World Bank warning of another global recession; Mier: Worse to come!

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(Shanghai Daily)
 

THE World Bank is warning developing countries to prepare for the "real" risk that an escalation in the eurozone debt crisis could tip the world into a slump on a par with the global downturn in 2008/09.

In a report sharply cutting its world economic growth expectations, the World Bank said Europe was probably already in recession. If the debt crisis deepened, global economic forecasts would be significantly lower.

"The sovereign debt crisis in the eurozone appears to be contained," Justin Lin, chief economist for the World Bank, said in Beijing yesterday. "However, the risk of a global freezing-up of the markets as well as a global crisis similar to what happened in September 2008 is real."

The World Bank predicted world economic growth of 2.5 percent in 2012 and 3.1 percent in 2013, well below the 3.6 percent growth for each year projected in June.



"We think it is now important to think through not only slower growth but sharp deteriorations, as a prudent measure," said Hans Timmer, the bank's director of development prospects.

The report said if the eurozone debt crisis escalates, global growth would be about 4 percentage points lower. It forecast that high-income economies would expand just 1.4 percent in 2012 as the eurozone shrinks 0.3 percent, sharp revisions from growth forecasts last June of 2.7 percent and 1.8 percent respectively.

It cut its forecast for growth in developing economies to 5.4 percent for 2012 from its previous forecast of 6.2 percent.

It saw a slight pick up in growth in developing economies in 2013 to 6 percent. But the report said threats to growth were rising.

It cited failure so far to resolve high debts and deficits in Japan and the United States and slow growth in other high-income countries.

On top of that, political tensions in the Middle East and North Africa could disrupt oil supplies and add another blow to global prospects.

China's growth - forecast in the report at 8.4 percent - could help bolster imports and gives it "big fiscal space" to respond to changing conditions, Lin said.

But the World Bank report added: "No country and no region will escape the consequences of a serious downturn." 

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Mier: Worse to come

By LEONG HUNG YEE  hungyee@thestar.com.my

Eurozone crisis, slower China growth likely to hurt economy

KUALA LUMPUR: The Malaysian Institute of Economic Research (MIER) expects gross domestic product (GDP) for 2011 to be 4.9% but to decelerate to 3.7% in 2012.

MIER executive director Dr Za-kariah Abdul Rashid said this year would not be as bad as 2008 or 2009 but might not be as good as 2011, pulled down by the eurozone crisis as well as slower growth in China's economy.

He said if the eurozone crisis turned worse, the country's economy might be affected and the GDP could reach the 2008/2009 level.

“There's some avenue if the Government wants to spur the economy by spending on development. It will depend on the private sector whether our economy turns out to be strong this year,” Zakariah said at a briefing to present Malaysia's economic outlook.

Zakariah: ‘The private sector has done a lot for the economy.’

“However, the private sector has done a lot for the economy. We can't expect much more from the private sector.”

He said MIER had previously forecast 2011 GDP growth to be 4.6% but revised it upwards after looking at the latest numbers and the crisis in the eurozone.

“Growth in the last quarter of 2011 is expected to be much lower on account of external developments. The latest monthly economic indicators are already suggesting that,” MIER said in a report.

It added that economic growth would likely get “bumpier” in the months ahead.

Meanwhile, Zakariah said that there was “room for 25 to 50 basis-point downward revision” in the overnight policy rate (OPR). However, he said the revision would depend on the situation and had to be done vigilantly.

Based on MIER's Business Conditions Index (BCI), the business sentiment had worsened from the second quarter of last year. The BCI fell to 96.6 in the fourth quarter of 2011, the first time it had dipped below the 100 threshold since the fourth quarter of 2010.

“It usually shows a contraction mode when the index sinks below 100. The BCI had been dropping since the second quarter of 2011,” Zakariah said.

Sales, local and foreign orders, as well as capacity utilisation were significantly lower in the fourth quarter of 2011, with companies expecting to scale back production over the next three months as inventory builds up.

Concurrently, consumer sentiment also fell to a two-year low of 106.3 on the Consumer Sentiments Index as household incomes lost momentum, and finances and job became a growing concern.

Zakariah said the index pointed out that consumers were also holding on to purchasing big tickets items as spending plans took a backseat.

Separately, Zakariah said it would be better for the Government to call for general elections early as uncertainty over the nation's political future would hurt the economy.

He said private investors were currently holding back investments on concerns that government policies could change due to the political climate here.

“If you ask me as an economist, I would rather see the problem solved once and for all. The earlier they settle the political matters, the better, we can focus on the economy.

