Thinking about our Economy

I received an e- mail from an office bearer of MCOBA. His name is Zin Dahari bin Zainal Abidin. He is the assistant Hon.sec of MCOBA( special functions). I have been writing recently about an old boy of MCKK. That gives us a chance to communicate.

Mr Zin Dahari said the vexing issue which he and his colleagues are debating now, is whether our economic fundamentals are that strong. On a small scale, here are my thoughts about the matter.

What started as an American problem, the explosion of the subprime lending scam, eventually became a worldwide economic slump. Malaysia which at one time said everything is OK is now saying different things. Recently, we were told that our economy contracted by 6%. This will make the prediction of our growth of negative 1% a gross understatement. It was meant more as a political palliative.

Maybe the economy will contract by 4%. If that is so, then our leaders have not been telling us the truth and not honest to us. It means our fundamentals are not healthy. The manufacturing sector which depends on worldwide demand is not alright. The much hyped resurgence in biotech and all that stuff have not produced the desired rescuing effects. The prices of our traditional commodities are not good.

In the meantime, our energies are being sapped by endless political feuds. By playing to the game of opposition parties, we the holder of overall power are contributing to the political mess. In Perak for example, our insistence of matching brinkmanship has further eroded our credibility and with it, our pledge to manage the economy. We should be cutting our losses there.

Our leaders don't seem to know which policies can fix the problem. We know we cannot depend entirely on external demand because our trading partners are also reeling from economic slumps. So, we think, strengthening domestic effective demand is the answer. We promised to pump in RM60 billion on top of the earlier 6-7 billion. So far, the desired effects in the form of domestic demand haven't materialised.

We should be asking this question? Was the stimulus package a shot in the arm or was it designed as a long term sustaining economic tool? By long term sustaining tool I mean, was it designed to build our capacities- efficiency, skills, competitiveness and so forth. If they have not, it is clear that the stimulus package was just a short cut solution meant more for political consumption. It means also, it was essentially political gimmickry.

It may actually mean, that the business- as- usual ways we have been practising are no more compatible with the new economic realities. Marxists will say, the superstructure or oberbau is no longer compatible with the changes that are occurring in the substructure or underbau. That being so, the superstructure will be blown away or most of it, anyway.

The Austrian economist, Joseph Alois Schumpeter recognised this principle too; he called it creative disruption. Old economic relations, institutions, practices, are no longer compatible with emerging realities. For example, competiveness requires removing impediments that hinder it. The current Prime Minister appears to have understood this phenomenon. He has for example liberalised some not that politically damaging economic sub sectors- i.e. those economic subsectors not already participated deeply by Malay economic interests.

He has also liberated some financial sub sectors- again, areas not heavily participated by Malays. In doing so, he has also recognised that 'revolutionary' changes in the superstructure need to be handled gingerly for fear of upsetting political realities. The biggest reality is that his political survival depends on Malay political support. Unfortunately, most of his appointed Malay ministers are not supporting him on this or have not understood the gravity of the problem as he has. That of course means, those he selected have no quality- most of them anyway.

If the PM understood Schumpeter, he must not stand in the way of collateral damages- inefficient and silly businesses will roll over. Skills-mismatched workers will have to re adjust and perhaps lose their jobs, economic institutions may halve to be revamped, leaders need to be despatched and replaced. He must do all these and he must be supported. His deputy must be in sync rather than seen to be plotting all the time. When changes take place, resources have to be reallocated.

There is also another dimension to this problem, at least here in Malaysia which seems to be unwilling to be said openly. One aspect of the superstructure that needed to be removed on account of having to accommodate with changes in the substructure, is Malay economic obstinacy. Sadly this Malay economic obstinacy is in the form of political insistence that the Malay-ness aspects of the NEP must be preserved at all costs. I say 'political', because in reality, by and large, the Malay at large is as hardworking and can be as efficient as any other economic actor, with the right leadership attitude. Malay economic responses are made to look bad because politicians actually want it to remain that way.

Recently Tun Dr Mahathir spoke about this pyramid scheme, mentioning the Maddof scam and so on,. The fact of the matter is, politicians have been using the NEP as their own giant Ponzi scheme, milking the benefits which were supposed to have liberated the Malay at large way back in 1970 and perhaps a few years extra. It is in the interests of the half past six Malay politicians to make vehement noises about Malay interests being threatened and what not, so that they can continue milking the economic advantages. The original NEP thought of by the great Tun Razak was hijacked and turned into a giant Ponzi scheme by UMNO political warlords.

Perhaps, the current PM is already sending his opposition to this continuance. He is in fact, returning to the roots his father established. He is doing it in his own understated and noiseless ways.

The dismantling of the MECD is one indication of showing publicly his intention to force the Malay mindset into accepting that the business as usual ways of doing things must be abandoned. We need to look the dismantling of MECD from this perspective. The only economic interests threatened are those of the political warlords.

How do we face the future? We know that old forms of doing things must give in to new realities. History can offer us only limited lessons to deal with emerging realities. At each successive wave of change, we add new elements on top of what history can offer us. We don't have any predetermined module and this is why, the quality of leadership is important.

The phases of economic changes that we have gone through, are really phases of partial equilibrium. We shall move from one phase to the next phase continually. That is the natural progression of society. We have seen this- we moved from an economy relying on commodities such as tin and rubber. We moved from that to manufacturing. From there we moved to industrialisation and then proceeded to higher quality manufacturing and high value added industrialisation. We continually adapt ourselves to new realities. We also recover previous economic fields as our skills and knowledge of doing things improved greatly. Oil fields that we thought have completely dried up can be re-milked using new skills and technology and improved knowledge.

Movement from previous phases of economic module represent in reality, discontinuance from earlier phases. At each successive phases, we re arrange our resources- financing, manpower, knowledge and skills. We re-shape our own capabilities and reworked our capacity building skills.

At the same time, readjustments here and there, means of course, we offer ourselves a wide array of possibilities. Again, the array of possibilities depends on quality leadership at all levels. The array of possibilities in turn has wide and far ranging implications.

We have to make changes in our economy. Maybe we have overpriced ourselves. The sub prime lending scam in USA showed that property prices are inflated artificially so as to lend to unqualified buyers. Protecting the financial institutions who perpetrated the scams will only lengthened the time to correct the mistakes.

If financial institutions are the ones that caused the lending scams, helping them by re capitalisation will only extend their miserable and lying lives. They will continue doing the same thing. Extending them capital may not be the right way. Better to allow the market to correct itself. One way is to allow collateral damage to occur to these mischief causing lending institutions, let them go bust.

End of part 1.