hishamh compiled

7/24/2019 HishamH Compiled

http://slidepdf.com/reader/full/hishamh-compiled 1/27

1

M O N D A Y , S E P T E M B E R 9 , 2 0 1 3

Middle Income Pain? Try High Income

From the Edge Daily (excerpt; emphasis added):

Highlight - Middle-class pain

KUALA LUMPUR: Salary earners in the “sandwiched” middle-income group will soon find

themselves at the losing end as the government continues its fiscal consolidation.

The middle-income group is defined as individuals who earn between RM2,300 and

RM7,000.

T his group forms 40% of the country’s workforce. The middle-income earners are mostly

taxpayers and are the vast majority who drive consumer spending — a main growth engine

for the domestic economy...

Erm...slight problem here. By all accounts, less than 20% of the workforce is eligible to pay

tax and about 10% actually does, which is totally at odds with the numbers quoted here. And

it turns out the problem is the definition – the text shouldn’t readindividuals, it should

read households.

The data compiled by DOS show the mean monthly household income level for the middle

40% is just RM4573 in 2012, or approximately RM2570 per income earner. A single personearning that amount who only deducts EPF contributions pays zero tax, and I don’t think

they’re the ones referred to as, "The middle-income patrons of gourmet coffee outlets will

have to either cut down their visits or opt for cheaper alternatives."

Sorry, if you can afford to drink gourmet coffee in Malaysia, chances are you’re not middle

income. It doesn’t detract from the main point of the article, but it should’ve been made

clearer who exactly we’re talking about.

Anonymous September 10, 2013 at 5:03 PM

Hello Hisham

I wanna ask your view on LGE's speech

http://limguaneng.com/index.php/2013/09/05/only-by-implementing-open-competitive-tenders-and-fighting-

corruption-that-would-save-rm51-billion-annually-can-the-prime-minister-prove-that-he-is-not-faking-his-

sincerity-nor-using-the-counterfeit-n/

Some key takeaway points. According to LGE..

1) open competitive tenders and fighting corruption would save RM 51 billion annually for the Federal govt.

http://www.theedgemalaysia.com/business-news/253658-highlight-middle-class-pain.html


http://www.statistics.gov.my/portal/index.php?option=com_content&view=article&id=1939%3Afindings-of-the-household-income-survey-2012-updated-02042013&catid=158%3Ahousehold-income-&Itemid=154&lang=en



http://econsmalaysia.blogspot.com/2013/09/middle-income-pain-try-high-income.html?showComment=1378803792626#c3237606854912016984








2

Effectively that would solve our budget deficit problem.

2) Through fiscal responsibility and fighting corruption by the PR state governments in Penang and Selangor, at

least 25% annual savings can be obtained from government procurement contracts.

3) Through their policies,PR has achieved annual budget surpluses in Penang, the increase in asset reserves by

50% and the reduction of the Penang state government’s debt by a record 95%

4) only 10% of the police force are involved in crime investigation work. If that proportion is increased to 50%

of the total police force, I am certain police omnipresence will be able to defeat criminals in Malaysia.

hishamhSeptember 10, 2013 at 8:46 PM

@anon 5.03

It's partly political hyperbole:

1. The RM51 billion figure is derived from 25% savings based on government operating expenditure

last year of RM205 billion. Problem is, operating expenditure is primarily stuff like salaries, pensions,

debt service, transfers (including transfers to state governments) and subsidies.

The actual amount spent on procurement was just RM32 billion. You could also potentially include the

RM46 billion under the development budget which involves investment in things like schools, roads

and utilities. If the 25% figure is correct, that would give potential savings of under RM20 billion, not

RM51 billion.

Unless LGE is claiming you can apply open tenders to wages and subsidies, I 'm afraid the claimed

savings are grossly exaggerated.

2. In theory, an open tender should be superior to a closed tender or direct nego in terms of reducing

costs. However, I have yet to see any corroboration or research that supports PR's claimed savings. Inaddition, the more complex and risky projects are (e.g. the MRT), the less likely savings are to be

realised as the universe of potential bidders would be comparatively smaller (which reduces

competitive pressure) and project uncertainty would cause bidders to build that into their bids. The

biggest savings would be from simpler, lower face-value tenders, not the big ones that actually gobble

up most of the budget.

3. The budget surpluses and savings are a matter of public record. However the reduction in debt was

due to the transfer of water assets and liabilities from the states to the Federal government. Note that

this affected not just Penang, but almost all states whether PR or BN (here, here, and here).

4. I can't comment on the numbers, but crime isnot just a matter of enforcement. Higher enforcementcould potentially reduce the level of crime at any given time, but it would not affect the trend.


thank you for the clarifications.

it does seem too good to be true.

1)in PR Alternative Budget, did it forecast savings from procurement and development?

2) regarding budget surplus and cash reserves, where can I see the data? how does other states fare against

Penang and Selangor?

3) wow, the debt restructuring is an eye opener. LGE is basically lying through his teeth. and to think Zambry

https://www.blogger.com/profile/06265308095732759923



http://satdthinks.blogspot.com/2011/10/was-yellow-ah-beng-being-proofy-again.html



http://satdthinks.blogspot.com/2012/01/analysis-of-negotiation-skills-in-water.html



http://satdthinks.blogspot.com/2012/05/between-zambry-and-guan-beng-which-one.html



http://econsmalaysia.blogspot.com/search/label/crime















3

got a better deal by having to keep 200 million of assets

4) i am surprised that there is no research findings that support savings from open tender. it appears to be a

given. btw how does the federal govt perform on open tenders.. are there any data showing how many

percentage of govt project is open tender.. and which are negotiated..

thank you for the reply

hishamh September 10, 2013 at 11:35 PM

@anon

1. Yes and no (link ). See page 10. There were same savings penciled in for procurement (about 20%), but the

development budget was substantially boosted.

2. The Auditor General reports on the summary financial position of each state. I don't know if anybody has

thought to actually tabulate all of them for public consumption.

3. Technically, he is not lying. I think a better phrase would be that he's being economical with the truth.

4. You can find a running total here. Unfortunately, contract values are not published, which would be useful

(note the majority are direct purchases, not tenders). That makes sense, as holding a tender (closed or otherwise)

is costly and time consuming and would only be worthwhile for larger contracts.

As for the evidence, the theory itself is sound. As open tenders would be made available to more bidders

(greater market access and competition), the likelihood of a more efficient bidder winning would be enhanced.

Closed tenders or pre-qualifying tenders, which restrict the number of market participants, would allow some

degree of monopoly rents.

Proving this is a lot harder than it looks however, as we can only see the results of one or the other, but not

identical contracts given under both systems i.e. you cannot construct a scientific experiment where you only

differentiate the variable of interest (closed or open) while holding all other factors constant.

Most people assume you can take the tender variance (difference between highest and lowest bids) as proof of

"savings", but this is a false comparison. I 've been involved in complex tenders myself, and in my experience

most of the variance can be explained by qualitative factors (quality of materials, design considerations, creative

input for example, not to mention the quality and comprehensiveness of the tender documentation) and not

necessarily a result of the type of tender system used.


Dear Hisham

thank you again for the links.

1) From the AB, they are looking at a RM6bill savings from procurement. A far cry below the RM51bill

mentioned in the speech.

2) Yes, it would be nice for someone neutral to tabulate all the date for public consumption.Even better with y-





http://www.keadilanrakyat.org/wp-content/uploads/2012/09/Belanjawan-Pakatan-Rakyat-2013-vAkhir.pdf



https://www.audit.gov.my/index.php?option=com_content&view=article&id=289&Itemid=301&lang=en



http://home.eperolehan.gov.my/v2/index.php?option=com_content&view=article&id=554














4

o-y data.

