Think people, not place

Comparing the wealth of nations, given how quickly fortunes can change nowadays, keeps armies of statisticians, economists and bureaucrats busy throughout the year. Figures about economic growth over regular time intervals are eagerly awaited by the general public and the mass media.

One popular way of measuring Malaysia and Penang lie in terms of economic health and wealth is through the attainment of soft skills. Per capita income provides a common dimension on which the economies of countries and regions can be easily compared with each other.

At the same time, how far an economy has developed is based on whether it is in the agricultural and/or natural resources stage, the manufacturing stage, or the services stage.

The extent of foreign direct investments (FDI) gives an indication of the difference between where Malaysia and Penang lie in terms of attainment of skills.Penang seems caught in the middle income trap. Since more than half of Malaysia's GDP comes nominally from the services sector, the country is considered to be in the tertiary stage.

In Penang's case, despite a headstart, the economy is still in the manufacturing stage, and the supporting infrastructure is not properly geared towards helping the development of services.

The fact that Malaysia is at the tertiary level while Penang is still at the secondary level casts doubt on the viability of this easy measure of economic status.

But is developed nation status about people or is it about location? Education and job opportunities have led people to move between states; we can only tell how people are distributed across the states, not their origins. Ultimately, developed economic status boils down to technology and the cutting-edge knowled of its people, i.e. by whom Fkoductionimb, activities are carried out to yield high incomes.

But skilled labour migrates while an economy stays put. If we adopt a procedure whereby global citizens count their collective wealth based on their origins no matter where they make their livelihood, then the per capita income would be more in line with the stage of development of their place of origin. Maybe this is what being developed actually means.

Penang has six per cent of Malaysia's population, but contribute eight per cent to the economy.

Globalisation, regionalisation, migration, FDIS, foreign labour - all these make the estimation of gross incomes of polities a seriously challenging matter. It is time to rethink the concepts if we wish to identify effectively how a society is developing steadily towards advanced status. Calculating collective income levels by place of origin is one possible way. Chan Huan Chiang

THINK PEOPLE, NOT PLACE

THESE DAYS, there is renewed interest in Wawasan 2020, the vision of former Prime Minister Tun Mahathir Mohamad for Malaysia to achieve developed nation status two decades into the new millennium.

He did not specify what being developed actually meant, and after nearly two decades we still misunderstand some critical points.

How fast the economy has to grow

Per-capita income level is a popular way of classifying nations. After adjusting for differences in exchange rates and inflation (i.e. purchasing power parity or PPP equivalents) we find that there are few (around 15) high income countries. On the other hand, there are many more (over 50) low income countries. This is why when we plot countries by income, we get a concave line as the income level falls sharply at the top end after listing just a few countries but flattens out at the low end to include many countries.

Penang has presently about six per cent of Malaysia's population but it contributes around eight per cent to the nation's economy. On a per capita basis then, people in Penang would be about 1.3 times richer than the average Malaysian. Still, their per capita income has to more than triple in the remaining years for them to join the ranks of global high income earners by today's standards. This means a steady economic growth rate of around seven per cent per year. Unfortunately, the East Asian financial crisis in 1997 and the sub-prime induced global recession over the past couple of years have affected the steady growth path. As things now look, by 2020, the rich countries would have become even richer. If advanced economies were to grow modestly at the rate of two per cent per year, Malaysia's per capita income would have to grow four-and-a-half times that in order to catch up. This would require an even higher steady growth — of about nine per cent per year.

We have experienced growth at eight per cent or so before, but we had the right configuration then. The workforce was educated, labour cost was low and there were not many other country competitors. Unfortunately, we can no longer depend on these attributes to achieve high growth.

Structural changes to the economy

An undeveloped, primary-stage economy is dominated by agriculture and natural resources. A developing, secondary stage economy has a manufacturing base forming the main source of employment as well as export earnings. Many see Malaysia as a tertiary stage economy because the services sector now makes up more than half of the gross domestic product.

Looking at how much services contribute to the national economy in order to gauge development status is actually a rather complex matter. Economists from the Malaysian Institute of Economic Research (MIER), for example, have argued that foreign participation in Malaysia's economy is huge and is the result of the country's vast international trade links.