“Right now everything is still hanging. People are postponing because of the elections. So if they settle it once and for all and immediately, it would be better,” Zakariah said.  

Europeans migrate south as continent deepens into crisis

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Helen Pidd in Berlin guardian.co.uk

Tens of thousands of Irish, Greek and Portuguese people leave in search of a new life as the eurozone's woes worsen

Gaelic sportsman Mick Hallows of the Roundtowers club in Clondalkin, Dublin who has emigrated to Australia because of a lack of work in Ireland. Photograph: Kim Haughton

Since its conception, the European Union has been a haven for those seeking refuge from war, persecution and poverty in other parts of the world. But as the EU faces what Angela Merkel has called its toughest hour since the second world war, the tables appear to be turning. A new stream of migrants is leaving the continent. It threatens to become a torrent if the debt crisis continues to worsen.

Tens of thousands of Portuguese, Greek and Irish people have left their homelands this year, many heading for the southern hemisphere. Anecdotal evidence points to the same happening in Spain and Italy.

The Guardian has spoken to dozens of Europeans who have left, or are planning to leave. Their stories highlight surprising new migration routes – from Lisbon to Luanda, Dublin to Perth, Barcelona to Buenos Aires – as well as more traditional migration patterns.

This year, 2,500 Greek citizens have moved to Australia and another 40,000 have "expressed interest" in moving south. Ireland's central statistics office has projected that 50,000 people will have left the republic by the end of the year, many for Australia and the US.



Portugal's foreign ministry reports that at least 10,000 people have left for oil-rich Angola. On 31 October, there were 97,616 Portuguese people registered in the consulates in Luanda and Benguela, almost double the number in 2005.

The Portuguese are also heading to other former colonies, such as Mozambique and Brazil. According to Brazilian government figures, the number of foreigners legally living in Brazil rose to 1.47 million in June, up more than 50% from 961,877 last December. Not all are Europeans, but the number of Portuguese alone has jumped from 276,000 in 2010 to nearly 330,000.

Gonçalo Pires, a graphic designer who has swapped Lisbon for Rio de Janeiro, said: "It's a pretty depressing environment there [in Portugal]." In Brazil, by contrast, "there are lots of opportunities to find work, to find clients and projects".

Joy Drosis, who left her Greek homeland for a life in Australia, expressed similar motives.  "I had to do something. If I had stayed in Greece, we were all doomed," she said. "I'm lucky that I can speak the language: many others can't."

The key moment in this southerly migration may have come last month, when the Portuguese prime minister, Pedro Passos Coelho, made a humbling visit to Angola, begging for inbound investment. Just 36 years after the end of Portuguese colonial rule in Angola, its president was ready to show mercy.

"We're aware of the difficulties the Portuguese people have faced recently," said José Eduardo dos Santos. "Angola is open and available to help Portugal face this crisis."

But the Portuguese making this move will not have it easy: life expectancy in Angola is still just 39, compared with 79 in Portugal, and crime is rife.

In Ireland, where 14.5% of the population are jobless, emigration has climbed steadily since 2008, when Lehman Brothers collapsed and the bottom fell out of the Irish housing market. In the 12 months to April this year, 40,200 Irish passport-holders left, up from 27,700 the previous year, according to the central statistics office. Irish nationals were by far the largest constituent group among emigrants, at almost 53%.

The Guardian spoke to one Dublin under-19s football and hurling club that had lost eight out of 15 players in the past 18 months. Most of the nascent sports stars had headed to Australia. Experts believe the exodus will increase, given the £1.4bn tax rises and austerity measures just announced. The thinktank the Economic and Social Research Institute (ESRI) forecast this month that 75,000 people would emigrate from Ireland in 2012 .

For departing Greeks the top destinations over the years, according to the World Bank, have been Germany, Australia, Canada, Albania, Turkey, UK, Cyprus, Israel and Belgium.

Skilled Greeks are particularly likely to leave: as an example of what can happen, 4,886 physicians emigrated in the year 2000 (the last year for which the World Bank's Migration and Remittances Factbook cites data for departing doctors), meaning the country lost 9.4% of its doctors in that single year.

The World Bank gives the number of immigrants living in Greece as about 1.13 million in 2010, around 10% of the population. Most have come, over the years, from poorer countries such as Albania, Bulgaria, Romania and Georgia, it is likely that the majority of new arrivals lack the skills to replace the emigrants.