Reading the Auditor General report and comparing Perak and Penang writeup. Is Penang really doing

significantly better? And is there great savings made by penang.

Perak

"Overall, audit analysis found that the financial position of the State Government for the year 2011 issignificantly better than in the year 2010. Consolidated Fund in the year 2011 amounting to RM780.73 million

has increased by RM18.40 million from RM762.33 million in the year 2010. Total revenue collected during the

year 2011 has increased to RM27.11 million, while investment in the year 2011 increased by RM19 million or

2.6% to RM758.70 million. In the year 2011, operating expenses increased by RM45.05 million to RM797.86

million. Account payable for the year 2011 increased by RM3.36 million to RM25.92 million. Besides, the

financial performance of Consolidated Revenue Accounts in 2011 has shown a surplus of RM22.43 million as

compared to a surplus of RM40.37 million in the year 2010. Total arrears of revenue in the year 2011 decreased

by RM59.71 million to

RM151.56 million as compared to RM211.27 million in the year 2010. While recoverable loan has increased by

RM52.92 million in the year 2011 to RM964.95 million as compared to RM912.03 million in the year 2010.

The State Government should maintained a good financial management performance and spend prudentlywithout compromising the quality of service and state economic development

3.

In order to succeed the Tenth Malaysian Plan, a total of RM1.5 billion budget was approved by the State

Government. This provis ion has been distributed to 10 departments/ offices. Overall the performance and

implementation of development of Tenth Malaysian Plan in the year 2011 was good. As at 31 December 2011, a

total of RM264.63 million or 97% had been spent as compared to the approved budget of RM273 million. There

were 5,287 projects or 96.7% had been successfully implemented from 5,469 projects approved while the

remaining 182 projects were either delayed, not yet started or in the planning stage. "

"Generally, the Audit analysis revealed that the financial position of the Penang State

Government as at the end of 2011 has improved compared to 2010. In 2011, the

Consolidated Fund showed an increase of RM2.56 million or 0.2% to RM1,133.74 million

compared to RM1,131.18 million in 2010. The balance of Consolidated Revenue Account as

at 31

December 2011 has increased by RM138.31 m

illion or 24.2% to RM710.81 million from

RM572.49 million in 2010. Revenue collected in 2011 has also increased by RM192.19

million or 46.8% compared to 2010, from a to

tal of RM410.70 million to RM602.89 million.

The assets comprising cash and investment remain unchanged at RM1.13 billion. The State

Government is recommended to maintain the performance of increasing revenue and

prudent spending to ensure continued good financial position.

Better investment analysis

should be carried out to increase the dividend returns on investment and also make

continuous efforts to collect arrears of rev

enue totaling RM77.84 million as at the end of 2011

which comprise of quit rent, repayment of student loan, installment or rental of the shops and

other revenue.

For the Tenth Malaysia Plan of Penang to be successful, a ceiling of RM810.29

million was allocated by the State Government for the period of 5 years for 2,489

development projects to be implemented withan approved total allocation of RM557.25

million.



5

Overall, the implementation of development projects under the Tenth Malaysian Plan

which is funded by the State Government was very good because 2,455 or 98.6% of 2,489

planned projects have been successfully completed. However budgetary performance was

found unsatisfactory because only a total of RM171.05 million out of RM557.25 million

allocations was spent.

"

3) economy of truth. ah that is one way to spin it. I must admit.. I am a big supporter of LGE so founding thisout was quite disheartening and a big eye opener for me.

4) in terms of comparison between different methods of procurement, perhaps the building of schools and roads

could be used for comparison. the specifications are pretty generic and building materials used are the same.

is there any ways to verify Penang's claim that 70% of state contracts were awarded to Bumis?

thank you again for the info and education!

hishamhSeptember 12, 2013 at 5:08 AM

@Anon

You're welcome!

It's very difficult to disentangle in a statistically rigorous way the effect of different leadership or policies have

on growth. Different states have different economic structures and respond to outside shocks differently, with a

correspondingly different impact on state finances.

Moreover, the record of spending and savings alone do not portray a complete picture, as you cannot assume

that the level or quality of service delivery is the same. Which one is better depends on the perspective onetakes.

On point 4, yes that would be one possible strategy to take. Unfortunately, we'll need the data to actually prove

it.

No, I don't know personally of any way to verify the claim on Bumi contracts, though I have no particular

reason to doubt it. I would be interested however if the contract face values correspond to the number of

contracts.


1) Then how do we know which leadership is doing a better job? Is there at least an indicator we can look at?

2) Perhaps the Penang or Selangor state govt could do the 'experiment'. that would prove once and for all their

point, assuming the experiment proves that open tender really do provides astronomical savings

3) Yes. that is what I am wondering too. The number of contracts is one thing. But what's more essential, one

that Penang curiously is being 'economical' about, is the face value of the contracts.

hishamh September 13, 2013 at 12:15 AM


















6

@anon

1. "Better" depends on what is more important to you and what your priorities are, which would be different for

each person. If minimising fiscal spending is important to you, than I'd say they've done a decent job. If the level

of service delivery is more important (and hang the cost), then maybe they haven't. Some people will give their

support based on environmental, social or business reasons - they're all valid. That's why we have a democracy.

Personally, I'd go by their economic policy platform, and not so much on performance, because performance isdictated by many factors outside the control of either state or federal governments. But that would just be me. I

can't answer the question for you because you would have different preferences.

2. Yes that would be one way. Better yet if somebody independent conducted the study.

Anonymous September 13, 2013 at 12:38 AM

Thank you for answering my queries

Anyways.. can you comment on this statement

https://fbcdn-sphotos-e-a.akamaihd.net/hphotos-ak-

ash3/q71/s720x720/1174520_539809366091863_773215944_n.jpg

And is it true that Sarawak contributed the most revenue for Malaysia?

http://www.freemalaysiatoday.com/category/nation/2013/09/11/dap-vows-to-ubah-rural-sarawak/

hishamh September 13, 2013 at 8:40 PM

I can't verify whether the numbers are correct, but I have no particular reason to doubt them.

Based on my hazy recollection of the law, this is a pretty tricky legal situation. Land and property rights are

always under state administration, not federal, but these rights do not extend to mineral rights or waterways

(inland or offshore). Basically, state rights end at anything more than six feet underground or beyond the high

tide mark.

So technically, Petronas is under zero obligation to pay anything at all to Sabah, Sarawak or the East coast

states, although they do anyway.

Most of the actual oil & gas extraction actually takes place beyond the three mile mark, which is another legalgray area, as by convention this would be - again technically - international waters. I don't what justification we

use for this, though there appears to be ample legal precedent (e.g. Denmark, Norway and the UK drilling in the

North Sea).