Switching the emphasis, therefore, from being export-led to a domestically driven economy is not easy. An entirely different investment scenario in terms of financial sources and technological competency is needed. Even if there is foreign interest in penetrating the relatively small domestic market, the present institutional framework in the services sector was not set up to welcome them. For that matter, many small-scale and medium-scale locally owned enterprises are also export-oriented ones that emerged after decades of government incentives for promoting exports.

That is the general picture of Malaysian development. In the Kiang Valley, for example, the economic evolution process has been disguised by huge investments in infrastructure as well as industry and business targeting by the government, making it hard to differentiate between what resulted from market forces and what from policy prescriptions. Penang's economic transition tells a different story. While it was also true that Penang's free trade zone emerged out of the government's export-oriented manufacturing strategy, much of what happened after that has been private sector resiliency, weighing investment risks alongside economic benefits. Multinational companies increased their local sourcing, first involving less critical components like packaging materials; but later, the subcontracting of components production to local companies increased the depth and scope of Penang's industrial organisation. Today, many local firms have ventured into innovation activities and have begun complaining that the patent process is slow — often registered only after successfully registering their patents abroad.

In Penang's economic structure, therefore, the main sector is still manufacturing rather than services. One would imagine that Penang should be more advanced than Malaysia as a whole. But, ironically, judging by sector composition, Penang appears to be in the secondary stage while Malaysia is in the tertiary stage. One should therefore not read too much into economic stages when we ponder over developed nation status.

Foreign direct investments cannot be an element of developed nation status

The critical criterion to be regarded as developed is core competency, arising from soft-skill issues such as technocracy, knowledge level, social standards and civility. The extent of foreign direct investments (FDI) gives an indication of where Malaysia lies and where Penang lies along such soft-skill issues. When FDI was promoted for Penang's free trade zone in 1970, unemployment was a high 14%. Local investments were insufficient to absorb labour, and FDI provided the necessary income opportunities for the population. By the 90s, Penang had not only achieved full employment, it had also to resort to importing labour to meet mounting export orders. We could have switched to a policy to reduce FDI then. Unfortunately, our export competitiveness continued to be FDI-driven because the proprietary technology and brand names are owned by FDIS located in Penang, that sell their outputs to the world.

This inability to innovate technology locally for the international market is one aspect of the so-called middle-income trap, that is, nations have been found to grow at a fast pace for several decades after which the per-capita income begins to stagnate, showing no signs of catching up with advanced industrial countries. To become a high income country would thus require homegrown technology so that FDI will no longer be needed. When this happens, foreign participation in the local economy will occur out of competition policy rather than technological dependency.

Where is the production and who is producing?

There is another reason for turning away FDI in order to become a developed nation. Per capita income is gross income divided by population.

But in calculating gross income, i.e. wages, profits, interest and rent, non-nationals, both individuals as well as companies are excluded. This means that more FDI will only result in more employment and production but will not raise gross income since FDI is by definition non-national. The situation gets worse if much of production and employment involves foreign labour. Importing workers adds to the local population. On a per capita income basis, one ends up dividing less income — due to the exclusion of non-nationals — with more population — due to imported labour.

In deciding how developed we are, it is necessary to think about where production is taking place, and who is doing the producing. If there is a way to define a Penangite, then we want to count income (wages, profits, interest and rent) that goes to him regardless of where the income is earned. Seeing it that way, the need to attract talented Penang people from across the world back home is less important since the income earned would be counted as part of Penang's gross income. (Conversely, incomes earned by foreigners in Penang would not be included in Penang's per capita income.)

In deciding how developed we are, it is necessary to think about where production is taking place, and who is doing the producing.

Ultimately, developed nation status boils down to technocracy and the knowledge of its people, i.e. by whom production activities are carried out to yield high incomes. Years ago when geographical mobility was limited, nationalities and statehoods were more easily defined, making measures like per capita income easier to understand.

Today, production has become multinational, involving foreign as well as Malaysian firms located both in Penang and other parts of the country and across the world. The concept of developed nation status is harder to define, because keeping count of where production takes place and by whom becomes rather complex.