Additional reporting by Henry McDonald in Dublin, Helena Smith in Athens, Tom Phillips in São Paulo, and Alison Rourke in Sydney 

• This article was amended on 22 December 2011 to delete a sentence reading: "In 2010, 1.21 million people emigrated [from Greece], according to the World Bank, equalling 10.8% of the population." This was actually the total "stock" of Greeks said by the World Bank to be living overseas as of 2010, not the number who emigrated in that year. Also deleted was a reference stating that "1.3 million people arrived [in Greece] in 2011". This was the total "stock" of immigrants said by the World Bank to be living in Greece as of 2010, not the number who arrived in that year. A sentence saying that 4,886 physicians emigrated from Greece in 2010 has been corrected; the year was 2000.

We need to talk about capitalism, say CEOs

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Simon Mann

Professors from the Harvard Businees School, above, have identified ten major threats to capitalism. Photo: Greg Newington

Three professors from the world's pre-eminent business school have co-written a study that at first blush looks to fall more into the genre of horror story than business text.

But in identifying 10 powerful forces that threaten the existence of the capitalist system - the most successful engine of economic growth the world has known - the dons of the Harvard Business School appear to have drawn a line connecting the fears of the boardroom and those of the protesters of the Occupy Wall Street movement.

Income disparity, resource depletion and potentially cataclysmic climate change were recognised by CEOs in a series of conversations conducted by Harvard as among the potential ''disruptors'' of global prosperity. The financial meltdown of 2008 and the Occupy movement are clear manifestations of those fears.



''And we would expect more [of the same],'' says co-author Joseph Bower. ''Because people really feel outraged.''

Professor Bower and his colleagues note in their study the broad concerns of the 46 business thinkers brought together in forums on three continents, but by far the most widely held was ''the tendency of capitalism, as it currently functions, to produce extreme disparities of income and wealth''.

Said one unidentified Asian business leader: ''Herein lies a major challenge, because the world has become very much more prosperous as a result of market capitalism. The rich have become richer. The poor in most cases have become richer. But the gap between the rich and the poor has grown wider … There is the growing sense of being left out, even as people are getting better off.''

One European executive said: ''What was the good of capitalism? Was it the fact that we were building a very large, very well off - not wealthy but well off - middle class? We are not doing this any more.''

The Harvard project coincided with the Business School's centenary. What better way to celebrate it than to examine the state of the system that had nurtured its own rise to prominence? By then, it had conferred nearly 56,000 MBAs on men and women, many of whom went on to head prominent companies in the US and around the world.

The school brought together chief executives and business leaders in 2007 and early 2008 for its series of discussions. They included Australia's David Murray, the former Commonwealth Bank boss who is now chairman of the Future Fund.

Using its famous case-method approach to inquiry, it took as a starting point the then most recent World Bank growth projections and batted around the issues. Capitalism at Risk: Rethinking the role of business, just published, is the result.

Joining in the talks were executives such as Jeffrey Immelt of General Electric, John Elkann of Fiat and Bertrand Collomb of Lafarge.

That capitalism has delivered for billions is not at issue: in the last decades of the 20th century, 97 per cent of countries enjoyed increased wealth, according to the World Bank. But the executives cited as potential threats the powerful forces within financial markets, environmental degradation and political populism, terrorism and war, migration and pandemics.

''History tells us that when an awful lot of people are disenfranchised, they have no incentive to play by the rules, and given today's communications availability, weaponry … that's an issue we have to really think about,'' one said.

Unsurprisingly, they back business, not government, to ameliorate strains on the system through innovation and activism. ''Good government is crucial, to be sure,'' write the Harvard professors. ''But government … needs the support and engagement of business to function effectively.''

In the US, the argument for higher taxes on the wealthy has coalesced around billionaire investor Warren Buffett, who has become a poster boy for the Obama's administration's campaign to raise revenues, resisted by Republicans.

''Finding a way to mobilise the entire relevant business community - and others - to help support the needed taxes simply makes sense,'' the Harvard dons conclude.

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Is the U.S. Worsening as a Place to Start a Business?

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By Scott Shane, Contributor from Forbes

While the United States remains a great place to do business, it’s been slipping as a place to start a business, according to the World Bank’s annual “Doing Business” publication.

In 2012, the U.S. was the fourth best country in the world to do business in, coming in behind Singapore, Hong Kong and New Zealand.  That’s only slightly worse than we were five years ago before the Great Recession hit.

As a place to start a business, things aren’t as good.  It now costs twice as much to start a company as five years ago – 1.4 percent of per capita income versus 0.7 percent.