T U E S D A Y , A P R I L 2 , 2 0 1 3

Somebody FINALLY Writes A Decent Paper On The Middle Income Trap

I’ve been meaning to cover this since it landed in my inbox last week, but hadn’t found the

time. But this new IMF working paper gets a big thumbs up from me (abstract):

Growth Slowdowns and the Middle-Income Trap

Aiyar, Shekhar and Duval, Romain; Puy, Damien; Wu, Yiqun & Zhang, Longmei








http://www.imf.org/external/pubs/cat/longres.aspx?sk=40411.0








7

Summary: The “middle-income trap” is the phenomenon of hitherto rapidly growing

economies stagnating at middle-income levels and failing to graduate into the ranks of high-

income countries. In this study we examine the middle-income trap as a special case of

growth slowdowns, which are identified as large sudden and sustained deviations from the

growth path predicted by a basic conditional convergence framework. We then examine their

determinants by means of probit regressions, looking into the role of institutions,

demography, infrastructure, the macroeconomic environment, output structure and trade

structure. Two variants of Bayesian Model Averaging are used as robustness checks. The

results — including some that indeed speak to the special status of middle-income countries —

are then used to derive policy implications, with a particular focus on Asian economies.

I’ve generally found academic research into the middle income trap (I refuse to dignify the

expression with capital letters) to be largely unsatisfying. Either these papers write about how

to get out of one and take the phenomenon as given or when investigating it, use atheoretic

arbitrary definitions like the number of years taken to exceed a certain income level.

I find the latter variety more than a little hard to accept, because you can spin the results anyway you want by tweaking the income levels or the number of years used i.e. it’s open to

fitting the data to the model rather than the other way around. In other words, you can easily

“prove” any particular preconceptions or stylised facts you may hold, which isn’t rigorous

enough proof for my taste.

The other thing of course, is by any of the definitions I’ve seen in use, nearly every single

developed country in the world today has been in a middle income “trap”, simply by virtue of

the length of time taken between income levels (e.g. Britain during the Industrial Revolution).

But this paper is DIFFERENT, and those capitals are deserved. The biggest difference is thatthe link between growth and development theory with the empirical data is finally there. The

authors define the middle income trap very specifically as deviations from convergence, not

as slowdowns in growth per se. That might not seem a big deal, but it effectively removes

much of the potential for data mining from the econometrics.

Let me explain: the idea of convergence springs from the basic neo-classical growth model.

Growth is derived from factor inputs (capital and labour) and technology. As countries

develop, growth in factor inputs slow – greater capital stocks attract greater risk of

obsolescence, requiring higher rates of investment to maintain a given level of “productive”

capital stock. Population growth first accelerates as lifespans increase and infant mortality

drops, then decelerates as fertility later drops.

In the end productivity becomes the final arbiter of economic growth. The quintessential

middle income trap occurs when productivity growth in a middle income country is

insufficient to maintain progress towards high income levels when the growth in capital and

labour has already slowed.

Technology has a special role to play here as developing countries, by definition, have a

lower technology level than the most advanced economies. Growth can thus be accelerated

by “borrowing” technological advancements from other countries. As the technological level

starts approaching the global ceiling, this source of advantage will slowly disappear, and any



8

further growth needs to come from innovation, i.e. internal additions to the level of

technology.

The upshot of it all is that growth slowdowns are a “natural” occurrence, a consequence of

declines in the increase of factor inputs as well as a technological level that is approaching

the global maximum. Barring setbacks, a country on the development path should see its

income level “converge” very quickly towards the global maximum when beginning from the bottom, but gradually slow as it reaches the heights.

With this in mind, the middle income trap thus would not be a growth slowdown

in absolute terms, but a slowdown relative to the growth trajectory defined by convergence,

conditional on existing factor endowments.

Put more simply still – imagine a road that goes up, and gets progressively steeper as you

climb. The stronger you are the faster you can run to the top, but the higher you climb the

harder it is to keep going at the same speed.

You’re only in an income trap if you’ve gotten off the road. This could be from tiredness

(low productivity), but it could also be from tripping up (policy mistakes), or someone

pushing you off (war).

Theory and empirics coming together – I love it!

A second difference is that the methodology used allows for testing income traps at all

income levels, not just in the middle income strata. And they test for multiple causal factors

of convergence slowdowns (both in levels and in differences), checked robustness through

different income definitions – as I said, I love this paper, they touched so many bases.

As for the results – they come to the conclusion that a middle income trap exists (higher

propensity for middle income countries to experience convergence slowdowns), that

convergence slowdowns are a higher risk for developing countries, and that episodes of

convergence slowdowns peaked in the 1980s (25% of the sampled countries). The latest data

for 2000-2005 shows incidence of convergence slowdowns had dropped to just 9%.

Probably more important than the identification of convergence slowdowns, are the policy

implications. Page 29 has a summary table of the results (for policy makers: the heatmaps

on Pg 33 – 34 would also be very informative, as is the spider web analysis on Pg 36). The

table basically outlines those reforms and policy initiatives required to avoid a convergenceslowdown.

There are some interesting quirks here – for example, deregulation helps to avoid slowdowns,

but once regulation is already light, further deregulation does not matter. Same thing with

government size – shrinking the government sector helps, but only if you keep doing it. Since

there’s a limit to downsizing, that suggests that you can only reduce risks just so much.

Strong rule of law however, always matters. High capital inflows also matter a great deal –

capital controls, anyone?

And so on to the trillion dollar question – is Malaysia in a middle income trap? At least asdefined within the sample period in this study?



9

And the answer is…

…No, but we used to be.

Convergence slowdowns in Malaysia occurred in two periods: 1980-85 and 1995-2000.

These episodes coincided with deep recessions i.e. not the sustained slower growth paradigm

of a “traditional” middle income trap. In the former, Malaysia was the odd man out along

with Hong Kong among a gaggle of Middle Eastern and Latin American slowdowns. The

latter episode, during the Asian Financial Crisis, was more a regional phenomenon.

One last thing of note here – even with its firmer theoretical foundations, this paper also

basically rebuts the basic tenets of the middle income trap hypothesis as it is typically

defined. Growth slowdowns across the globe, of both the absolute and convergence variety,

happen for a variety of causes not necessarily directly or even indirectly linked with

productivity.

In the end what it all boils down to is the specific drivers of growth, which would be different

for each country with their different levels of capital, labour and technology, geographical

locations, cultural and historical contexts, and a myriad other variables.

Technical Notes:

Aiyar, Shekhar and Duval, Romain; Puy, Damien; Wu, Yiqun & Zhang, Longmei, "Growth

Slowdowns and the Middle-Income Trap", IMF Working Paper No 13/71, March 2013

Hafiz Noor Shams April 4, 2013 at 5:17 PM

I have some thoughts about the paper, especially since if middle income trap is merely a divergence from steady

path, is it really a trap?

Also, I have a feeling there's an issue with the middle-income definition. I know they chose several definitions

and it all showed the middle growth had high proportion of slowdown. But, low-income and high-income

countries have pretty much stable growth. Only the middle-income have pretty volatile growth because, well,

they're growing and the others not so much. The paper may mistaken volatility with "trap".

Other than that, libertarians will love this paper for its implications.

Anonymous January 25, 2014 at 11:09 PM

HishamH,

Is the paper Growth Slowdowns Redux: New Evidence on the Middle-Income Trap equivalent to the paper you

introduce above? Or is it a different thing all together? What is your thought on this?

http://www.nber.org/papers/w18673.pdf?new_window=1

hishamhJanuary 27, 2014 at 8:38 AM





http://maddruid.com/

http://econsmalaysia.blogspot.com/2013/04/somebody-finally-writes-decent-paper-on.html?showComment=1365067064495#c1980159648210523341













http://maddruid.com/





10

@anon

No, it's not the same. This paper suffers from the same problems of other papers on this subject have -

arbitrary thresholds, and trying to shoehorn theory into the results.

