NAJIB’S Budget: Directionless

Budget: Directionless

How can we describe Dato’ Seri Najib Tun Razak’s maiden budget?

This budget reminds me of the song “Me and You and a Dog name Boo”. Those of my generation will recall that it’s a song by a band called “Middle of the Road”. It is a ‘middle of the road kind of budget’. It is like the story in Aesop’s fables of the man, his son and his donkey. In trying to please everyone he ended up pleasing no one.

The budget contains contradictions and incongruity. We will just look at 2 of the proposals, the RM50 credit card charge and the 5% real property gains tax and the contradictions in this Budget will be obvious.

Consumption/Credit card charge

The people are suffering from the global financial crisis. RM67 billion is to be spent as a financial stimulus to get the economy going. This is by stimulating local demand and consumption. In order to stimulate demand, there must be consumption. In order for there to be consumption, the people must have the means to spend. The government is trying to get the people to spend and buy things so that it stimulates the manufacturers to produce. By imposing the RM50 charge, its immediate effect is to force the people to cancel their credit cards and therefore their only available credit lines.

It penalizes the people who do not cancel their extra credit cards by imposing a RM50 charge on each credit card and RM25 for a supplementary. Without the extra credit from the credit cards how are the people to buy and spend? This contradicts the aim to stimulate the economy. The other effect is that if the cardholders are to cancel their credit cards, they must repay the outstanding loans. Many of the cardholders survive by repaying the monthly minimum. We have a workforce on low wages. This is one of negative effects of the Barisan Nasional flawed policy of keeping the costs of doing business low. It is almost impossible for many to settle the outstanding amount in one lump sum. Therefore, the real practical effect is that the RM50 charge creates a heavy and unnecessary burden on the people during an already difficult economic time.

Property Industry/ RPGT

The government wants the property industry to be an engine of growth. It should be because it provides business to 155 other trades and industries that are linked to the property development industry, the building construction and building material manufacturing industry. However, Dato’ Seri Najib has decided to bring back a 5% real property gains tax. The RPGT was imposed in the days of the housing boom to discourage property price speculation. It has no place in a situation where there is a slump when the developers are having problems in selling. The government in the proposed budget says, it wants to stimulate property sales and to revive the property, building and construction industry. This cannot be done when in the very same budget, it imposes a penalty to discourage the buying and selling of property. This is why I say it is directionless. Does Dato’ Seri Najib wants to stimulate the building and construction sector or to curb it? I think this is where Najib’s donkey fell into the river.

Economic Recovery

The 2010 Budget has many facets. As I said, it tries to be everything to everyone and ends up pleasing no one. I wish to focus on only one issue, that is, economic recovery. This is the foremost concern of all Malaysians because it is a rice bowl issue.

Dato’ Seri Najib has now finally confirmed on 23 October 2009 what the people on the ground already knew long ago because they are actually suffering and paying the price of the Barisan Nasional’s earlier denial syndrome.

· Exports fell by 23.4% in first half of 2009 compared with a gain of 15.5% in 2008.

· Industrial Productivity Index fell 12.7% from a positive 3.3% 2008.

· The net foreign direct investment fell to RM3.6 billion compared to RM19.7 billion in 2008.

· The private sector that used to contribute 30% of the GDP prior to the Asian Financial Crisis in 1997/98 is now reduced to 10% of the GDP. The domestic direct investment fell from RM72 billion in 1997 to RM56 Billion in 2008.

Falling FDI

The Opposition has raised the concern of falling FDI since 2007 but each time the Barisan Nasional government has denied that there was any need to be concerned and that FDI was healthy. There was a consistent denial and refusal to acknowledge the problem. The Barisan Nasional was in denial mode. Now, the Prime Minister finally admits that there is a problem and that the countries in the region have attracted foreign investments away from us. He has proposed several measures but I fear that they fail to hit the target. I agree with the comments given by many of my Pakatan colleagues that Dato’ Seri Najib has correctly diagnosed the problems but has failed to prescribe the correct medicine. This is because as we all know the good medicine is always a bitter pill to swallow. It takes political will and courage to take the medicine which sadly have not been shown to exist.

I will only refer to two points to show how the 2010 budget has missed the targets to revive our economy.

The first is the failure of this Budget to address and remedy the deficiencies pointed out in The Global Competiveness Report 2009-2010: World Economic Report.

The second is the fact that Malaysia has been infected by the ‘Dutch Resource Curse’.

