Wednesday, October 18, 2006

ala Grameen Bank

I admire the Nobel Prize winner Professor Muhammad Yunus, who started Grameen Bank. An idea worth emulating, in a world of needs and wants. As always, our individual needs is always greater than the next person, however dire the next person's is.
What I am going to suggest is just a simple idea, it doesnt matter if it doesnt work, or if the success rate is 50%.
Lately I have been corresponding with an old friend Zamri Baba who has been involved with charity work, distributing zakat funds, doing the running around and attending meetings etc.
What if we set up a cooperative bank, whereby we pool our little bit extras into an account aptly named cooperative account. Then we lend some money to the poor (small amounts) to help set themselves up in business, or to ease their burden or set them up to be able to apply for jobs. The word lending is important here, for we expect them to pay it back when they can afford, so that we can lend the money again to the next person.
The loan amount could be small, say RM200 to buy a bicycle so that he or she can apply for a job away from home, or RM50 to buy rice, anchovies and eggs to start a nasi lemak business.
As for interest charge, I would prefer that we dont charge any, make it interest free. Free from riba' - free from guilt.
Make it our work of charity.
We could start by setting up an account with a bank, then set up a committee who is responsible in approving loans and so on so forth. Where do we get the funds? Public donations of course.
How do we solicit donations? Well, to start with we could set up website, even just a simple blog, publish our intentions, account number for donations and update where the loans go to..
Please post comment here, do you think this simple idea is possible?

Monday, October 16, 2006

an article by Muhammad Yunus


A Hand Up, Not a Handout
Why not microloans for Katrina victims?

Saturday, October 14, 2006 1:00 p.m. EDT

America's government and people brought charity to a new level last year in their response to Hurricane Katrina. The rebuilding has been particularly difficult, however, because it has involved lives as well as bricks and mortar. Many victims had been desperately poor all their lives. Helping them to self-sufficiency has proved just as difficult, if not harder, than putting homes and businesses back up again.

Having many very poor citizens, and more than its share of natural disasters, Bangladesh--my own country--has a great deal of experience facing both these challenges. We have a per capita gross national income of $440, with half the population living below the poverty line. We've little to start with, and much of that is repeatedly snatched away. In 1998, floods covered much of the country for over two months, affecting 30 million people; and a single cyclone killed 300,000 in 1970. Despite these catastrophes, more of our people are climbing out of poverty.

So at the risk of sounding presumptuous: What can the U.S. learn from Bangladesh about post-disaster economic recovery? Like many other countries, even Bangladeshis were quick with a handout after Katrina, giving the U.S. $1 million for the victims. But Americans might be surprised to learn that one of our most successful tools for rebuilding businesses is not government handouts, but rather, small loans packaged with practical business and social advice.

Microfinance is one of the biggest success stories of the developing world, and proponents like me believe it could be just as successful in helping the poor in wealthy countries such as the U.S. The basic philosophy behind microfinance is that the poor, although spurned by traditional banks because they can't provide collateral, are actually a great investment: No one works harder than someone who is striving to achieve life's basic necessities, particularly a woman with children to support. Sadly, it is also true that in catastrophic circumstances, very little of the cash so generously given ever gets all the way down to the very poor. There are too many "professionals" ahead of them in line, highly skilled at diverting funds into their own pockets. This is particularly regrettable because very poor people need only a little money to set up a business that can make a dramatic difference in the quality of their lives.

I started the Grameen Bank 30 years ago by distributing about $27 (no typo here!) worth of loans among 40 extremely poor Bangladeshis. Since the bank officially opened in 1983, it has loaned $5.7 billion in microfinance. Today, Grameen has 6.6 million borrowers in Bangladesh alone, borrowing $500 million a year in loans that average just over $100 each. The loans are entirely financed by borrowers' deposits and the bank recovers 98.85% of all money loaned. Notably, Grameen Bank has been profitable in all but three years since its launch. Our largely poor customers save $1.008 for every dollar they borrow, so the poor are truly funding the poor.

The bank supports businesses such as small services, stores, direct sales, furniture-making, cell phone stations and milling, all of which support the local economy. And it works. More than half of our borrowers have moved out of poverty, mainly through their own efforts. Most importantly, when you lend money to disadvantaged people, it gives them a sense of pride, rather than the humiliation they may feel over a handout. And just as helpful as the money is the guidance they get from the bank. Training and connecting poor, inexperienced workers to a reliable and ethical lending and savings service is a huge advantage for them that only gets stronger after a disaster. This is particularly true of women, who are often constrained by social and financial barriers. Grameen communities have also made tremendous strides on health and social issues, such as sanitation, and pushed aside discriminatory practices such as bridal dowries.