M O N D A Y , A U G U S T 1 5 , 2 0 1 1

The Myth of Malaysia’s Middle Income Trap

It’s a stylised fact and almost universally accepted that Malaysia is caught in a middle income

trap. But a funny thing happened when I went looking for the evidence – it’ incredibly hard to

find. And thinking about the issue made me more convinced that the whole idea is about as

real as Hogwarts.

Taken at face value was does the term mean? Simply that a middle-income country stays a

middle income country, and doesn’t make the leap into high income status. There’s also the

notion of a poverty trap for countries; that low-income countries are unable or unwilling to

make the necessary structural changes to achieve a growth “take-off” and start on the long

road of development.

I hadn’t the time to try and track down the antecedents of both ideas, though they appear to

have originated in the 1950s and 1960s (concurrent with the advent of development and

growth economics) and formed the basis of large scale foreign aid to low income countries by

the likes of the World Bank. In fact you could say that the whole raison d’être ofdevelopment institutions such as the World Bank and the Asian Development Bank is that

countries need “help” – especially large scale, expensive “help” – to get going. I don’t want

to get sidetracked into that particular debate, so I’ll just concentrate on Malaysia’s particular

“problem”.

The reason why I haven’t been able to fully track these ideas down is that, despite a decent

literature search, there’s an incredible lack of academic papers on the “trap” condition itself,

as opposed to how to get out of one. That doesn’t make sense to me – where I’ve been able tofind references, the idea of a “trap” is taken as a given, with lots of advice to aspiring

countries on what to do to get out of one. There’s hardly anything empirical on what middle

or low income “traps” actually are, much less if they actually exist. How you can define a

policy path based on a particular problem, yet almost completely ignore the conditions and

particularities of the problem itself, is beyond me.

There is however a consistent narrative that underscores the idea of a middle income trap and

it goes something like this:



11

1. Low income country begins by development through low wage manufacturing;

2. Growth is driven by a shift in labour resources from low productivity agriculture to

higher productivity manufacturing;

3. Investment in the accumulation of capital relative to labour drives productivity

improvements, both absolutely and relative to agriculture and mining;

4. Rapid growth comes from both an increase in productivity and an increase in the

quantity and quality of factors of production (investment in fixed and human capital;

improvements in healthcare and diet cuts mortality rates and increases population

levels);

5. At some stage, diminishing returns sets in for capital, while population growth slows

to a maintenance level;

6. Since growth is now dependent solely on total factor productivity, rather than

increases in the factors of production themselves, countries that lack the capability toimprove productivity find growth potential limited by this constraint and remain stuck

as middle income countries.

This narrative seems to describe Malaysia pretty well – we’ve nowhere near matched the

record of development posted by the likes of Singapore or Korea for instance. There’s no

doubt as well that manufacturing – especially export-oriented manufacturing – appears to

have hit a wall:



12

But there’s a number of ways I can pull this argument apart. Let’s take the obvious first – for

a middle income country to remain a middle income country, growth has to have stalled

relative to the high income target. Here’s the raw data (GNI per capita; RM ‘000; 1970 -

2010):

Apart from three identifiable recessions (1985-87, 1996-2001, 2009-2010), growth has been

steady, if not spectacular. The World Bank’s definition of high income only came into being

around 1987 (click here for the data and history of the World Bank’s income definitions) –

here’s the chart above as a ratio to that definition (GNI per capita in USD; ratio to World

Bank High Income Level; 1987-2010):

http://data.worldbank.org/about/country-classifications/a-short-history






13

You’ll notice that there’s a lot of movement here – the 1997 financial crisis caused a massive

loss in relative welfare, as did this past recession, though not quite to the same degree. It took

nearly five years for Malaysia to make up the ground lost in 1997, something which we’ve

almost achieved in a year this time. The 2001 recession on the other hand was a mere speed

bump.

But looking at the ratio above, there’s one thing you don’t see – stagnation. At almost no

point, save in the early 1990s, could you reasonably point to and say “TRAP!” In fact, the

recent record is actually pretty good, as we’ve almost covered a third of the distance to the

high income threshold in the past decade alone. More formally, ADF and PP tests strongly

reject the hypothesis that the ratio is stationary in levels.

Another way of looking at the same thing using different data is through the Penn World

Tables, which has a few indicators measuring per capita GDP as a ratio to US per capita GDP

(index levels; US=100; 1960-2007; G-K method;PWT ver6.3):

http://pwt.econ.upenn.edu/








14

The picture here’s slightly different, but the conclusion’s the same – Malaysia’s per capita

income is still gaining ground on that of developed economies. There’s only a few periods

(pre-1968; 1980-86; 1997-2001) where you could say that Malaysia’s economy was

“trapped” – otherwise, we’ve made continually progress. Again, formal tests point to non-

stationarity.

Digression: It was interesting to look at the experience of the NIEs in this context – we’ve

always been treated as poorer cousins to them, despite starting off on nearly the same footing.

So I can’t resist inserting the following (log ratios to US GDP per capita; US=100):

Singapore and Hong Kong started off richer than Malaysia and maintained their lead. We

started better off than Korea and Taiwan, but ended up behind because of two factors – poorgrowth pre-1970 and losing a lot of ground in the 1985-87 recession. More research required

here obviously…and now back to the topic at hand.



15

The past, as they say, is prologue. Just because growth has rather inconveniently not stalled

as per the “trap” hypothesis, doesn’t mean it can’t happen in the future. But even here, there’s

more than enough grounds for rejecting it.

Recall the narrative of the middle income trap above – rapid factor accumulation plus higher

productivity from the shift to manufacturing drive the initial growth phase out of low income

status. As economies mature, factor accumulation slows and productivity gains becomeharder to achieve, “trapping” countries who can’t make the transition to higher value added

manufacturing.

The first and very obvious shortcoming here is that this narrative essentially recognises only

one path to development – that of industrialisation. But looking at the milieu of high income

economies today, it’s obvious that there’s more than one way to skin this particular cat. Of

the East Asian economies to make the full transition to industr ialisation, I think it’s fair to say

that only Korea and Japan have followed that road. Taiwan’s more of a mixed economy, and

Hong Kong and Singapore have thrived on services. Europe’s experience is similar – for

every Germany, there’s a Norway or Switzerland.

If we look at development policies, again there’s considerable heterogeneity. Japan and

Korea followed an almost socialist style industrial policy, with Hong Kong’s laissez faire

economy diametrically opposite. Singapore’s policies falls somewhere in between with an

emphasis on pragmatism, and you could say that Taiwan’s policy with respect to

development to be one of benign neglect. Yet all these economies managed to make the leap

to high income status. This suggests that there’s the individual structure of the economies in

question matters – and means that there’s no single “answer”.

Malaysia’s economy, need I point out, is pretty diverse. While export oriented manufacturingcarried the initial brunt of development (from the 1980s onwards), we’ve continued to

maintain a sizeable primary sector and now have a burgeoning services sector:



16

Focusing development efforts and investment on the latter (where measured productivity can

be higher than in manufacturing) is likely to produce greater benefits than trying to counteract

a trap that doesn’t exist.

Lastly, and the biggest reason why I reject the notion of Malaysia’s middle income trap, is

that we’re not past the factor accumulation stage. Malaysia’s demographics are highly

supportive of future per capita income growth. Birth rates have already fallen belowreplacement levels, yet we have a big cohort in the school years that will raise the ratio of the

labour force to the population. Any investment made to raise productive capacity or factor

productivity will produce considerable dividends down the road. We’re about to experience a

baby-boomer induced economic growth phase on par with that experienced by developed

economies in the post-WWII era.

