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Decided to make adjustments on the way I blog & share due to time constraints and other commitments. In the coming weeks you should see them. Short updates but more frequent & concise.

Sunday, August 26, 2012

Best Countries for Vacation on a Shoestring

The focus here is on purchasing power parity (PPP) which is an economic technique used to determine the relative value of currencies against each other. In other words, PPP can be used to as an international comparison of income level. In order for one to use a common basket of good used by all countries in comparison for purchasing power. The measurement being most popular now are either the Big Mac Index or Starbucks tall Latte Index with the former being the most widely used. 
Why is this important? First, export driven countries have severely undervalued currencies. Second, rich and industrialized have just the opposite. The reason is simple, a weaker currency makes your exports cheaper and therefore promotes industries to make them but is bad for us the consumers because things are expensive especially those being imported. Ironically a balance has to be obtained. You can't keep undervaluing your currency as any imported inputs to make the exports becomes more expensive. Look at the Tiger Cub members whom are all export oriented economies; Malaysia (-44%), Indonesia (-45%), Philippines (-28%) and Thailand (-47%). 

If you live in Malaysia, best countries to visit when you have a tight budget are countries that do primarily exports but do not earn as much as we do (GDP per capita). Here's a rough spreadsheet and the numbers (source: CIA handbook). I excluded NA and Europe as they are rich industrialized. I excluded South America and Africa too as the high cost of flying there compensates for their weak currencies against us.
Countries that are developed (primarily services oriented more than >65%) certainly always have a strong currency. A strong currency also translates to better income levels. It is the basis of their economy just like we the exporters need weaker currency, they need a stronger currency in order for their economy to function. We as a nation needing exports to drive our economy will always be the underdog, that is unless we are able to move forward from manufacturing into services. The logic is pretty simple. Remember when Singapore first left The Federation of Malaya, their currency was at a 1:1 basis (during their manufacturing phase) and it slowly creep up to what is now at a ratio of ~2.5 and it's going to be higher. China's currency is not going to fly high anytime now. In fact they have a long way to go before catching up to any of the Asian Tigers, I reckon it's going to be 20 years or so, are you going to hold the Renminbi for 20 years? Go and visit Singapore next year while China can wait for another decade.

If you life's dream is to travel and see the many wonders of the world, I do hope that your plan does include either working in Singapore or Australia =) if not, well we have Google Earth.

Jenna Ho Pui Yu. 23 year old lass from Hong Kong.

Saturday, August 25, 2012

Why We Didn't Join The Tiger Club?

We often ask ourselves and the country we live in, what kind of government do we need? What policies should it pursue? What should the government meddle with and what it should not intervene? 

The four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) placed major emphasis in education and industrial policies that drives large exports to rich industrialized countries and are now highly developed economies in East Asia. Their economic success stories have served as role models for many developing countries, especially the Tiger Cub Economies (Malaysia, Indonesia, Thailand and The Philippines). In order for industrial policies to work good governance is mandatoryGovernments in making decisions with regard to electoral or personal incentives can be captured by vested interests, leading to industrial policy that would only support rent-seeking the political elite, while distorting the efficient allocation of resources by market forces at the same time. This is thus by far the largest criticism against industrial policy, the failure of government.

Here then lies the basis of good governance and is the foundation of all developed economies in the world.   
1. Providing a set of uniform rules and regulations. Only a good government is able to make markets possible. Failure to adhere to the strictly defined rule of law creates nepotism which are common in developing countries (hence the word developing which includes developing new rules/regulations to make markets possible). Lack of binding contractual and transparent agreements you will see business deals being made behind closed doors guaranteed only through personal relationships.

2. Defining and protecting property, institutional and individual rights and laws. This makes market more credible. The best example there is is what we call the copyright law, without such a thing there is no point in writing to earn a living nor there is any meaning in creating new music, same goes to movies. Without copyright protection, there's no incentives for individuals to develop them and hence no market to begin with. Property law which defines the rights of the buyer and sellers facilitates investments too and is in itself another form of market transaction that benefits the economy as a whole.

