Sunday, March 27, 2005

Who benefits from the current pegged ringgit?

Title: Who benefits from the current pegged ringgit?
There is growing chorus nationwide calling to an end of the ringgit peg. Even both former Prime Minister and Deputy Prime Minister agree on this issue – its time to let the ringgit free float. The head of MIER said that the current regime only benefits a few, indirectly implying the exporters. Lately even the IMF joined the fray in calling for the ringgit float.
Meanwhile cabinet ministers and Bank Negara officials are adamant on the status quo, quoting each other that the current exchange rate is not far below equilibrium, less than 5%.
Given the medium term trend of depreciation of US dollar, the ringgit has depreciated around 20% against our major trading partners’ currencies, except United States. Our goods and assets have become cheaper to them, which is reflected in the merchandise trade balance and in the current account. Money continues to flow in, foreign reserves at record high; liquidity is high and interest rate very low. This cheap money fuels economic growth, at 7% last year.
In this fixed exchange rate regime, the government is using fiscal expansion, the only effective way in this situation. A lot of government projects have been revived and undertaken.

So what is wrong with this picture?
First of all, in any fiscal policy setting, the government is in control – where to spend, whom to spend on. Compare this to a fully monetary expansion – where the central bank, Bank Negara, controls the liquidity and the interest rates. The people are in control; borrow money, and spend or invest it on what is best for them.

The advantages for the government in the current below par fixed exchange rate are:
1. be able to spend money (fiscal expansion) without crowding out investment and increasing interest rates (Yes, give projects/licenses to favoured firms, let them borrow money at low interest rate and make profits)
2. because fiscal expansion does not result in higher interest rate(to a certain extent, in this environment), government can spend on where it want, and whom it want.

So what is happening in this environment?
Government is doling out licenses to print money to favoured firms, read: monopolistic non-competitive business ventures. E.g. Electricity generation, satellite TV, internet service provider, mobile phone carrier, commercial bank etc. Yes, these monopolies need large capital start up; this is where low interest rate and large captive financial market (we cannot easily send money out of the country until recently) is useful. Low interest rate, cheap financing means juicy profits for these monopolies.
Ask yourself, who are these people behind the monopolies.
Of course, without doubt, those exporters also benefit; borrow money cheaply, build factories, export their products and bring in foreign exchange.

At whose expense?
As a general rule, when the currency is below its equilibrium value, export become profitable, so more resources and investment would be devoted to export sector. Foreigners would gleefully buy our products and assets – benefiting them, while we are getting less than true value (arbitrarily) when we exchange our exports for our imports. Because we devote more resources and investment towards exports, less resources and investment would be devoted for our own consumption, (things that we produce for our own use like food, clothing and housing) making them more expensive in he future, creating future inflation.
Investments in new technology for products for domestic consumption will result in greater efficiency, hence lower overall prices in the future. By neglecting this sector in favour of export sector, defence or whatever, we will be facing higher inflation.
So we all together, the whole populace will face higher prices in the future. We are being ripped off on either sides, low interest rate or return on our savings, and high prices for our consumption. Next time you look at the rich list in the business pages, you can be assured that you contributed to their riches. All those high prices you paid for pay TV, gas, electricity, telephone (and some of us, weekly Sports Toto), we all paid the price.

Last week’s loosening of financial regulation by Bank Negara will help ease the flow of capital in and out of the country. Depositors with large amounts of cash can negotiate interest rates as well. All those loosening up of the financial rules and regulations, combined with easier hurdle to get merchant bank licences; will help squeeze the usually fat margin of local banks and financial institutions.
We suggest complete deregulation of financial markets, with the first step; unpegging the ringgit – sooner rather than later. Anyone, be they local or foreign could apply for banking, brokerage and insurance licenses. This way the financial markets will be competitive and strong. The cost of capital will be lower – which will spur investments, better productivity for our future competitive advantage.
Everyone will benefit, not just the big boys.

Tuesday, March 08, 2005

Unions demand 5% wage increase.

This week’s New Zealand’s news was about the 5% wage increase demanded by EPMU – the Engineers, Printing and Manufacturing Union. Also in Christchurch, 1000 City Council workers were on the verge of strike when the City Council agreed on 5% wage increase. This latest wage increases is not surprising at all, given that the economy has been expanding for the past 10 years and unemployment at a record low of 3.6% - the lowest among OECD. This also gives indication to the Reserve Bank that the economy has NAIRU (non accelerating inflation rate of unemployment) of 3.6%.Simplyput, an unemployment rate at which more economic activity does not put the economy at a strain, as limited resources (labour and capital) being bid up by the participants in the economy, hence inflation. At an unemployment level below NAIRU of 3.6%, Labour, whether skilled or unskilled become scarce, employers start to offer higher and higher wages to attract labour talents. This has a flow on effect, because higher paid workers will have more to spend, to a higher inflation rate. Remember that production of goods and services do not expand as much because of constraint in labour and capital.
The current minimum wage in New Zealand is NZD$9.50 per hour, with a proposal by the government to increase it to NZD$10 per hour before the end of the year. So a worker on the minimum wage could earn NZD$400 on the standard 40 hour week, less taxes at 19%. If a said worker has a dependent family, each child will be entitled to $50 a week in the form of family support and $15 tax credit (government giving back the taxes to you) for low income families starting from 1st April 2005. Add extra $100-$200 in the form of accommodation supplement a week (yes, the government pays part of your rent or mortgage) depending on circumstances. A worker with a spouse and 2 children may earn $400 before taxes, but he has a spending power of $550 per week.
That is an example of a government who takes an active role in income distribution.