The impact of microfinance is spreading world-wide. As of December 2004, 3,100 microcredit institutions reported reaching 92,270,289 clients, 66,614,871 of whom were among the world's poorest when they took their first loan. Assuming five persons per family, the loans to the 54.8 million poorest clients affected some 330 million family members by the end of 2004.
Microfinance has worked so well that it has become a major instrument of reconstruction in post-tsunami Asia as well. A Sri Lankan conglomerate, Ceylinco, partnered with Grameen to provide small loans to 10,000 tsunami victims. These range from $300 to $10,000 and carry an interest rate of 6%, less than half the rate for similar small loans in Sri Lanka. The loans have a one-year grace-period, and Ceylinco takes no collateral, thereby heaping all the risk onto itself. But the company felt this was still a wise investment.

Because some countries that rely heavily on microfinance also happen to be disaster-prone, Grameen now has special disaster loan funds (DLFs) to help meet the urgent need for cash after a catastrophe. These funds also aim to offset the microlender's own losses. The funds were established in Bangladesh after the record flooding of 1998, which affected 20% of the population. Similar funds were set up in Central America in the wake of Hurricane Mitch, and in Poland after the floods of 1997. The DLFs are financial reserves and usually derived from the initial donor grant to the micro-credit lender.

Many people ask, Why not just give free cash, especially under such dire circumstances? In Bangladesh, we've learned that when aid is free, not only do the poor get the least of it, but everyone inflates their needs. While some handouts are clearly necessary in such times, we focus on lending small amounts of money. This lets us keep costs down and rebuild funds for the next disaster. Most importantly, our Grameen banks are ready to act at a moment's notice. They can respond to a disaster without waiting for anyone's permission, immediately becoming like humanitarian agencies by suspending loan payments, and providing cash, food and medicines. Once rebuilding starts, the bankers keep detailed records of the money lent, and people are allowed to repay bit by bit.

That is the strategy we followed after the 1998 flooding, which covered 50% of Bangladesh's land and affected customers at about 70% of our branches. More than 700 Grameen borrowers or their family members were killed and just over half (a million borrowers) were affected by the flooding. That represents a small percentage of the overall population affected, but the Bank and its staff where there right away to help with immediate needs. Later, microlenders helped people restructure their loans or gave out new loans on more favorable terms.

Microlending has already helped millions reach a better life through their own initiative. It has also given them valuable skills as well as crucial financial back-up in case they ever face a natural disaster like Katrina. So it might be time to think about another type of support for Katrina's victims: the microloan. As our small, flood-battered country has learned, giving someone a hand up doesn't always require a handout. The most important thing is to help people get back to work while letting them hold on to their self-respect. Microloans can do just that.

Mr. Yunus, who yesterday won the 2006 Nobel Peace Prize, is founder and managing director of the Grameen Bank of Bangladesh.

Sunday, October 15, 2006

Nobel Peace Prize: Muhammad Yunus and Grameen Bank

Posted by Joerg W in International Economics, Fulbright on Friday, October 13. 2006

The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006 to Muhammad Yunus and his Grameen Bank for "their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means."

Muhammad Yunus was born in 1940 in Chittagong, the business centre of what was then Eastern Bengal and is now Bangladesh. He was the third of 14 children of whom five died in infancy. Educated in Chittagong, he was awarded a Fulbright scholarship and received his Ph.D. from Vanderbilt University, Nashville, Tennessee. In 1972 he became head of the Economics Department at Chittagong University. He is the founder and managing director of the Grameen Bank. Prof. Yunus wrote the memoir Banker to the Poor: Micro-Lending and the Battle Against World Poverty (,
According to the BBC, "Hillary Clinton, wife of former US President Bill Clinton, said in 2000 that Mr Yunus had helped the Clintons introduce micro-credit schemes to some of the poorest communities in Arkansas." Since Senator Fulbright was from Arkansas, one could conclude that the Fulbright program has made a full circle (in a positive sense) and America has benefited from awarding a Fulbright grant to Muhammad Yunus.

The CEO of Grameen Foundation USA is Alex Counts, who is also a Fulbright Alumnus. He will present the plenary luncheon address on Sunday, November 5, during the Fulbright Association's 29th Annual Conference "Fulbright Alumni: Expressions in Civil Society."
The Fulbright Academy lists in the right column here some Nobel Laureates, who are also Fulbright Scholars.