We are also slipping in how easy it is to start a business as compared to other nations.  As the chart below shows, we were fourth in this category in 2007.  This year we were number 13.

Source: Created from Data from the World Bank’s “Doing Business” reports, various



The World Bank measures 184 countries, so we don’t need to get out the worry beads yet.  Scoring worse than Macedonia, Georgia, Rwanda, Belarus, Saudi Arabia and Armenia might be embarrassing, but few entrepreneurs will choose those countries over the United States. And few American entrepreneurs are moving elsewhere to start companies.

But remaining behind New Zealand, Australia, and Canada year after year should cause those in Washington to take notice.  Policies to bring more foreign entrepreneurs to the United States won’t work very well if those entrepreneurs find it easier and cheaper to start their businesses in countries like Australia and Canada.

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Towards a multi-polar international monetary system

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THINK ASIAN By ANDREW SHANG

IMF cannot create sufficient credit to help resolve growing financial crises 

MOST people think of the international monetary system as an architecturally designed system made in Bretton Woods at the end of the Second World War. This may be true for the international financial institutions like the International Monetary Fund or the World Bank, but the existing system is a messy legacy of rules, regulations and foreign exchange systems and institutions that facilitate trade and payments between countries.

Unlike a national monetary system, where there is one currency issued by the national central bank and national agencies responsible for financial stability, there is currently no global central bank, no global financial regulator and no global finance ministry. In short, we have global financial markets, but no global mechanism to deal with periodic crises, except through the (sporadic) consensus views of national policy-makers.

This was not a problem when the United States was the dominant power in the 1950s and 1960s. But this changed when the United States dropped the link to gold in 1971. From then on, the international monetary system was largely driven by decisions between the United States and Europe, which collectively owned the majority of the voting power in the IMF. Needless to say, the emerging markets had little say, since they were the major beneficiaries of aid and funding from the IMF and the World Bank.

In 1975, the Group of Six (G6) formally came into being, comprising the United States, UK, France, Germany, Japan, Italy, with Canada being added to form G7 the next year. Basically G7 leaders met regularly and decided most of the decisions for the international monetary system. The G7 accounted for roughly half of world GDP, but essentially ran the global financial system.

The grouping was only widened in 1997 when the heads of the United Nations, World Bank, IMF and WTO were invited to join the regular G7 meetings. In 1998, Russia was added to form G8, but with the outbreak of the Asian crisis, the need for more global representation let to the formation of G20 in 1999. The G20 collectively account for 80% of world GDP and two-thirds of the world population.



The reason why the international monetary system is not functioning smoothly is that decision-making lies in the hands of sovereign nations, not the global institutions. A unipolar system is alright as long as the dominant power is stable. This is not necessarily true in a multipolar system, because even obvious decisions cannot have consensus, because of different national interests.

If we keep on thinking about reforming the international monetary system in national terms, can we arrive at a more effective system in promoting global trade and payments and maintaining global financial stability?
For example, the debate over the role of the US dollar and the emergence of the renminbi is seen as threats to the status quo. This is understandable, but money and finance are not ends in themselves, but means to an end of global prosperity and stability.

The real question is what is the global financial system supposed to do, and what is the best way to achieve it?

In the immediate post-war period, there was a shortage of US dollars. Hence, the IMF was created to provide liquidity and foreign exchange reserves for the post-war reconstruction. The United States ran current account surpluses, held most of the world's gold reserves and everyone wanted dollars. Today, because of the Triffin Dilemma, the continuous US current account deficits gave rise to the Global Imbalance, thought to be the cause of the current crisis.

One theory goes something like this. East Asia went into crisis in the 1990s, built up large foreign exchange reserves and current account surpluses and these surplus savings reduced global interest rates and caused the advanced markets to lose monetary control. However, that is not the complete story. There is increasing awareness that the global shadow banking credit was pumping out leveraged liquidity that may have caused national monetary policies to lose effectiveness.

In other words, instead of shortage of global liquidity, we have too much liquidity sloshing around global financial markets, so much so that most central banks are debating how to prevent such liquidity creating asset bubbles, banking crises or over-appreciation of the exchange rate that haunted Japan and East Asia. You either deal with this through self-insurance, building up large exchange reserves, or you allow the IMF to become the provider of liquidity when you need it.

Most countries do not like IMF imposing stiff conditions and they discovered quickly that the IMF has no teeth when you are not a borrower.