3. Root out fraud & corruption. Let's take fraud. A good government ensures that the infrastructure is in place so that any money being deposited into say a bank or an investment scheme doesn't just pocket our money and disappear. Or when we buy new shares from the stock market we have a reasonable degree of certainty that the company would not engage in any fraudulent activity. Hong Kong was notorious for it's street gang and heavy corruption within the authorities, keep that in check and see what we have now. 

4. Builds and maintains infrastructure. A modern functioning economy are transportation intensive. We need bridges, roads, highways, ports, reliable electricity, good broadband connectivity, installing traffic lights and other utilities. We often do not realize that having them makes private businesses less costly as a result. By replacing trucks on highway with an efficient railway system you not only reduce the transportation time of goods but we also reduce the cost itself. This is evident via massive infrastructure spending by countries like China.

5. In other lesser ways, trade relations and international trade agreements can only be made via government. In Malaysia we take great effort in lowering trade barriers with countries like China and the United States as this will reduce the cost of trading with our major partners. 

No doubt that Malaysia has to pursue industrial policies to grow its economic pie as we are export driven but Malaysia's government is big and a big government is what I describe as highly inefficient. Communism did not fly because the government is so centralized that it has to control everything from the flow of goods, the quantity being sold and as well as the price. Such a government is one very very large monopoly. "What would your business look like if your customers, by law or system, could not go anywhere else?" [quoted from the book Naked Economics]. When there is monopoly, innovation and responsiveness is bone dry. Is there a need to go the extra for a customer? Is there a need to provide better service at the expense of profit? The answer is NO, because there is no market share to gain, you have it all yourself. 

Crony capitalism (apparently quite prevalent in developing countries) is a little bit like communism because when the government controls some element of the economy, the allocated resources go wherever politicians sends them rather than by the market. Projects that have the potential to be highly profitable do not get financing while undisclosed projects are given to brother-in-laws or well known contacts usually for personal gains. First we lose our tax money, second markets ONLY work at the peak of its potential when resources are flown to where they are valued most. This is done automatically if there is no intervention.

The rule of thumb to follow is that the government should not be the sole provider of particular service or distribution of certain goods unless there is a very good or a compelling reason to believe that the private sector or the state will fail. They are still however elements of a country that cannot be run by the private sector and states, for example public healthcare and national defense. No company can tell where you should place your submarines plus it's a secret, in areas like this it is best left to the government. In order to fix problems, the first step is always to realize that there are problems in Malaysia. One of them and the easiest is to get the government's sticky fingers out: introduce competition, eliminate cronyism, return to fiscal federalism and decentralization, give states more power & development grants, provide directed subsidies only. I am pretty convinced that the failure of the economy would be the ultimate call for a new government in our country. Communism failed in 1989, when will our central command be bygones? It is not that we are not moving forward, it's that we are not moving quickly enough.