Thursday, October 12, 2006

Dynamic Capitalism: Entrepreneurship is lucrative--and just

here is the latest writing by Edmund Phelps:

Dynamic Capitalism
Entrepreneurship is lucrative--and just.

Tuesday, October 10, 2006 12:01 a.m. EDT

There are two economic systems in the West. Several nations--including the U.S., Canada and the U.K.--have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, as in pharmaceuticals, much comes from start-ups, particularly the most novel innovations. This is free enterprise, a k a capitalism.

The other system--in Western Continental Europe--though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks. Since World War II, a great deal of liberalization has taken place. But new corporatist institutions have sprung up: Co-determination (cogestion, or Mitbestimmung) has brought "worker councils" (Betriebsrat); and in Germany, a union representative sits on the investment committee of corporations. The system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks. What it lacks in flexibility it tries to compensate for with technological sophistication. So different is this system that it has its own name: the "social market economy" in Germany, "social democracy" in France and "concertazione" in Italy.

Dynamism and Fertility

The American and Continental systems are not operationally equivalent, contrary to some neoclassical views. Let me use the word "dynamism" to mean the fertility of the economy in coming up with innovative ideas believed to be technologically feasible and profitable--in short, the economy's talent at commercially successful innovating. In this terminology, the free enterprise system is structured in such a way that it facilitates and stimulates dynamism while the Continental system impedes and discourages it.

Wasn't the Continental system designed to stifle dynamism? When building the massive structures of corporatism in interwar Italy, theoreticians explained that their new system would be more dynamic than capitalism--maybe not more fertile in little ideas, such as might come to petit-bourgeois entrepreneurs, but certainly in big ideas. Not having to fear fluid market conditions, an entrenched company could afford to develop radical innovation. And with industrial confederations and state mediation available, such companies could arrange to avoid costly duplication of their investments. The state and its instruments, the big banks, could intervene to settle conflicts about the economy's direction. Thus the corporatist economy was expected to usher in a new futurismo that was famously symbolized by Severini's paintings of fast trains. (What was important was that the train was rushing forward, not that it ran on time.)

Friedrich Hayek, in the late 1930s and early '40s, began the modern theory of how a capitalist system, if pure enough, would possess the greatest dynamism--not socialism and not corporatism. First, virtually everyone right down to the humblest employees has "know-how," some of what Michael Polanyi called "personal knowledge" and some merely private knowledge, and out of that an idea may come that few others would have. In its openness to the ideas of all or most participants, the capitalist economy tends to generate a plethora of new ideas.

Second, the pluralism of experience that the financiers bring to bear in their decisions gives a wide range of entrepreneurial ideas a chance of insightful evaluation. And, importantly, the financier and the entrepreneur do not need the approval of the state or of social partners. Nor are they accountable later on to such social bodies if the project goes badly, not even to the financier's investors. So projects can be undertaken that would be too opaque and uncertain for the state or social partners to endorse. Lastly, the pluralism of knowledge and experience that managers and consumers bring to bear in deciding which innovations to try, and which to adopt, is crucial in giving a good chance to the most promising innovations launched. Where the Continental system convenes experts to set a product standard before any version is launched, capitalism gives market access to all versions.

The issues swirling around capitalism today concern the consequences of its dynamism. The main benefit of an innovative economy is commonly said to be a higher level of productivity--and thus higher hourly wages and a higher quality of life. There is a huge element of truth in this belief, no matter how many tens of qualifications might be in order. Much of the huge rise of productivity since the 1920s can be traced to new commercial products and business methods developed and launched in the U.S. and kindred economies. (These include household appliances, sound movies, frozen food, pasteurized orange juice, television, semiconductor chips, the Internet browser, the redesign of cinemas and recent retailing methods.) There were often engineering tasks along the way, yet business entrepreneurs were the drivers.
There is one conceivable qualification that ought to be addressed. Is productivity not finally at the point, after 150 years of growth, that having yet another year's growth would be of negligible value? D.H. Lawrence spoke of America's "everlasting slog." Whatever the answer, it is important to note that advances in productivity, in generally pulling up wage rates, make it affordable for low-wage people to avoid work that is tedious or grueling or dangerous in favor of work that is more interesting and formative.