This is the real dilemma of the current international monetary system. Do we seriously want a global institution to re-balance the global economy through carrots and sticks? If so, each nation would have to give up sovereign power to the IMF.

Currently, the IMF cannot fulfill the disciplinary role against the large shareholders nor can it create credit sufficiently to help resolve the growing financial crises. IMF resources are roughly US$400bil and it would have to be increased by a factor of five, before you have enough resources to deal with the European debt crisis. No single country nor group of countries can deal with such exponential growth of the global financial system, last measured as US$250 trillion in conventional financial assets and US$600 trillion in nominal value of derivatives.

In sum, there are structural issues on the global system to be thought through, before you consider the technical question whether surplus country currencies like the renminbi should be included into the SDR basket of currencies as the global reserve currency.

The reality is that no country will forever be in surplus, and sooner or later, deficit countries will have to borrow from the international pool of savings.

In the absence of a coherent global consensus on what to do, muddling through from crisis to crisis seems to be the likely way forward.

In short, don't expect the dollar dominated system to change a lot unless there is another systems crash.
● Andrew Sheng is president of the Fung Global Institute.

Euro fallout is bad news for world economy

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Global Trends By Martin Khor

The IMF-World Bank meetings last week confirmed the global economy has entered the ‘danger zone’ of a new downturn and possibly recession. This time it could be more serious and prolonged than the 2008-2009 recession. 

THE last two weeks have seen a clear downward shift in expectations on the global economy. The dominant view now is that the world has slipped into stagnation that may well become a recession.

Warnings that the economy had entered a “danger zone” generated the gloomy mood at the annual Washington gathering of the International Monetary Fund and World Bank, as well as the G20 finance ministers’ meeting.

Prominent economists are predicting the new crisis will be more serious and prolonged than the 2008-09 recession.

If the United States and its sub-prime mortgage mess was the immediate cause of the last recession, the epicentre this time is the European debt crisis.

The eurozone’s GNP grew by only 0.2% in the second quarter, and the European Commission predicts the rates will be 0.2% and 0.1% in the third and fourth quarters.

As the domino effect of contagion hit one European country after another (rather like how Asian countries were affected in 1998-99), European leaders have scrambled for a solution.

But none has worked so far.

In the Greek debt tragedy, the government has had to announce one painful austerity measure after another, but its economic condition continues to worsen and the social protests and strikes indicate the approach of the political breaking point.



The costs of austerity are already being seen (by the public at least) to outweigh the benefits.

Several British newspapers last week reported a set of big measures to tackle the European crisis was reportedly being worked on by unnamed European officials.

The centrepiece is a Greek debt default with creditors repaid only 50%, and two measures to cushion that shock – an injection of fresh capital into European banks that would suffer big losses from the default, and the boosting of the European bailout fund from 400-plus billion euros to almost two trillion euros to enable hundreds of billions of euros in new credit to countries like Italy and Spain to prevent them from becoming new debt-crisis economies.

However, this leaked news of a big Plan B was not confirmed by any policy maker, so its status or even existence is unknown.

Instead, the news out of Washington last week was of continued paralysis in European policy.

Greece this week is facing a new crunch time – waiting to see if the European institutions and IMF will approve the next bailout instalment of US$8 billion to service loans that are coming due, and what would happen if they do not. Would it be time then to declare a default?

Meanwhile, the US has its own budget deficit tug-of-war between the President and Congress and between Republicans and Democrats.

What this means is that Europe and the US are not able to make use of the policies (massive increases in government spending, interest rate cuts and pumping of money into the economy) that pulled them quickly out from the last recession.

Moreover, the coordination of policy actions among developed countries (and several developing countries as well, that also undertook fiscal stimulus policies) that fought the last recession no longer seems to exist, at least for now.

Thus the new global slowdown or recession is likely to last longer than the short 2008-09 recession.

The developing countries should thus prepare to face serious problems that will soon land on them.

We can expect a sharp fall in their exports as demand declines in the major economies.

Commodity prices are expected to climb down; they have already started to do so.

There may be a reversal of capital flows, as foreign funds return to their countries of origin.

The currencies of several developing countries are already declining and it may be the start of sharper falls.

It’s beginning to look like 2008 all over again.

But this time the developing countries are starting this downturn in a weaker state than in 2008, since they have not yet fully recovered from the last shock.

And as the downturn proceeds, there will be fewer cushions to blunt the effects or to enable a rapid recovery.

It is also clear that there is an absence of a global economic governance system, in which the developing countries can also participate in.

All countries are affected when the global economy goes into a tail spin.