For instance, would a Penang firm doing research and development in Seattle make better progress than the same firm doing the same thing in the Kulim High Tech Park in Kedah or in the Bayan Lepas free trade zone? If so, then should policy shift from looking inwards to looking outwards? Suppose tax monies are invested in various types of business in Penang but such activities require a lot of foreign labour input; would we then still consider such tax spending effective? Suppose your son or daughter can earn much higher salaries by working abroad compared to working in Penang due to wage levels and exchange rate differences; which would we consider more beneficial?

More foreign direct investment will only result in more employment and production, not higher gross income since FDI is by definition non-national.

People of Penang or people in Penang?

Is developed nation status about people or is it about location? In other words, are we talking about Penang people or people in Penang? Looking back 8o years, the proportion of people living in Penang has not changed much (around six per cent of the nation). Back then Penang people lived in Penang. Since then, education and job opportunities have led people to away to another state, where they often meet, fall in love with and marry someone from another state and, possibly, settle down and have children in a third state. Today, we can only tell how people are distributed across states, but we can no longer tell their origins.

Most other states, like Penang, have held on to their population share of Malaysia. The only exceptions are the Klang Valley, where the population share of Selangor together with Wilayah Kuala Lumpur (since 1980) has increased. In the case of Perak, for example, the share has fallen. It must be emphasised that we are referring only to the population rather than to origins, because there are many Perak people who now work and live in the Kiang Valley, along with many others from all over the country, thus increasing the population share there.

Social mobility today involves a lot of spatial mobility. Cross-border labour movements and investments, from state to state and from nation to nation, are both more socially acceptable as well as more prospective in terms of immigration laws.

Call it the international division of labour or globalisation if you like. But if global citizens can make their livelihood anywhere but count their collective wealth based on their origins then maybe this is what being developed actually means.

 305,358 MALAYSIANS ABROAD SINCE MARCH 2008

ACCORDING To Deputy Foreign Minister A. Kohilan Pillay, 304,358 Malaysians have moved abroad from March 2008 to August 2009. "Among the factors for migration are education and economic factors such as work and business, as well as social factors such as following a spouse overseas': said Kohilan at the Dewan Rakyat on Nov 30, 2009. "However, these figures were based on those who have registered with Malaysian diplomatic missions." He adds that this figure includes "about 50,000 students".

This revelation caused a stir among political commentators. Tay Tian Yan of My Sinchew called it a "wake-up car. Wong Sai Wan wrote in The Star that this is a "worrying trend" and quoted former diplomat Dennis Ignatius as saying that there were "more than 300,000 in Britain, 200,000 in the United States, 95,000 in Australia and 50,000 in Canada". Wong urged authorities to examine why "one per cent of the population left the country in just i8 months'.

Statistics for 2007 showed that 139,696 Malaysians moved overseas.

 

References

• Cecilia Kok (2oo9), Search for a new growth model, biz.thestar.com.my, April 26.

• Quah Boon Huat (2009), “De-industrialising for the wrong reason?” Malaysian Institute for Economic Research, Kuala Lumpur.www.mienorg.my/newsarticles/archives/pdfiquah2o-4-og.pdf.

 


THE NATIONAL, BUDGET IS THE PEOPLE S BUDGET

A democratic government exists to guarantee the supply of collective goods. These goods are not gifts coming from the top for those at the bottom. They are public property. But with sustained deficit, inequalities are visible only over time. The future will pay for our present excesses.

THE READING of the federal budget is a widely anticipated affair judging from the intensity of commentaries and debates, both private and public, about how the government should spend its money and from where revenue can be obtained. After the announcements, we hear responses like “people friendly” or “election year” budget, giving one the impression that the budget is like a relationship linking people with the government.

the sun

This is actually missing the point, because in a democracy, the government and the people are the same thing and the budget merely represents the collective spending of the people, for the people. The budget is a social choice between cars and health care or education, in other words, individual spending between private goods and public goods.

A young economy has relatively small budgets because income levels are low and the social choice reflects private spending on basic necessities and consumer goods. When the economy reaches an advanced stage, personal incomes are at a stage where individuals have bought most of what they basically wanted. Consumers then begin to long for goods that cannot be individually bought. These are public “lumpy” goods like an efficient highway system, universities, good quality air, recreation parks, public safety, and so on, that can only be supplied after financial resources are pooled.

