregate measure and at the same time they deliver some positive pull effects on income levels of the poor without raising too much their daily cost of living. I know this is contrarian thinking ...still trying to find an example...

Another point and i agree with you is the gender composition matter, especially of those who enter universities. If more and more of them are women, then we must be prepared for a future where they will be the ones better trained for a high-income economy but still lesser provided with opportunities to make direct contributions to it owing to social norms and occupational criteria. Needless to say, more tensions may arise not just from women denied the chance to realize their potential but also from some men who may feel disenfranchised if on the other hand more and more women become qualified to take higher paying posts.

These issues are also as important as the mechanics of trying to realize a higher income economy.

Anonymous,  18 March 2010 at 13:08  

Hishamh,

The restriction is political. There is no restriction on PR intake. I have seen provisional PR status granted to those with post-graduate degrees on condition they secure a job.

The greying population is wellknown and they are preparing for it. Only time will tell whether they will be successful.

But I am curious to know what specific types of industries or sectors you think can be encouraged to attain the HIE and what GNP figure would you accept as HIE ?

Ex

Anonymous,  18 March 2010 at 15:06  

From MKINI..
"The economic regime adopted after race riots in 1969 has given a wide array of economic benefits to the 55 per cent Malay population, but investors complain it has led to a patronage-ridden economy that has resulted in foreign investment increasingly moving to Indonesia and Thailand....
Malaysia attracted 31 per cent of the total foreign direct investment that went to Malaysia, Indonesia and Thailand in 2008 versus half of that total in the 1990-2000 period, according to UN data."

It does not gell at all...NEP introduced in 1969..in the eighties M'sia was a favored investment destination..now its no longer so >>but why blame the current scenario on NEP

Myb ppl got pissed off with flipflopping PR heavy PakLah n 1M'sia and NOT the NEP.

hishamh 19 March 2010 at 11:16  

Ex,

Yes, Singapore's experience will be well worth watching, as are the efforts in other greying countries, as we'll be in their position in about 30 years or so.

As for getting to HIE, I don't actually think it will be all that hard. Fertility rates are already dropping fast, and we'll get a working age cohort that should be enough to get us over the line within the next 10-20 years, irrespective of what the government does.

The essential problem I see is that the the HIE threshold is based on GNI per capita (US$11,906 as of 2008) which handicaps Malaysia because our labour force is so small relative to the population compared to our regional peers. GNI over the work force paints a different picture.

My estimate is that we will need close to US$17,000 to achieve high-income status in 2020, compared to the just under US$7,000 we had in 2008.

That isn't a very demanding target since its in nominal terms, not real. We need just 8.4% growth p.a. in nominal terms to get there - we averaged better than 9% nominal growth over the past 10 years (not including the 2009 recession).

So its not outside the realm of possiblity that we'll achieve high-income status within the original timeframe of 2020.

I'm actually more concerned about the type of HIE we will be, not whether we'll get there. I suspect we'll still have the same complaints - uneven playing field, low quality education, crime, inequal distribution of income, high cost of living - as we do now.

hishamh 19 March 2010 at 12:11  

As for mecahnisms to accelerate the process, let me refer to the model I outlined in my first comment:

1. Two goods, one tradable, one not tradable.

2. Assume further a single labour market within the country, but real labour wages are set in international markets for the tradable sector. Wages in the nontradable sector are set from internal demand and supply.

3. Assume purchasing power parity applies for tradable goods, but not for nontradable goods.

4. Assume a free floating exchange rate.

5. Assume nominal wages are downward sticky.

6. The economy is also open and small relative to the world economy.

The assumptions can be relaxed and won't substantially detract from the general insights of the model.

Implications:
1. A positive productivity shock in the tradable sector raises nominal labour incomes in the tradable sector.

Since we assume an economy-wide labour market, that raises nominal incomes across the board. However, since prices in the tradable sector are set in international markets (incl. labour), real labour incomes (or if you prefer, the marginal return to labour) must remain the same.

Since we also assumed nominal wages are downward sticky, the adjustment occurs in prices - the real exchange rate falls, which reduces international purchasing power.

Depending on the price and income elasticities of exports/imports, we can have a situation where increasing productivity is accompanied by falling real labour incomes (sound familiar?).

Realistically, since the real world is not quite as exacting as assumed here, there would be some increase in real incomes but not to the extent of the increase in productivity.

2. The opposite occurs when we have a positive productivity shock in the non-tradable sector.

Again we get an economy-wide rise in nominal incomes, because of higher returns to labour. But because the productivity increase occurs in the non-tradable sector, the higher labour costs are equivalent to a negative productivity shock in the tradable sector.

As nominal wages are also downward sticky, and labour returns and goods prices are set in international markets, the adjustment occurs in prices - i.e. we get an appreciating exchange rate.

Thus we get a positive impetus from not only the initial rise in nominal incomes, we get a further boost from rising international purchasing power as well.

Hence, I don't think increasing export competitiveness is a long term answer. What we need to look at is boosting the non-tradables sector, which in general means looking at services - much more bang for the buck. The dividing line isn't exact (there are services that are tradable), but services is where we should concentrate our efforts on.

Note that its possible to gain higher real incomes from going up the export value chain, but because it doesn't change the labour balance between the tradable and non-tradable sectors within the economy, you don't get the accelerating effect of the exchange rate on real incomes.

The McKinsey report walla lnked to suggests the same, noting that high-income economies also tend to have substantially bigger service sectors. They also note that government policies tend to be more effective in the non-tradable sector, which I suspect is due to the same equalizing effect of PPP on prices in the tradable sector.

Of course, within the services sector itself, different policies will need to be pursued - some require more investment in education and infrastructure (healthcare, business services, and ironically education itself), but some not so much (wholesale and retail trade, tourism).

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