Monday, August 13, 2012

Malaysia 2020 Is Not A Vision, It's A Dream

The study of economics also encompasses poverty, income inequality and wealth distribution which is directly tied to two major things: human capital and a nation's productivity level. How does one define human capital? I tie it with scarcity. Here's a simple picture to begin with. How much skill does it need to man our national favourite "Old Town" like kopitiams? that you see ubiquitously (not scarce/rare) in most major cities in Malaysia. At most RM5/hour. Compare this with engineers RM30+/hour, doctors and lawyers RM50+/hour. Professionals are scarce, standing there manning the shops are not, any human who has two legs can do the job. Hence poverty is directly linked to absence of human capital. Take India for instance, it is not a poor country, it has a booming middle class but it's poverty rate is still high. According to 2010 data from the United Nations Development Programme, an estimated 37.2% of Indians live below the country's national poverty line. The problem lies in education or a lack of developing basic skills. You see India's illiteracy rate as detailed by the board of census from India is at a staggering 24.4%!! For that education matters, it matters a lot. 
Construction a big contributor. Services which comprise 50% of our GDP should be in the driving seat!
An economy of a country booms by growing its GDP. A bulk of our GDP growth in 2012 is from GTP via the construction industry, in fact at 5.6% is the highest contributing sector surpassing services at 4.9% [source: as above]. A healthy economy does not necessarily mean a base of growing human capital, we have to look deeper. You cannot turn "penjaga kerata or Ramli burger flippers" into professionals even when the economy is healthy, only investments into human capital can do that. Name me one developed country/high income nation that does not have a big pool of human capital? Neither does having plenty of natural resources mean nation can be high income. Take a big look at most countries in Africa, they are rich in resources but are not rich themselves. In reality, there's a striking correlation between a country's level of human capital and it's economic well-being; e.g. Japan, Switzerland, Hong Kong (which used to be apart from China) and Singapore just to name a few. Malaysia's labor market can't do that much for graduates with lack of skills or dry of basic knowledge. There is no way you can force private enterprises to hire anyone and here lies our humongous civil service. The global economy as of 15 years ago favours skilled workers highly as the shift to using computers infiltrates almost every sector of the economy and we need people who are intelligent to have those skills and to learn new skills at the time on the job.
As you can clearly see, we depend a lot on construction. E.g. Big projects like the MRT and River of Life in KL. 
Growing too slowly to hit Vision 2020. Why are less productive "developing countries" growing at a faster rate than us? Note that the top are all "developed countries".
Levels of productivity are inextricably linked to how much human capital there is. Take this: Why would MNC (multinational corporations) like Samsung continuously build factories in Malaysia when it can be a lot cheaper say in an emerging market such as Vietnam? The answer is productivity. Most of Malaysians can compete against a Vietnamese peasant who earns say 1/4 of our salary because we are better educated, better trained and have better supporting infrastructure. The term "outsourcing" only has context when a company deems that it is cheaper to produce of X or half of X with say 1/20 or 1/20 relative to our salary. This is a clear example of sport shoes where it is now exclusively being produced in countries like Thailand, Indonesia and Vietnam. A nation's productivity levels depends on many factors ranging from development expenditure (infrastructure, education), better government institutions (regulatory, anti-fraud, tax structures) and innovation. Unknown to many, productivity also affects birth rates because as your RM/hour earnings go up, your time becomes more expensive so we indirectly spend less time raising children. These people now invest in the qualify of their children and not quantity. Singapore is a good example with birth rates now at near 1 levels, well below the replacement rate of 2.1 [source: star publications] hence they depend a lot on attracting highly skilled workers from abroad such as Malaysia! This explains a lot of things: high income nations have slow population growth rate if not negative like Japan, Chinese in Malaysia have the lowest birth rate among the 3 major races, Africa has many malnourished kids.

The problem I see with Malaysia:
1. We attract "mainly" low skilled workers; construction laborers.
2. We have an exodus of highly skilled workers and is growing by leaps and bounds; migration problem.
3. Our only saving grace today is that we are "cost-competitive" (not increasingly productive), using more or less of the same headcount with the slowly rising wages to produce X for the next couple of years.
4. Money from our national budget goes to the wrong place; operating expenditure 70% and development expenditure only 30% as of 2011.
5. Education sadly is not given a national agenda. Syllabus gets change whenever we change our education minister.
6. I personally do not trust the 3% unemployment number which has been at the same level for a decade. *I have no data to back my distrust except for rising crime.

The world now demands for ever higher levels of human capital which translates to better wages and higher levels of productivity. This is the only thing that separates high income nations and the have nots. We need a country that gets this right and schools/colleges/universities that produces the right stuff. Having said so, we have nothing on the right lane. We should forget about Vision 2020. Take education and you need a generation to fix it and the fruits of that seed can be seen in countries like South Korea and Taiwan which started back in the 1980s.

On a side note, this topic also explains another recent wave of events. [source: a book titled "handbook of crime correlates"]
Higher total socioeconomic status (usually measured using the three variables income (or wealth), occupational level, and years of education) correlate with less crime. Longer education is associated with less crime. Higher income/wealth have a somewhat inconsistent correlation with less crime with the exception of self-report illegal drug use for which there is no relation. 

Higher parental socioeconomic status probably have an inverse relationship with crime.
High frequency of changing jobs and high frequency of unemployment for a person correlate with criminality.
Somewhat inconsistent evidence indicates that there is a relationship between low income, percentage under the poverty line, few years of education, and high income inequality in an area and more crime in the area.
The relationship between the state of the economy and crime rates is inconsistent among the studies. The same for differences in unemployment between different regions and crime rates. There is a slight tendency in the majority of the studies for higher unemployment rate to be positively associated with crime rates.