Of course, productivity levels in the smaller countries will always owe more to innovations developed abroad than to those they develop themselves. Some might suspect that the domestic market is so tiny in a country such as Iceland, for instance, that even in per capita terms only a very small number of homemade innovations would bring a satisfactory productivity gain--and thus an adequate rate of return. In fact, most of the Continental economies, including the large ones, have been content to sail in the slipstream of a handful of economies that do the preponderance of the world's innovating. The late Harvard economist Zvi Griliches commented approvingly that in such a policy, the Europeans "are so smart."

I take a different view. For one thing, it is good business to be an innovative force in the "global economy." Globalization has diminished the importance of scale as well as distance. Tiny Denmark sets its sights on markets in the U.S., the EU and elsewhere. Iceland has entered into European banking and biogenetics. France has long done this--and can do more of it. But it could do so more successfully if it did not insulate its innovational decisions so much from evaluations by financial markets--including the stock market--as Airbus does. The U.S. is already demonstrably in the global innovation business. To date, there is an adequate rate of return to be expected from "investing" in the conception, development and marketing of innovations for the global economy--a return on a par with the return from investing in plant and equipment, software and other business capital. That is a better option for Americans than suffering diminished returns from investing solely in the classical avenue of fixed capital.

I would, however, stress a benefit of dynamism that I believe to be far more important. Instituting a high level of dynamism, so that the economy is fired by the new ideas of entrepreneurs, serves to transform the workplace--in the firms developing an innovation and also in the firms dealing with the innovations. The challenges that arise in developing a new idea and in gaining its acceptance in the marketplace provide the workforce with high levels of mental stimulation, problem-solving, employee-engagement and, thus, personal growth. Note that an individual working alone cannot easily create the continual arrival of new challenges. It "takes a village," preferably the whole society.
The concept that people need problem-solving and intellectual development originates in Europe: There is the classical Aristotle, who writes of the "development of talents"; later the Renaissance figure Cellini, who jubilates in achievement; and Cervantes, who evokes vitality and challenge. In the 20th century, Alfred Marshall observed that the job is in the worker's thoughts for most of the day. And Gunnar Myrdal wrote in 1933 that the time will soon come when more satisfaction derives from the job than from consuming. The American application of this Aristotelian perspective is the thesis that most, if not all, of such self-realization in modern societies can come only from a career. Today we cannot go tilting at windmills, but we can take on the challenges of a career. If a challenging career is not the main hope for self-realization, what else could be? Even to be a good mother, it helps to have the experience of work outside the home.

I must mention a "derived" benefit from dynamism that flows from its effects on productivity and self-realization. A more innovative economy tends to devote more resources to investing of all kinds--in new employees and customers as well as new office and factory space. And although this may come about through a shift of resources from the consumer-goods sector, it also comes through the recruitment of new participants to the labor force. Also, the resulting increase of employee-engagement serves to lower quit rates and, hence, to make possible a reduction of the "natural" unemployment rate. Thus, high dynamism tends to bring a pervasive prosperity to the economy on top of the productivity advances and all the self-realization going on. True, that may not be pronounced every month or year. Just as the creative artist does not create all the time, but rather in episodes and breaks, so the dynamic economy has heightened high-frequency volatility and may go through wide swings. Perhaps this volatility is not only normal but also productive from the point of view of creativity and, ultimately, achievement.

Ideals and Reality

I know I have drawn an idealized portrait of capitalism: The reality in the U.S. and elsewhere is much less impressive. But we can, nevertheless, ask whether there is any evidence in favor of these claims on behalf of dynamism. Do we find evidence of greater benefits of dynamism in the relatively capitalist economies than in the Continental economies as currently structured? In the Continent's Big Three, hourly labor productivity is lower than in the U.S. Labor-force participation is also generally lower. And here is new evidence: The World Values Survey indicates that the Continent's workers find less job satisfaction and derive less pride from the work they do in their job.

Dynamism does have its downside. The same capitalist dynamism that adds to the desirability of jobs also adds to their precariousness. The strong possibility of a general slump can cause anxiety. But we need some perspective. Even a market socialist economy might be unpredictable: In truth, the Continental economies are also susceptible to wide swings. In fact, it is the corporatist economies that have suffered the widest swings in recent decades. In the U.S. and the U.K., unemployment rates have been remarkably steady for 20 years. It may be that when the Continental economies are down, the paucity of their dynamism makes it harder for them to find something new on which to base a comeback.

The U.S. economy might be said to suffer from incomplete inclusion of the disadvantaged. But that is less a fault of capitalism than of electoral politics. The U.S. economy is not unambiguously worse than the Continental ones in this regard: Low-wage workers at least have access to jobs, which is of huge value to them in their efforts to be role models in their family and community. In any case, we can fix the problem.