Mark my words: fifty years from now, people will look back and see these next 2-3 decades

as Malaysia’s golden era. While the ETP and NEM will probably get the credit, this is a

structural transformation that’s been years in the making.

roger dodgerAugust 16, 2011 at 10:28 AM

Interesting point for discussion there. One thing I've pondered is what to make about the debate regarding

manufacturing and services (e.g. manufacturing good, services bad, or vice-versa).

Would like to refer you to debates and commentary on this: http://www.economist.com/debate/overview/207

and http://www.economist.com/node/18712351

It seems that our manufacturing base appears to decline relative to services. Don't you think that there will be a

'hollowing-out' of the economy as we increasingly move away from manufacturing industries to service and

(ironically) commodities (e.g. palm oil, O&G)

Plus the comment in one of the articles that service as a share of trade has plateaued - does that not bode well for

a country which places an over-reliance on services (e.g. Britain and its financial industry)?

AnonymousAugust 16, 2011 at 4:09 PM

Hishamh,

Agree with your analysis on the postive demographic effect on Malaysia's economic growth.

However, you have not touched on the serious issue of brain drain in Malaysia. Despite having an advantage in

terms of population growth and demographic profile over country like Singapore, we are losing a big number of

our brightest and high pontential citizens who go overseas to contribute to other economies to the extent of even

competing against ours.

Your thoughts please?

hishamhAugust 16, 2011 at 5:09 PM

@Rodger

Thanks for the links mate, interesting reading. I'm not advocating a single route towards development - note thatmy charts show relative shares in GDP, not growth. There's scope for a further drop in manufacturing share

without necessarily jeopordising our manufacturing base. And looking around there's still ample scope for

http://econsmalaysia.blogspot.com/2011/08/myth-of-malaysias-middle-income-trap.html?showComment=1313461718867#c8404980225585290438















17

growth in services (not just finance).

@anon

While the brain drain looks big in actual numbers, it's not that big in terms of the marginal loss of people per

year. So I'm not too worried about it, especially since higher growth and higher per capita incomes will

inevitably attract some back in the future. The ability to make money papers over a whole lot of other faults...

SkiAugust 16, 2011 at 6:06 PM

This post of yours is precise...in terms that it sets the other end of the judgement scale of Malaysian economic

outlook. The realization of Malaysia's middle-income trap is a notion which has been regurgitated to death and

its refreshing to see a fresh take backed up with some opposing evidence. Yet, the conclusions here seem to be

substituting an overly negative view with an overly optimistic one.

I agree with all your points that highlight 'holes' in the middle income trap theory, and indeed most of your

evidence is irrefutable. However i believe your evidence certifies that Malaysia's middle income trap is not as

profound as a lot of economic analysts seems to make out (@ anonymous).

Yet, this is not to say that Malaysia being caught in a middle income trap is the stuff of fantasy. A main point

which you fail to address is that, apart from the numerical calculation of a middle-income trap, is the factors

pertaining to HDI, specifically Malaysia's 'Brain Drain' which acts as a massive withdrawal to the economy as

well as leaving a bleak scope for the future. Furthermore, your usage of Nominal GNI figures is limited as it

does not take into account the extensive rise to the cost of living (as well as rising commodity prices). Rising

costs are so substantial that "Within the next 5 years, it is expected that Kuala Lumpur will be as costly to live as

London" (quoted from Global Innovation Index 2011). This will also have disastrous implications on Malaysia's

ability to attract FDI, arguably an economic necessity in order to rise to a high-income level.

Anyway, my main thoughts were on your "incredibly hard to find", thought i could assist:

-http://www.sti.or.th/sea-eu-net/form/Malaysia%20Country%20Profile%20draft%202011-05-26.pdf

-http://www.neac.gov.my/files/Malaysia_Economic_Monitor-Brain_Drain.pdf

-http://www.globalinnovationindex.org/gii/GII%20COMPLETE_PRINTWEB.pdf

Here's a few statistical analysis papers i had on file that speak specifically on current information pertaining to

Malaysia's middle-income trap.

Hope to hear some feedback :)

wallaAugust 16, 2011 at 7:52 PM

Product angle: http://is.gd/rz33hl

Still looking for services angle...

What worries me is this:

We have commodities, manufacturing, oil and services.

Commodities is holding its own but it is worked by foreigners; if Indons, their economy is up and twenty

percent who would have come here have decided to stay back so that's also a specter ahead. And since owned by

a few, what reason have the estate owners to share their incomes with the locals who didn't work on them?

Taxes via government as income dispenser? Another debate.

Next, manufacturing is hollowing out because other cheaper places are up all at the same time and because we

had maxed at quasi-industrialization phase only so we are at best today only OEM and not ODM. So how to go

beyond that? HK and Sg were manufacturing bases. They're not today even when their brain-pool is bigger.

In fact, it can be eye-opening to take a drive into all the industrial zones and just see what actually is happeninginside them to get a better feel of the conclusions from charts.













18

Next, oil is sunset so the price will go up, giving a nice rush and then the bottom will be pulled away when it

dries up; the day we become a net oil importer, our power plants will demand more tariff in order to survive;

that impact needs to be factored, perhaps with other things like purchasing-power parities, inflation, and

competitiveness.

i also have a problem with services because i can't figure out how the eighty percent of the workforce with only

an SPM sijil can raise their productivity and earn more income beyond their salary scales.

Say they're not in banking or civil service. Where else? Nurses in private hospitals earning good income from

medical tourism? How small is that on a 'per capita basis' which is the central unit of measure in the entire

argument?

Allow me to make perhaps an error here: 'per capita basis' averages aggregates and hides lumpiness; a lot of

wealth is held by a few under corporation banners which have been out-flowing funds lately. If a govt has to

keep announcing the same projects as FDI, one can only conclude DDIs are few where real value is to be

created, and FDIs have also been few and that is immensely troubling; for instance, say Arab money is nulled in

Iskandar and the Jln Tun Razak financial hub; how will these projects look immediately?

So my concern is the diversity/heterogeneity factor is not strong enough where one element can compensate forthe others and this feature the charts don't depict.

We don't have an amalgam of abilities led tenaciously by contextual intelligence with a pragmatic global spread.

hishamhAugust 17, 2011 at 9:33 AM

Hi Ski,

Thanks for the links, but those papers are like those I’m complaining about – they talk of a middle income trap,

yet do next to nothing to prove it.

Secondly, the problem of brain drain is serious, but not in the context I’m talking about here. Consider this – Malaysia’s brain drain has been going on for decades and has accelerated in the last ten years. Yet, this has

hardly put a dent in Malaysia’s gains in income per capita. Will it have an effect down the road? Certainly, but

not to the extent of derailing the demographic transition phase we’re about to enter. To do that, the loss of

human capital needs to be far, far greater.

The World Bank report on brain drain was poorly done – it seems written more to shock and get attention rather

than a rigorous treatment of the problem (the survey was a bad joke and should never have been attempted). The

economic costs of brain drain have even been challenged from within the organisation. The question is: how

much of Malaysia’s brain drain stems from our special circumstances, and how much from the “normal”

immigration of talent from developing to developed countries? Globally the number one reason for immigration

of high value human capital is economic. But that suggests that with time, economic growth and development inMalaysia will make it increasingly attractive for our diaspora to come back – and to attract talent from poorer

countries in the region.

The latter maybe an idea that Talent Corp should be pursuing more vigorously instead of trying to get

Malaysians to come back, as I’ll lay odds we’d have better chances of success. After all, isn’t that what

Singapore’s been doing to us all these years?