Companies’ coffers have been bloated with good profit figures for the past few years, on the back of longer than expected economic expansion. Wages have not increased much for the past 10 years because of the deregulation of labour market and high unemployment in the 90’s. Most people would view the latest demand by unions simply as workers demanding their fair share of economic pie.
Firms have certain obligations about their earnings and profits:
1. Customers – by providing quality products and services, ploughing back some of their earnings for research and development, hence better products in the future.
2. Government - in the form of taxes.
3. Workers – in the form of wages and salaries.
4. Stockholders – in the form of dividend and growth in share price.
5. Environment and the community – enhancing and not degrading its environment and community.

Back in the 60’s through to 80’s, New Zealand used to have the strongest unionised workforce in the OECD. Every worker in the workforce compulsorily joined a union, with union fees deducted from their pay packet every pay period. A conservative right leaning government put an end to that, union membership becomes voluntary and termination of employment made easier. Adding salt to the wound, a National right leaning government removed minimum wages in the early 90’s, giving way for unscrupulous employers to make their adult full wage employees redundant and replacing them with youth workers under the guise of traineeship. Youth workers cost less in wages, about half of adult wages.
The result - lower level of wages and higher unemployment, not desirable to the workers, or the economy.

Malaysia has never experienced strong union movement in its history. Wages has been slow to keep up inflation. Without strong union movement, workers will not be able to negotiate themselves to a better wage settlement, hence less than their fair share of firm’s profits. An abundant number of skilled and unskilled workers, exacerbated by the number of immigrant workers in the country keep wages low. That is why we see a widening gap between rich and poor in our society. In economic terms, the division of profits between capital owners and labour is skewed in favour of capital owners.
Did you ever see a counter on KLSE giving total annual return in excess of 20% in dividend and price growth combined? Is it normal?
We might argue that it is fair given the risk, but risk premium is low, after all, we have a history of stable governments since independence, and Malaysia is not a dictator ruled African state.
The absence of minimum wage legislation and safety net - income support for the unemployed, the sick and the older generation further aggravate the situation, keeping wages low. Without the safety net, even the sick and the retirees have to find a job to supplement their income. Earning power of workers is smaller in the real terms as years gone by, hardly keeping up with inflation.
Have you ever see an old man, past retirement age and could hardly run ten metres works as a security guard outside a gold shop or a supermarket?

Stockholders get more than their fair share of firms’ profits, in the form of higher dividend and high company growth rates, so does the government, higher profits means higher taxes. As for the environment and the community, that depends on the legislation and enforcement by government agencies. Firms do their best to make profit, sometimes at a cost to the environment and the community they operate in.

Does a low wage keep the country competitive? Yes in the short term, but not in the long term. Poor workers tend to be less skilled, less motivated, overworked (some of them work long hours or have two jobs), less educated and invest less in their children’ education. Firms cannot invest in higher technology with low level of workers’ education (higher technology usually is associated with high productivity).

Noor Yahaya Hamzah has his own blog page at

Wednesday, March 02, 2005

Graduate Unemployment; Life is not a Bunch of Roses

Title: Graduate Unemployment; Life is not a Bunch of Roses
Back in the late 80’s and early 90’s, when unemployment high, we had the same problem. My ex-uncle in law (he was married to my auntie) who worked at Pusat Islam told me a story that some government department were given a budget to employ these graduates, a salary of RM400 per month, a desk but nothing to do – a stereotype government job. Some of the more enterprising graduates opened burger stall and drink kiosk by the roadside. Graduate unemployment is not new. We read about it in the past year. Recent figure indicates that the number is around 80,000 and rising.
Blames on the root of this problem has been passed around like a soccer ball, from the tertiary institution for offering courses that is not needed in the marketplace to economist for predicting the wrong demand sector.
The economy has been in growth mode for some years now, unemployment at record low, and employers are recruiting foreign workers in their thousands. We might think that the current drive to repatriate illegal immigrants would open up jobs to locals, but it is more complicated than that. Tertiary graduates have higher expectations about jobs that they apply.
They avoid 3D criteria – DANGEROUS, DIRTY and DEMEANING (jobs that doesn’t bring prestige). By eliminating jobs that has these criteria; construction jobs, factory works and farm works, their choices become limited. Well this is just a generalisation; there are quite a number of graduates who would do anything given chance and good salary, good on them. A lot of it has to do with expectations, what society expect of them and their attitude towards hard work.
As a society, Malaysians still have remnants of feudal attitudes. We groom our children to think that certain jobs are beneath them. Even worse, we pressurise our children to achieve whatever our dream job that we couldn’t achieve ourselves e.g. sending our kids for ballet lessons or medical school – it doesn’t matter that the kid is not interested, he or she will get used to it. We always want them to aspire for better things in life – well, there is nothing wrong with that, but when thing doesn’t turn out as we plan, we should just get on with it. As they say in English, life is not a bunch of roses. Employers aggravate the situation by offering low, starvation rate wages and limiting their workers upward potential. Government and our elected representatives did their part in worsening the situation by letting employers exploit workers with impunity, suppressing union movements and opening a floodgate of immigrant workers from neighbouring countries to keep wages low.
If there is a problem called graduate unemployment, the problem lies in their attitude towards hard work and the types of job that they coveted.
Fact is, graduates are the best brains in the country, and they represent our best bet in our country’s competitiveness in the future. Let them do whatever jobs available, it does not matter if the job that they do has anything to do with their tertiary training. With their brains and talents, they can improvise, move t the top and be their best in their chosen field.