Malaysia: 24^th

Malaysia is ranked 24^th in the Global Competitive Report 2009-2010. It is prepared by the World Economic Forum. Malaysia has dropped three positions. According to the report, Malaysia’s drop is due essentially as a result of a much poorer assessment of its institutional framework. In this area, every indicator has been exhibiting a downward trend since 2007, causing Malaysia to tumble from 17^th to 43^rd position in this area in just two years.

The report quoted that security is of particular concern, 85^th down 25 ranks. According to the business community, the potential of terrorism (97^th) and crime (95^th) both impose significant business costs.

Also of concern is the business deficit, which increased in 2008, amounting to almost 5% of Malaysia’s GDP. Yet in most other dimensions, it scores high, particularly, in those factors at the top end of the value chain, namely, impressive 7% growth per year between 1990 and 2000 and a healthy 5% since then. Mirroring this economic success, Malaysia has featured prominently in the competiveness rankings ever since its first inclusion in the 1994. Indeed, it remains the most competitive Stage 2 (efficiency-driven) country.

The report recommended that to maintain its competitive edge, Malaysia now needs to prepare its conversion into a knowledge-based innovation driven economy. Improving both the quantity and quality of higher education (41^st), boosting technological readiness (37^th) particularly ICT penetration would be required.

It would have been expected that the Barisan Nasional Government under Najib Tun Razak will address the deficiencies leading to the drop in the competitiveness ranking in our countries pointed out by the World Economic Forum. Unfortunately, we do not see this being done in this Budget. If this is not done, then is improbable that we can achieve the announced target of moving up to a higher competitive level.

Another way of putting it is whether Najib has the political will and the political capital to force the warlords to change where Badawi and even Mahathir had failed. In order to appreciate the findings of the World Economic Forum, let us look at the Global Competitiveness Report.

The 12 Pillars of Competitiveness

The World Economic Forum looks at 12 areas in measuring competitiveness.

The determinants of competiveness are many and complex. Economists have longed tried to understand what determines the wealth of nations. This attempt has ranged from Adam Smith’s focus on specialization and the division of labor to neoclassical economists’ emphasis on investment in physical capital and infra-structure and more recently, to interest in other mechanism such as education and training, the rule of law, transparent and well functioning institutions, firm sophistication, demand conditions, market size and many others. There are 12^th Pillars of competitiveness, they are:

· First Pillar : Institutions

· Second Pillar : Infrastructure

· Third Pillar : Macroeconomic stability

· Fourth Pillar : Health and primary education

· Fifth Pillar : Higher education and training

· Sixth Pillar : Goods and market efficiency

· Seven Pillar : Labour market efficiency

· Eighth Pillar : Financial market sophistication

· Ninth Pillar : Technological readiness

· Tenth Pillar : Market size

· Eleventh Pillar : Business sophistication

· Twelfth Pillar : Innovation.

I will only refer to two major pillars and a short commentary on four others.

1^st Pillar: Institutions

The institutional environment is determined by legal and administrative framework within which individuals, firms and governments interact to generate income and wealth in the economy. The importance of a solid institutional environment has become even more apparent during the present current global financial crisis, given the increasing role played by the state in the economy of many countries.

The quality of institution has a strong bearing on competiveness and growth. It influences investment decision and the organization of production and plays a central role in the ways in which societies distribute benefits and bear the costs of development strategies and policies. For example; the owners of land, corporate shares, or intellectual property are unwilling to invest in the improvement and upkeep of their property if their rights as owners are insecure.

The role of institutions goes beyond the legal framework. The Government attitudes toward markets and freedoms, and the efficiency of its operations, are also important: excessive bureaucracy and red tape, over regulation, corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, and the political dependence of judicial system impose significant economic costs to businesses and slow the process of economic development. Proper management of the public finances is also critical to ensuring trusts in the national business environment. The quality of government management of the public finances to complement the measures of macroeconomic stability is an important element and is captured by pillar 3.

Although the economic literature has mainly focused on public institutions, private institutions are also an important element in the process of wealth creation. The recent global financial crisis, along with numerous corporate scandals, has highlighted the relevance of accounting and reporting standards and transparency for preventing fraud and mismanagement, ensuring good governance. An economy is well served by businesses that are run honestly, where managers abide by strong ethical practices in their dealings with the government, other firms, and the public. The private sector transparency is indispensable to business, and can be brought about through the use of standards, as well as auditing and accounting practices that ensure access to information in a timely manner.