Government and the budget exist, economically speaking, only to guarantee the supply of such collective goods.

Who pays and who receives?

The people of Malaysia set their sights on becoming a developed nation by 2020, yet they do not appear to be grappling with the difficult social choice of private and collective spending.

The wish list for the budget is long, containing issues like retirement incomes, cost of living allowance and financial assistance for the poor. People want more collective public spending, yet they are disappointed about not having more tax breaks, suggesting that there should be less public spending. This ambivalence between simultaneously wanting to increase as well as lower public spending may be the reason that Malaysia's public budget remains at about a quarter of the gross national income for 2010, which is the same proportion as the budget in 1967. In advanced economies, public budgets can rise to half the gross national income —making governments big business there.

Worse still, not only has the size of Malaysia's public spending remained the same relative to total national income over half a century, tax revenues have not shown much potential to rise. Malaysia has 28 million people today, 64% of whom are in the working age of between is and 64. Two-thirds (the labour participation rate) are economically active (working or looking for a job) giving us a labour force of about n.8 million. The Inland Revenue Department has only about 4.5 million people in its files, in other words, only 40% of the labour force (i6% of the population) help finance the collective spending of the nation. This is regardless of the tax incidence being very low. A person whose taxable annual income is RM20000 is nevertheless given a tax bill, even if it is for a mere R475 or Rm6.25 a month.

Personal income tax combined with corporate income tax raise only about a third (nine per cent plus 24%) of the total revenue of the public budget. Just as much of the revenue is derived from oil resources; these are now on the verge of running out. Public sector revenue has become critical. To stay at 25% of national income, an alternative public revenue source has to be found when oil revenues do run out. How then is Malaysia to further increase the public revenue share of national income?

Choosing between more taxes and deficit spending

The upside is that Malaysia does not only have a current account surplus (excess of savings over investments or excess of export income over payments abroad) but the surplus is also sizable. A couple of years ago the current account surplus amounted to nearly i6% of the gross national income. Despite a much dampened economy the following year, the current account as a percentage of gross income remained in the double digits.

Strangely, deficit spending (excess of public expenditure over total public revenues) during budget announcements over the past decade has come under intense public criticism. Textbooks teach us that a country cannot technically face a public budget deficit when the current account is in surplus. This is because if the current account surplus is held by the public sector then there would not be a budget deficit. On the other hand if the money is held by the private sector, then in theory, the government can increase taxes by the amount of the deficit which would instantaneously remove the deficit.

People want more collective public spending, yet they are disappointed about not having more tax breaks, suggesting that there should be less public spending.

In the case of Malaysia, forced savings through the Employees Provident Fund (EPF) is the main reason for the high national savings rate which is in excess of investments resulting in the current account surplus. EPF money is no longer available to be taxed thus requiring the government to borrow instead — essentially resulting in a budget deficit.

Budget deficits that accompany current account deficits require borrowing from abroad. Based on the concept of sustainability today's productive capacity must not deny future generations the same productive capacity, prolonged budget deficit is non-sustainable. Our children and their children will be left to repay the debt we incur today. However, in Malaysia's case, the current account surplus has enabled domestic instead of foreign borrowing.

The consequence of this will manifest in Malaysia's future: The people will have to repay the debt to the people. Part of future tax money will not be available for public consumption or investments. This money will go back to the people who are creditors of this debt. Individually, the affect will be different, depending on who the taxpayers of the future are, and who the bondholders are who will redeem this debt. Aggregated as one nation, this is merely moving money from one pocket into another.

Social responsibility

Collective spending is a social responsibility that increases in prominence as economies become more developed. The good of all in society marks our civility. In developed societies, citizens can claim their basic right to food, shelter, education, health and much more regardless of one's circumstance, offering help when able and receiving help in times of need. This is the strength of the collective society.

The opposite is to live behind locked doors and high walls outside of which the unfortunate and downtrodden will beg, borrow or steal in order to meet their basic needs. Gated communities, sprouting all over Penang at an increasing speed, are symptomatic of what has gone wrong with the way Penang is developing. We are dividing ourselves into insiders and outsiders, the haves and the have-nots.



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