AnonymousAugust 17, 2011 at 9:56 AM

The issue of brain drain is avery subjective issue. The argument Malaysia is doomed thanks to some PhD

holders leaving Malaysia is unclear..is there any correlation between a country's growth with brain drain?Last

time I red Australia caught 5 Malaysian with drugs, are these the brain drain you're talking about?The phillipine/indonesia have massive brain drain that repatriate foregn exchange to their home countries...so what is

te effect of brain drain on Malaysia...?which category...




http://blogs.worldbank.org/allaboutfinance/node/660












19

The brain drain who fled to singapore are not talents, they migrated there for better pay, most are not involved in

RnD and are mere cheap engineers and end up as RnD assistabts who wash test tubes.If not, why are Sinapreans

despising the Malaysian foreign talents who are competing with them for HDB flats/jobs/school

placements..most of these Malaysian PRs will eventually flee Singapore due to the high cost of living...true

there are talents like Olivia Luma nd founder of Hyflux, but what is done is done.

We have 28 million people whom we can nurture and develop and we have a good education system despitewhat people say. I have seen technicians and a documentation engineer promoted to senior engineer and

regionalQuality manager respectively as our US corporate heads see their potential and perseverance and willing

train them and they do not speak Mandarin or impeccable Queen engrish.Imean even the Japanese and Italian

engineer si met do not speak proper english but we do not see any issue..

I always doubt the figures that 80% of our workforce is SPm holders, we have 12 million workforce, can

someone give me exact statistics how many are exactly SPM and even college educated.none can provide the

answer,its just hearsay , as a baby boomer generation, most of my classmates are degree graduates and at least

have a diploma,even my relatives are pursuing education in some way..certificates,diploma etc.Even if we look

around us, we have many colleges/universities churning out graduates and most of us us haveworked outside our

fields, I worked in marketing before and I got an process engineer job at a US/German semicon plant..we areworking hard to build our future.

hishamh,I like your article, it may not be 100% true it is one of the few good news about our future around on

the net....for 10 yers I read stuff in alternative news on how our country is doomed and gloomed due to nitty

gritty issue and we are seeing countris with high speed trains and better public transport and people who queue

going up in flames.


Walla, good points as always. I've actually read that paper you linked to in prepping this post. As you've no

doubt noticed, there's a distinct paucity of other good sources on the subject.

Here's some food for thought:

1. Interesting factoid - we're short of foreign workers in plantations because wages are actually higher in

Indonesia.

2. One fine day I'm going to a post on the myth of Malaysia's loss of competitiveness :). Consider that after a

decade of double digit wage inflation, China's cost advantage is nearly gone. Vietnam and Indonesia are

cheaper, but they don't have the institutions or the infrastructure to scale up yet. Also consider that the old view

of mercantilist trade competition doesn't really apply here in East Asia - we're part of a long supply chain, and

not necessarily competing with each other. I think at this stage, we're in a short term stable equilibrium with

respect to manufacturing competitiveness and a 5-10 year window of opportunity to go up the value chain before the others start catching up.

Digression: with all the angst over the hollowing out of US industry, it's interesting to note that US industrial

output has been increasing steadily over the decades. Implication - increasing productivity means stagnant job

creation relative to output. Say we do become more innovative and add higher value to manufacturing? We'll

need to handle the excess labour somehow, and services fits the bill.

3. Most of our power plants are gas-fired, not oil-fired, and NG reserves will last 50-60 years more than oil. In

any case, I've always favoured a tax on petrol instead of the current subsidy.

4. The essence of what I'm pointing out in this post is that productivity gains aren't strictly necessary to register

the required increase in per capita income. We're still at the stage where adding human capital is enough to raise

output. A rising cost level and an appreciating currency will do the rest. But there will be a divergence here -








20

costs of goods will become cheaper relative to incomes, but costs of services will need to accelerate. Material

sufficiency will be easier to achieve, but quality of life will become a more pressing issue. But that's a problem

endemic to all high income economies.

5. Another funny factoid I found while doing the literature search on this post - economic growth causes

investment, not the other way around. Something on my future agenda to prove or disprove for Malaysia.

But you've pointed out the biggest fly in the ointment here - how do we ensure that the gains in income will beshared equitably? That's my biggest worry, the distributional issue between labour and capital. One way would

be to impose capital gains taxes, but that would reduce business investment. Another option is to strengthen

labour laws, but that introduces rigidities into the labour market. Third possibility is profit sharing remuneration

schemes, but I'm struggling to figure out how to do this in the context of SMEs and non-listed companies.

Fourth way - make everyone a capitalist (savings channeled into higher yield securities rather than low paying

bank deposits), which has some promise as equity participation is still low. But this would not overcome the

problem of initial endowments (rich get richer etc) and inequality. We'll probably need to look at a combination

of these measures, but it's a pretty problem to be sure.


@anon 9.56

Sadly, the figure for educational attainment sounds about right to me - though you have to factor in the

differences between age groups. The older generations have a lower ratio of degree holders, which brings down

the average for the whole population. You can also get enrollment and graduation rates on Malaysia compiled

by the World Bank here. It's not pleasant reading.

We're making progress especially with the expansion of private tertiary institutions in the past decade, but even

if we doubled student capacity today it would be barely enough for my taste. The new emphasis on vocational

education can't be implemented soon enough in my view.

Greg LopezSeptember 1, 2011 at 11:01 AM

Hi Hisham,

Your right about the Middle Income Trap not having a theory - that's why it has not really caught on in

academia.

The World Bank and ADB though have a lot to say about it.

If your familiar with growth economics - a lot of this becomes clear.

The key question is "what growth rates are appropriate?". This of course is a political question. As you correctly

pointed out, we have been growing but at a slower rate - and this is not politically acceptable.

But there are other more important cause for concern. Human capital and ability to innovate are key to long term

sustainable growth. Here Malaysia is falling behind despite huge investment in education.

I have a summary of what is ailing Malaysia in this article.

http://asiapacific.anu.edu.au/newmandala/2011/08/22/malaysia-%E2%80%93-a-simple-institutional-analysis/


In addition to the works I've cited in my article on institutions, you may be interested in these works:

ADB, Asia 2050, 2011; WB, East Asian Renaissance , 2007; Imbs and Wacziarg, Stages of diversification,

2003; Kenichi Ohno Middle Income Trap, 2009.




http://databank.worldbank.org/ddp/home.do?Step=2&id=4&hActiveDimensionId=WDI_Series

















21

The key issue is not so much the trap but whether we can restructure the economy to a more competitive model -

raising competency and contestability.

Keep up your wonderful postings.


Hi Greg,

Thanks for the links.

I don't question the need for upgrading our software and hardware, but I do think that framing the problem in

terms of a middle income trap risks an inappropriate policy response *cough* high income status *cough*. High

income on its own is no panacea, and when we achieve that target (as I'm confident we will) yet with people's

perceptions of things not having changed much, the tension between raised expectations (as Idris Jala puts it -

"everybody will be rich") and actual realisation will be a political and social problem down the road.

NIzamSeptember 8, 2011 at 3:28 AM

Hi HishamH

very interesting view. good that i have found your blog, better late than never - a colorful view of Malaysian

economy indeed.

hope to catch you for TEh Tarik some time when im in KL...

Nizam

ed DOT precise AT gmail


Agree fully with you hisham.

In economic theory, increased incomes (welfare) is an organic process, as society learns to better deploy its

productive resources.