Our institutions are in a terrible state of disrepair.

Judiciary:

In the 1980s, Malaysia attracted FDI because our workforce was conversant in the English language. English is the international language of business. The second attraction is the legacy of our system of law applying the British common law tradition where there is certainty of law and justice and the confidence of those that have to appear before the Courts that decisions will be made without fear or favour. The importance of the application of the common law is that litigants from England, Australia and from the Commonwealth and those who are familiar with the common law knows with certainty how to conduct their business and how their disputes would be decided if they should bring their disputes to the Malaysian Courts.

All these were demolished in the past 26 years.

It started with the Court ordered dissolution of UMNO because of phantom voters. This order was not the one sought by Tengku Razaleigh. He wanted the phantom votes to be cancelled and only the valid votes counted. If this was done, he would have won and be the President of UMNO and Prime Minister of Malaysia. Instead of making an order not to count the phantom votes, the Court made the surprising decision to declare UMNO illegal thereby allowing Mahathir to continue to be the President of a newly formed UMNO Baru and casting Tengku Razaleigh into the wilderness called Semangat 46.

The sacking of the Lord President and 5 Supreme Court Judges saw the rot setting in. The recent ex-gratia payment to the sacked Judges is a compensation to remedy the wrong done to them personally but no action has been taken to remedy the wrong done to the institution and to restore public confidence.

The recent Attorney General’s decision not to prosecute the perpetrators in the judge fixing scandal according to the findings of the Royal Commission on the VK Lingam Video on the basis that the Attorney General was satisfied no offences had been committed, shows that the institution of the Rule of Law has been replaced by the Rule of Man and Malaysia to lawlessness.

The Perak power grab and the failure by the judges to give effect to the clear wordings of Article 72 of the Federal Constitution that the proceedings in the State Assembly cannot be questioned by the Courts confirms what NH Chan had said that ‘All is not well in the House of Denmark’ in referring to our Courts. This judicial rot continues to haunt our nation. The question in Hamlet where NH Chan took the quote “to be or not to be” for Malaysia must be “not to be”.

The disqualification of Wee Choo Keong as the Member of Parliament in Bukit Bintang and the Court appointing the Barisan Nasional candidate as the Member of Parliament for Bukit Bintang when he did not obtained the majority support of the voters in that constituency was another example of the perception by the people of political interference in the judiciary. As quoted in the Global Competitiveness Report, one of the problems that erodes competitiveness is where these problems are political dependence by the ruling party on the judiciary to maintain its rule. This decision eroded public confidence.

We now see history repeating itself in the sentence of six months imprisonment and RM3,000.00 fine of Tian Chua the Keadilan MP for Batu. The newspaper reports that the Magistrate found Tian Chua guilty because he preferred the evidence of the constable to that of the member of parliament flies in the face of established legal principles that it is for the prosecution to prove beyond reasonable doubt that the accused committed the crime and it is never the burden for the accused to prove he is innocent. Further, no one can be called to prove a negative. How can Tian Chua be expected to prove that he did not bite the constable especially when the constable admitted to punching the MP? There is no law in the world that allows the police to assault persons when effecting arrest?

The erosion in the judiciary in cases relating to the government and political cases spread to commercial cases. The cases of Ayer Molek, Adorna, Asean Paper Pulp are well known. How do you expect the businessmen whether local or foreign to expect justice in our courts? What has been shown by the recent decisions is that if you have a legal problem, it is not necessary to find a lawyer who knows the law but it is more important to find a lawyer who knows how to say “correct, correct, correct”.

The budget proposed to address the problem of our institutions by building more courts. The problem cannot be resolved by building more court houses. The rot is not in the building but in the persons sitting as judges and the interference by the executive in the judiciary to prolong the political rule of the Barisan Nasional. There is no proposal to address the real problems in our institutions.

2^nd Pillar: Infrastructure

Extensive and efficient infrastructure is an essential driver. It is critical for ensuring the effective functioning of the economy, as it is an important factor in determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy. Well developed infrastructure reduces the effect of distance between regions, with the result of truly integrating the national market and connecting it at low costs to markets in other countries and regions. The quality and extensiveness of infrastructure networks significantly impact economic growth and reduce income inequalities and poverty in a variety of ways. These include telecommunications, broadband and internet penetration. The Prime Minister has confirmed in his speech that Malaysia has a 25% internet penetration compared with 95% in Republic of Korea, 88% in Singapore, 64% in Japan and 60% in USA.