Why, then, if the "downside" is so exaggerated, is capitalism so reviled in Western Continental Europe? It may be that elements of capitalism are seen by some in Europe as morally wrong in the same way that birth control or nuclear power or sweatshops are seen by some as simply wrong in spite of the consequences of barring them. And it appears that the recent street protesters associate business with established wealth; in their minds, giving greater latitude to businesses would increase the privileges of old wealth. By an "entrepreneur" they appear to mean a rich owner of a bank or factory, while for Schumpeter and Knight it meant a newcomer, a parvenu who is an outsider. A tremendous confusion is created by associating "capitalism" with entrenched wealth and power. The textbook capitalism of Schumpeter and Hayek means opening up the economy to new industries, opening industries to start-up companies, and opening existing companies to new owners and new managers. It is inseparable from an adequate degree of competition. Monopolies like Microsoft are a deviation from the model.

It would be unhistorical to say that capitalism in my textbook sense of the term does not and cannot exist. Tocqueville marveled at the relatively pure capitalism he found in America. The greater involvement of Americans in governing themselves, their broader education and their wider equality of opportunity, all encourage the emergence of the "man of action" with the "skill" to "grasp the chance of the moment."

I want to conclude by arguing that generating more dynamism through the injection of more capitalism does serve economic justice.
We all feel good to see people freed to pursue their dreams. Yet Hayek and Ayn Rand went too far in taking such freedom to be an absolute, the consequences be damned. In judging whether a nation's economic system is acceptable, its consequences for the prospects of the realization of people's dreams matter, too. Since the economy is a system in which people interact, the endeavors of some may damage the prospects of others. So a persuasive justification of well-functioning capitalism must be grounded on its all its consequences, not just those called freedoms.

To argue that the consequences of capitalism are just requires some conception of economic justice. I broadly subscribe to the conception of economic justice in the work by John Rawls. In any organization of the economy, the participants will score unequally in how far they manage to go in their personal growth. An organization that leaves the bottom score lower than it would be under another feasible organization is unjust. So a new organization that raised the scores of some, though at the expense of reducing scores at the bottom, would not be justified. Yet a high score is just if it does not hurt others. "Envy is the vice of mankind," said Kant, whom Rawls greatly admired.

The 'Least Advantaged'

What would be the consequence, from this Rawlsian point of view, of releasing entrepreneurs onto the economy? In the classic case to which Rawls devoted his attention, the lowest score is always that of workers with the lowest wage, whom he called the "least advantaged": Their self-realization lies mostly in marrying, raising children and participating in the community, and it will be greater the higher their wage. So if the increased dynamism created by liberating private entrepreneurs and financiers tends to raise productivity, as I argue--and if that in turn pulls up those bottom wages, or at any rate does not lower them--it is not unjust. Does anyone doubt that the past two centuries of commercial innovations have pulled up wage rates at the low end and everywhere else in the distribution?

Yet the tone here is wrong. As Kant also said, persons are not to be made instruments for the gain of others. Suppose the wage of the lowest- paid workers was foreseen to be reduced over the entire future by innovations conceived by entrepreneurs. Are those whose dream is to find personal development through a career as an entrepreneur not to be permitted to pursue their dream? To respond, we have to go outside Rawls's classical model, in which work is all about money. In an economy in which entrepreneurs are forbidden to pursue their self-realization, they have the bottom scores in self-realization--no matter if they take paying jobs instead--and that counts whether or not they were born the "least advantaged." So even if their activities did come at the expense of the lowest-paid workers, Rawlsian justice in this extended sense requires that entrepreneurs be accorded enough opportunity to raise their self-realization score up to the level of the lowest-paid workers--and higher, of course, if workers are not damaged by support for entrepreneurship. In this case, too, then, the introduction of entrepreneurial dynamism serves to raise Rawls's bottom scores.

Actual capitalism departs from well-functioning capitalism--monopolies too big to break up, undetected cartels, regulatory failures and political corruption. Capitalism in its innovations plants the seeds of its own encrustation with entrenched power. These departures weigh heavily on the rewards earned, particularly the wages of the least advantaged, and give a bad name to capitalism. But I must insist: It would be a non sequitur to give up on private entrepreneurs and financiers as the wellspring of dynamism merely because the fruits of their dynamism would likely be less than they could be in a less imperfect system. I conclude that capitalism is justified--normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.

Mr. Phelps, the McVickar Professor of Political Economy at Columbia, was yesterday awarded the 2006 Nobel Prize for economics. Click here to read a selection of his previous articles from The Wall Street Journal.