Malaysia has serious issues with allocation of resources. It continues to be top down. Hence my disagreement

with your article on East Asia Forum.

The government should retreat or take a hands off approach in deciding what "projects" contribute to growth. It

should let the private sector do it.

While selective state intervention is necessary to drive a poor country to higher income levels, it cannot play this

role when it moves closer to the frontiers of technology - i.e. state is good for catching up but not leading. This

relies solely in the creative process of individuals.

I don't see how ETP can facilitate this. My bigger problem as you would realise, is this obsession with ensuring

Bumiputera entrepreneurs must succeed.

The government is conflating two separate issues - efficiency and distribution. This should be addressed through

separate instruments.


Greg,




http://www.twnside.org.sg/



















22

I've only just seen my own article, so forgive the lack of reply.

I think the difficulty many are having with the government's programs is that there's such a smorgasbord of

acronyms that there's confusion as to which program is supposed to do what. Hell, I've been to a few of

PEMANDU's open days an presentations, and I'm only just beginning to understand what they're trying to do.

The ETP for instance is only intended to ensure the implementation and achievement of the investment targets

identified under the NEM. Institutional reform on the other hand comes under the GTP, while structural reformscome under the new Strategic Reform Initiatives (SRIs) and distributional issues under the 10th Malaysia Plan.

We don't hear as much about the GTP compared to the ETP - I hear less progress is being made here due to

vested interests (read: civil servant rice bowls). Much of the GTP is concerned with improving public sector

service delivery and legal reform, but it also involves culling ineffective projects and initiatives (you can just

imagine the resistance to this). The SRI's of course are spanking new, while the 10MP is nothing more than

spending priorities.

Maybe the government needs to do a better job communicating progress on these other fronts too, not just the

ETP. But then, since measuring progress here is much harder than the easy-to-sell investment numbers under the

ETP, I'm sure there's a political decision not to.

I'm not sure I agree that the NEM/ETP/GTP are "more of the same" top-down management of development. I

know a number of people who were involved in the formulation of the ETP/GTP projects and the former, within

the broad confines of the sectors identified under the NEM (none of which I disagree with), was definitely

private sector driven. In fact the complaint was it might have been toomuch private sector driven.


Hi Hisham,

Private sector driven...hmmm which private sector.

A point on government as facilitators and government as managers (the Malaysia Inc. model). The ETP is a

continuation of the Malaysia Inc. model where the government acts as a manager model.

If we agree that the private sector should take the lead, why does the government need to "decide" who gets

"what" project.

Allow the private sector to decide which projects is feasible. If more than one company wants to go into a

particular sector or undertake a project - go ahead. They should bear their own risks.

Why the need for EPPs? Why the need to have labs to discuss what areas are for new growth? This can lead and

I believe have led to collusion. Certain companies will get certain project - of course in Malaysia's very owntransparent manner.

Look at how the GLCs continue to intervene in the workings of the market. There is now less scrutiny because it

is all centralised within PEMANDU, which is within the Prime Minister's Department, and the Prime Minister

who also happens to be the Finance Minister.

On another note, here is the survey that was used in the Brain Drain report. You can contact the author if you

want to.

http://asiapacific.anu.edu.au/newmandala/2011/09/21/brain-drain-in-malaysia/

Cheers

Greg








23


Greg,

While I won't disagree with you with respect to the mega projects like the MRT and KLFID (which are about as

transparent as mud), I can't actually recall many EPPs being undertaken by GLCs. Certainly the ones that I work

with aren't involved in any big way.

The feedback that I've gotten from participants in the labs have been "good" in a perverse kind of way - the

debates and arguments were apparently highly contentious and confrontational.

A second point is that the EPPs are in no way "public" sector projects or even "public-private" partnerships,

except where GLCs are involved. The risks continue to lie with the investor here. I suspect many of the

investments so far announced actually predate the ETP, and were put forth mainly for the chance of faster

approvals and prestige purposes.

Greg LopezFebruary 4, 2012 at 4:58 PM

Hi Hisham,

This is a very late reply. Been finishing up my thesis. Happy New Year by the way.

You noted that that EPPs are in no way public owned (agreed) or even PPP except when GLC owned (not so

sure).

Assuming your correct, this would bring many of "government expeditures" off-budget, don't you think so?

Also, appreciate your opinion on the multi-layer "fixers" - PEMANDU, PEMUDAH, MIDA (One stop

investment centre) - basically all of these are about reducing transaction cost (would you agree), yet more

institutions/organisations are created to basically do the same thing.

Hence the ETP is really a "fixer" as the REFSA papers argue.

Also, in an earlier comment, you noted that the GTP is not moving (where the actual instituional bottlenecks

are).

Hence, do you think transaction costs can actually be lowered if nothing happens in the GTP?

Thanks

Yang Oi MunFebruary 6, 2012 at 11:33 AM

Our GNI and GDP growth per capita certainly looks impressive.

Nonetheless aggregates don't tell an awful lot about distribution. So I very much agree with @walla points.

1) The slack in manufacturing was well picked up by commodities super bull market in the past decade(minus

some violent price correction in 2009 and 2011)

2) IMO,the state of manufacturing is much worse than reflected in the drop as share of GDP&export. General

observation is that for every engineer there is probably a van load(or maybe even bus)of foreign workers.

3) Except for rubber tapping, I know of no Malaysians of my age who are doing non supervisory job in

plantations.

4) It would be helpful also to have the figures for services as percentage GDP&Export. As well as populationdetails of different sector.


















24

The tremendous growth in the service sector was probably a consequence of the need to absorb more and more

Malaysians moving away from goods/crops producing sector. I just hope that the service sector is not overly

reliant on the windfall from commodities.

"fifty years from now, people will look back and see these next 2-3 decades as Malaysia’s golden era"

Would only agree in a the case of a prolong Western deflation balanced by Eastern/South economic growth.

If US/Europe knocked the world into a global depression, then we will be very hard hit(not as hard as othercountries though). Meaning a crash in commodity price and manufactured goods demand.

Even if we can generate internal demand, how are we going to reintegrate enough number of Malaysians into

jobs that produce goods/crops remains to be seen.

hishamhFebruary 6, 2012 at 11:24 PM

@Greg,

I don't think it would be proper to say that we're looking at bringing govt expenditure off-budget - private sector

investment is still private sector, irrespective of whether it's under govt aegis or not.

I agree that that PEMANDU is a "fixer", though not in the sense that the REFSA papers have insinuated. I think

it's really a way to short circuit the govt machinery process (and turf battles), putting pressure directly on the

civil service beyond what could be achieved at the ministerial level.

Is that good or bad, I'll leave for the political scientists. But I'm reminded in this instance of "Yes Minister" (if

you've ever seen it). Political appointees are subject to "capture" by permanent officials. As much as that was

satire, I suspect it comes with more than a grain of truth.

Remember that PEMANDU is repsonsible for more than just the ETP, but also implementation of the GTP,

NEM and 10MP. Their remit also goes beyond the more narrowly defined roles of each ministry.

I don't think I said there was no progress on the GTP, more that there was considerable internal resistance to it.

hishamhFebruary 7, 2012 at 12:09 AM

@Oi Mun

1) In terms of growth, I agree. But apart from the sharp and deep drop caused by the recession, manufacturing

has now recovered to pre-recession levels and then some.

2) I think there's a slow move away from export-oriented manufacturing towards domestic - but it's a slow

process.