It is now announced in the Budget that RM11.3 billion high speed broadband 10 megabytes per second in Kuala Lumpur and Selangor will be installed by end March 2010 and then to other parts 2012.

We cannot expect to be competitive when our competitors are in the process sof upgrading to the 2^nd or 3^rd generation capabilities while we have not even installed the 1^st generation capability.

There is much to be done in this area.

3^rd Pillar: Macroeconomics stability

The stability of the macroeconomic environment is important for business and therefore is important for the overall competitiveness of a country. The government cannot provide services efficiently if it has to make high interest payments on its past debts. Running fiscal deficits limits the government future ability to react to business cycles. Firms cannot operate efficiently when inflation rates are out of hand.

We see a start in this Budget to reduce the deficit. In 60 years we have only a surplus budget between 1993 and 1997. It will be noted that these were the years when Dato’ Seri Anwar Ibrahim was the Finance Minister. Before and after him, the Government ran a budget deficit even during the good times.

5^th Pillar: Higher education and training

Quality higher education and training is crucial for economies that want to move up the value chain beyond the simple production processes and products. In particular today’s globalizing economy requires economies to nurture pools of well educated workers who are able to adapt rapidly to their changing environment. This pillar measures secondary and tertiary enrollment rates as well as the quality of education as assesses by the business community. The extent of staff training is also taken into consideration because of vocational and continuous on the job training which is neglected in many economies, for ensuring a constant upgrading of workers skills to the changing needs of the evolving economy.

In 2008, Malaysian universities have fallen out of the radar screen of the top 200 universities in the World. The QS World University Ranking for 2009 has shown that there is an improvement the ranking to 180 but it is still outside the top 100. University of Tokyo ranks 22, University of Hong Kong ranks 24 and National University of Singapore is 30 in the world.

There has been an underperformance in our education standards. At 28.6% gross tertiary enrolment ratio and 15% completion ratio, Malaysia is 7% and 6% respectively lower than the average economies with similar level of GDP per capital. This means Malaysia is having a tertiary skills shortage. This point to Malaysia lacking the necessary skills and knowledge in our human capital that is necessary to move the Malaysian economy up the value chain.

We have an increasing proportion of unemployed graduates. This group has risen from 15.2% in 2000 to 25.1% in 2007. This means that there is a skills mismatch. It means our universities are churning out graduates with skills that are not needed in our modern industries. Every 10 years, with modern technology, new jobs requiring new skills are created. Our universities are still following old syllabuses teaching old skills. Unless our universities change the mismatch in skills, this will hamper our competitiveness.

UNEMPLOYED GRADUATES*

In 2004, there were 4,594 unemployed graduates of which 163 were Chinese, 207 were Indians and 4,060 were Malays; In 2005, there were 2,413 unemployed graduates of which 31 were Chinese, 70 were Indians and 2,186 were Malays; In 2006, there were 56,750 unemployed graduates of which 1,110 were Chinese, 1,346 were Indians and 50,594 were Malays. In 2007, there were 56,322 unemployed graduates of which 1,348 were Chinese, 1,401 were Indians and 49,075 were Malays. In 2008 (as of June) there were 47,910 unemployed graduates of which 1,403 Chinese, 1,569 Indians and 49,075 were Malays.

*Government response to Question by me in Parliament recently

6^th Pillar: Goods market efficiency

Countries with efficient goods markets are well positioned to produce the right mix of products and services given supply and demand conditions, as well as to ensure that these goods can be most effectively traded in the economy. Healthy market competition, both domestic and foreign, is important in driving market efficiency and thus business productivity, by ensuring that the most efficient firms, are producing goods demanded by the market are those that thrive. For example competitiveness is hindered by distortionary or burdensome taxes and by restrictive and discriminatory rules on foreign direct investment (FDI)-limiting foreign ownership-as well as on international trade.

The NEP and its ill effects have been stated so often, I do not need to repeat it. The liberalization of the 27 sub-sectors in the service industry is a step in the right direction but it is too little too late. Much has to be done in this area but until racial politics is removed there is no possibility of Malaysia becoming competitive.

7^th Pillar: Labor market efficiency

The efficiency and flexibility of the labour market is critical for ensuring that workers are allocated to their most efficient use in the economy and provided with incentives to give their best effort in their job. Labour market must therefore have the flexibility to shift workers from one economic activity to another rapidly and at low costs and to allow for wage fluctuation without much social disruption.