Nobel prize for Economics: Edmund Phelps

So the Nobel Prize for Economics this year goes to Edmund Phelps for his explanation on inflation and unemployment.
Let me paste an article explaining his theory:

The 2006 Nobel Prize in Economics has been awarded to Edmund S. Phelps of Columbia University for his contributions to understanding the tradeoff between unemployment and inflation. Dr Phelps overturned the formerly accepted idea that inflation and unemployment are causally related.

In the 1950s and 1960s, policy economists virtually throughout the developed world came to believe that unemployment was influenced by inflation. This belief was based on the observed inverse correlation between the rate of inflation and the rate of unemployment: The higher the observed rate of inflation, the lower the unemployment rate. This relationship became known as the Phillips curve, after A. W. Phillips, the New Zealand economist who wrote the 1958 article that popularized this correlation.

Politicians in the 1950s and 1960s used the relationship to pick an acceptable level of unemployment and inflation. They adjusted taxes, public expenditure and interest rates to pick a desirable spot on the supposed unemployment and inflation trade-off.

Ultimately the relationship was to break down in the early 1970s, but before the facts proved its downfall, it had come under theoretical attack from Edmund Phelps and Milton Friedman in the late 1960s.

Prof Phelps was critical about the purely statistical nature of the Phillips curve, which was not grounded in economic theories of decisions made by people or companies. Nor was it related to any notion of stability in the labour market.

During the 1970s, politicians and policy makers tried to manipulate the perceived Phillips Curve relationship by pushing inflation higher in hopes that unemployment would thereby be reduced. In the event, however, that only set up a spiral of higher prices followed higher unemployment. Thus, the era of stagflation.

Edmund Phelps opposed this understanding of the Phillips Curve as simplistic, naïve, and without theoretical foundation.

Phelps challenged this view through a more fundamental analysis of the determination of wages and prices, taking into account problems of information in the economy. Individual agents have incomplete knowledge about the actions of others and must base their decisions on expectations. Phelps formulated the hypothesis of the expectations-augmented Phillips curve, according to which inflation depends on both unemployment and inflation expectations.

As a consequence, the long-run rate of unemployment is not affected by inflation but only determined by the functioning of the labor market. It follows that stabilization policy can only dampen short-term fluctuations in unemployment. Phelps showed how the possibilities of stabilization policy in the future depend on today's policy decisions: low inflation today leads to expectations of low inflation also in the future, thereby facilitating future policy making.

Dr Phelps’s macroeconomic model implies that inflation cannot have a lasting impact on unemployment. Rather, there exists a so-called “natural rate of unemployment” (more accurately called the “non-accelerating inflation rate of unemployment”, or NAIRU). 1976 Nobel-Prize winner Milton Friedman also made important theoretical contributions to the development of the NAIRU concept.

Because the Phillips Curve justified government attempts to manipulate the economy, its invalidation by Phelps and Friedman was a major defeat for Keynesian macroeconomics. For that reason, perhaps, the New York Times seizes on a quote from Dr Phelps lamenting the very model for which he was awarded the Nobel Prize.

Mr. Phelps himself has become less than enchanted by his findings. “The ‘natural unemployment’ rate,” he said, “leaves people with the idea that there is no hope. It is an act of nature that cannot be repealed by man.”

I have to believe that the Times has quoted Dr Phelps out of context, for that statement is simply incorrect as it stands. Although the NAIRU is not altered by overall levels of taxing and spending, it can be influenced by microeconomic labour market policies, such as education and training programs and other incentives facing workers. It has also been shown to be related to unemployment benefits: the more generous the benefits, the higher the NAIRU. Many economists believe that Canada’s more generous benefits help explain why Canada’s unemployment rate is virtually always above that in the United States, indicating that Canada has a higher NAIRU.

Given that in Malaysia there is no unemployment benefit, whereby everybody has to work and participate in the economy OR starve, it would be natural that the NAIRU is very low, at 1-2%. Employers exploit that facts by offering low wages, and if there is no taker to the RM400 a month job on offer, they can approach Immigration Dept to apply for even cheaper foreign workers. (Cheap foreign workers is an illusion in my opinion, because you have to factor in the airfare cost, skill base in the economy and escalation in basic consumer demand that contribute to inflation.)

So the only solution for Malaysian workers is to upskill, and look for better job that pays more OR migrate.
And WHAT the Govt should do?
Invest in upskilling the labour force and some stabilization policies.