3) My brother-in-law's a padi farmer :)

4) Services share of GDP is actually available and announced in the quarterly national accounts report (from

which I derived the chart in the post). The services share of exports has been for the last few years recorded a

small surplus, primarily from tourism. Labour force for each sector is available via EPU or from DOS (second

drop down list, item 12).

Gains in services were pretty much across the board and faster than any of the primary or secondary sectors. Of

them all, I'd say only transport and storage sector might be particularly sensitive to commodities. Remember that

when talking about real GDP, price changes are stripped out.

"Would only agree in a the case of a prolong Western deflation balanced by Eastern/South economic growth."

You're missing the point of that part of my post. It's pure mathematics - our GDP per capita growth has GDP asthe numerator and population as the denominator. Population growth is dropping fast, but current labour force

growth is dependent on population growth 20 years ago when it was a lot faster. Ergo, GDP per capita must







http://epu.gov.my/web/guest/populationandlabourforce



http://www.statistics.gov.my/portal/index.php?option=com_content&view=article&id=1251&Itemid=109&lang=en











25

increase faster than GDP during this transitional period, irrespective of economic conditions here or abroad.

Since we're also looking at a ratio (GDP/GNI per capita relative to the World Bank's high income threshold, or

equivalently the US standard of living), not a level, these gains would likely occur anyway, even if the global

economy tanks.

As to how to absorb all these new entrants into the labour force, crudely speaking demand creates its own

supply - people need to eat, they need shelter, they need clothes and all the other myriad things that come withmodern life - and someone has to supply all these items.

While I don't believe in the absolute applicability of Say's Law, there's a certain truth in it.

And if you don't believe in that, there's always the ETP, which funnily enough aims to create just enough jobs to

fulfill the expected number of new entrants to the labour force in 2020.

Yang Oi MunFebruary 7, 2012 at 5:35 PM

Hishamh,

Thanks for the linkd. I must learn to build some charts.

Hopefully the downturn of our manufacturing has bottom out.

Understand that your post is about debunking on some vague mainstream assertions. So far figures for income

growth Asean and BRICS should be outgrowing global benchmarks.

Instead of preoccupying with main aggregates and speaking as a layman I am just of the opinion that we could

probably be more focused on domestic structural issues.

Dont know about Thailand figures. But their balance of manufacturing, agriculture, service and natural gas

looks pretty resilient from the outside. (barring political/natural disaster)

I am sure people can adapt. I am just concern of how the transition would be.

Greg LopezFebruary 11, 2012 at 2:51 PM

Hi Hisham,

Yes Minister is one of my favourite. And there is now Hallow Man.

If you have the time, look up Mustaq Khan on governance and economic growth.

http://www.soas.ac.uk/staff/staff31246.php

HE has some interesting views on how to square the politics and economics of growth.

ps: When you have the time, appreciate if you could comment on all of the REFSA articles on PEMANDU.

Cheers

Greg

hishamhFebruary 11, 2012 at 9:38 PM

Greg,

Not much to comment on the Refsa papers - I find it hard to take them seriously.


















26

WL Teo November 28, 2012 at 8:36 PM

Hi Hishamh,

Your article is very stimulating and has a good angle. Recently, 3 economists from Asian Development Bank

provided a working definition of "middle income trap" in a working paper published in April 2012. According

to that paper, Malaysia is in a middle income trap. A summary of that paper can be found in my post:

http://malaysianeconomy.wordpress.com

hishamh November 28, 2012 at 10:21 PM

Hi Teo,

Yes, I read that paper when it came out. I also note that their definition of middle income trap is arbitrary. To me

that's trying to get the data to fit the hypothesis, which isn't what I would call academically rigorous.

Some other pointers:

1. Note that Malaysia's growth has exceeded global growth nearly every year since independence, and is about

on par with our peers.

2. Most TFP growth estimates are also about on par with our peers, and exceeds that of Singapore. Insofar as the

trap hypothesis is a narrative about productivity, that suggests that we are not in one.

WL Teo November 29, 2012 at 10:17 PM

I do not think the definition is entirely arbitrary. Other things being equal, a middle income country should grow

faster than a rich country, since there is more opportunity to learn from the leader and catch up. This means that

a middle income country should close its gap relative to rich country, unless its economy is really in a bad

shape. But, the real question is how fast is the gap closing. If the growth rate is only slightly higher than the rich

world average, it could take literally decades for a country to graduate to high income status. Simply calling a

country to be not in a middle income trap because it eventually will get out of it (but perhaps after decades) does

not seem to be a good idea. That's why even if using median is somewhat arbitrary, I think the authors' criterion

is still quite useful as a guide.

I don't think the middle income narrative is only about TFP either. Growth in per capita GDP depends not only

on TFP but also on growth of capital per worker. If a country fails to move up value chain, growth of capital per

worker could slow as there is lack of investment opportunity and growth of GDP per capita can therefore be

slower, making the transition to high income status a much more delayed process.

hishamh November 30, 2012 at 12:15 AM

The problem here is that their definition is not with reference to catch-up to the global technology frontier (e.g.

catching up with the US, which is the way I approached the subject in this blog post), but from a sample of other

middle income countries that have graduated to high income status.

The underlying assumption would then be that the experience of these countries is "normal" and those who don't

meet that standard are ipso facto "lagging". This is like taking the upper end of a distribution of outcomes and

declaring it as the entire population - there is an inherent bias here (or if you prefer, a halo effect).

Second point is that there's also an underlying assumption that the sources of growth are entirely endogenous,

which isn't true. The first wave of Asian rebuilding/industrialisation after WWII was partly driven by US

spending on the cold war, the second wave by outward Japanese (and to a lesser extent, Taiwanese and Korean)

investment in the wake of the exchange rate adjustment created by the Louvre Accord - all exogenous events. I

could name a couple more, like China's 1993 devaluation that rendered everybody else uncompetitive at a

stroke.























Looking at the data, it's fairly obvious that Malaysia's record matches that of the NIEs, except that we were

badly affected in 1985-87 and in 1997-98, whereas Korea, Taiwan and Singapore were considerably less so. The

former recession was especially damaging.

If the middle income trap is an economic "process" (whether you accord the blame on TFP or capital intensity),

then one would expect a graduated response, not the sharply volatile movements around crisis points that we're

seeing in the data.

Another point is that recoveries after financial crises are always slower than business cycle recessions,

irrespective of the stage of development, which pretty much describes what Malaysia went through in the half

decade after 1997-98.

So we have a serious identification problem here - how to distinguish between what underpins the trap

hypothesis, and the exogenous events that have driven investment and output in Malaysia and the region.

If you look at the capital stock data (DOS has the time series available online), then it's fairly obvious that

growth in the capital stock (and in capital intensity) has fallen off sharply post-1998.

But again, that presumes that investment before 1997 was endogenously driven and appropriate for our stage ofdevelopment. That's something I don't accept - for one, the Japanese factor, and for another, the real estate

bubbles we endured in the mid-1980s and the mid-1990s. Most of the drop in capital stock growth in the last

decade came from falling investment growth in structures.

I worked in banking during the 1990s, and saw all this first hand - highly excessive credit growth, excessive

money supply growth, real estate and stock market speculation, and of course the aftermath of all the above.

What I'm getting at here is that there are growth spurts and growth slowdowns, but I don't believe that there is a

universal mechanism that explains why some countries succeed and some don't.

But thanks for the comments, you've given me something to look at over the next couple of weeks. I didn't have

access to detailed data on the NIEs when I did this post last year, but I do now. It be interesting to map out the

differences in the growth experience between those countries and Malaysia.

hishamh compiled

Documents