The present policies have imposed glass ceilings and driven away our best and brightest.

Efficient labour markets must also ensure a clear relationship between worker incentives and their efforts as well as the best use of available talent.

42% of Malaysian businessmen have rated the unavailability of skilled labour as the most severe business constraint compared to 37% in East Asia and 35% globally.

In the past decades, Malaysia has shown its efficiency in the labour market by shifting from Filipinos to Indonesians and then to Bangladeshis and now to see those from Myanmar. The low wages and poor working conditions have driven away our Malaysian workers. There is no upward movement for the labour force. It is only a lateral shift. Malaysians workforce does not feature in this.

The Barisan Nasional Government has deliberately sacrificed our local skilled workforce on the altar of their racial politics.

The Dutch Disease

Malaysia has exhibited the classical symptom of the Dutch Disease or the Resource Curse. Global investors are not going to put money into the country if the Government does not address the Malaysian Resource Curse. The Dutch Disease is the phenomenal of the resource rich economies performing worse than those without such natural resources.

Malaysia three legged growth model

· Manufacturing Trade

· Commodity Trade

· Public sector economy

Petrol and natural resources provide 40% of Malaysian Government revenues. This supports the largest public sector economy in Asia with 27% of the GDP.

Natural resource sector revenues allowed Government to sustain economic growth through government spending and unprofitable and unsuccessful affirmative action projects.

Political corruption

One of the negative effects of the Dutch Disease is that it is often easier for a natural resource rich government to maintain authority through allocating resources to favour constituents than through growth-oriented economic policies and a level, well regulated playing field. This is the rise of the political corruption.

Rent seeking behavior

Another negative effect is the creation of rent-seeking behavior. Rent-seeking behavior is distinguished from profit-seeking behavior in that the profit-seeking behavior, entities seek to extract values by engaging in mutually beneficial transactions.

On the other hand, in rent-seeking behavior, entities seek to extract uncompensated value from others without making any contribution to productivity through manipulation and exploitation, such as by gaining control of land and other pre-existing natural resource or by imposing burdensome regulations or other governmental decisions that may affect consumers or businesses.

The clear examples are the regulations and issuance of licences and concessions to selected individuals: APs, the creation of monopolies such as highway concessions, water concessions, independent power producers and electricity generation concessions, even rubbish and waste have been privatized. The Malaysian public are paying to rent seekers.

Prescription

Malaysia no doubt is affected by the global financial crisis but its problems have a deeper underlying cause. It is this underlying cause that has to be addressed. The Malaysia Resource Curse must be exorcised. There are many resource rich countries that have escaped and avoided the disease.

The key is governance. Well governed countries find ways to insulate their economies from the down side of commodities and natural resources trade. Resource rich countries such as Norway has shown that this can be done by adopting straight forward economic fundamentals, sound monetary policies, and having open trading and investment regimes. The enforcement of laws against corruption is a basic requirement. The strengthening of political and economic institutions by giving effect to the democratic institutions and constitutional guaranteed fundamental liberties is another. Investing in education and infrastructure will increase competitiveness of the manufacturing sector. Sadly these have been ignored by the Prime Minister in the 2010 Budget.

A global investor said that if Najib and Barisan Nasional do not recognize the Malaysian Resource Curse and do not have the political will to address it, neither he nor any other investor is going to put money into Malaysia. Without the structural reforms, pouring RM1 billion a month into the rent seeking economy is just pouring good money down the drain. How long can the Malaysian public continue to suffer in silence?

Conclusion

I wish to end by quoting not from the speeches by the Opposition Pakatan MPs but from someone in the Barisan establishment.

“There are lots of things to be fixed. The roof is not leaking; we do not need a plumber. It is the foundation of the house and probably the whole house that needs to be rebuilt. The transformation requires concerted efforts.”

Datuk Zainal Aznan Yusof
National Economic Action
Council Member

It does not appear to me that the Prime Minister, Dato’ Seri Najib Tun Razak will be able to gather the concerted effort required to re-build the whole house. Since Barisan Nasional cannot, there is only one other alternative. This alternative has been shown to be able to change as seen by the 4 star ranking given by Auditor General on the audit of the Pakatan Selangor and Penang Government.

William Leong Jee Keen
Member of Parliament Selayang

30^th October 2009