Once again, the developing countries are not responsible for the new downturn, but they will have to absorb the ill effects.

Yet there is no forum in which they can put forward their views on how to lessen the effects of the crisis on them and what the developed countries should do.

As the new crisis unfolds, there will be renewed calls for reforms to the international financial and economic system.

This time there should be a more serious reform process, otherwise more crises can only be expected in the future.

Dark clouds over US and Europe !

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WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

Within the past couple of weeks, the world has changed. From a world so used to the United States playing a key leadership role in shaping global economic affairs to one going through a multi-speed recovery, with the emerging nations providing the source of growth and opportunity. This is a very rapid change indeed in historical time. What happened? First, the convergence of a series of events in Europe (contagion of the open ended debt crisis jolted France and spread to Italy and Spain, forcing the European Central Bank or ECB to buy their bonds) and in the US (last minute lifting of the debt ceiling exposed the dysfunctional US political system, and the Standard & Poor's downgrade of the US credit rating) have led to a loss of confidence by markets across the Atlantic in the effectiveness of the political leadership in resolving key problems confronting the developed world. Second, these events combined with the coming together of poor economic outcomes involving the fragilities of recovery have pushed the world into what the president of the World Bank called “a new danger zone,” with no fresh solutions in sight. Growth in leading world economies slowed for the fourth consecutive quarter, gaining just 0.2% in 2Q'11 (0.3% in 1Q'11) according to the Organisation for Economic Cooperation and Development. The slowdown was marked in the euro area. Germany slackened to 0.3% in 2Q'11 (1.3% in 1Q'1) and France stalled at zero after 0.9% in 1Q'11. The US picked up to 0.3% (0.1% in 1Q'11), while Japan contracted 0.3% in 2Q'11 (-0.9% in 1Q'11).

A construction worker guides a beam into place in Philadelphia. Picture: AFP Source: AFP

IT’S not always sunny in Philadelphia. The Federal Reserve Bank of Philadelphia has reported severe dark clouds over the area’s factory sector. 

The US slides

Recent data disclosures and revisions showed that the 2008 recession was deeper than first thought, and the subsequent recovery flatter. The outcome: Gross domestic product (GDP) has yet to regain its pre-recession peak. Worse, the feeble recovery appears to be petering out. Over the past year, output has grown a mere 1.6%, well below what most economists consider to be the US's underlying growth rate, a pace that has been in the past almost always followed by a recession. Over the past six-months, the US has managed to eke out an annualised growth of only 0.8%. This was completely unexpected. For months, the Federal Reserve had dismissed the economy's poor performance as a transitory reaction to Japan's natural disaster and oil price increases driven by turmoil in the Middle East. They now admit much stiffer headwinds are restraining the recovery, enough to keep growth painfully slow. Recent sentiment surveys and business activity indicators are consistent with expectations of a marked slowdown in US growth. Fiscal austerity will now prove to be a drag on growth for years. Housing isn't coming back quickly. Households are still trying to rid themselves of debt in the face of eroding wealth. Old relationships that used to drive recoveries seem unlikely to have the pull they used to have. Historically, consumers' confidence had tended to rebound after unemployment peaked. This time, it didn't happen. Unemployment peaked in Oct 2009 at 10.1% but confidence kept on sinking. The University of Michigan's index fell in early August to its lowest level since 1980. Thrown in is concern about the impact of the wild stock market on consumer spending. Indeed, equity volatility is having a negative impact on consumer psychology at a time of already weakening spending.

Traders in the oil options pit of the New York Mercantile Exchange – the oil price slipped as US growth was revised down in the second quarter. Photo: AP

Three main reasons underlie why the Fed made the recent commitment to keep short-term interest rates near zero through mid-2013: (i) cuts all round to US growth forecasts for 2H11 and 2012; (ii) drop in oil and commodity prices plus lower expectations on the pace of recovery led to growing confidence inflation will stabilise; and (iii) rise in downside risks to growth in the face of deep concern about Europe's ability to resolve its sovereign debt problems. The Fed's intention is at least to keep financial conditions easy for the next 18 months. Also, it helps to ensure the slowly growing economy would not lapse into recession, even though it's already too close to the line; any shock could knock it into negative territory.

The critical key

Productivity in the US has been weakening. In 2Q11, non-farm business labour productivity fell 0.3%, the second straight quarterly drop. It rose only 0.8% from 2Q10. Over the past year, hourly wages have risen faster than productivity. This keeps the labour market sluggish and threatens potential recovery. It also means an erosion of living standards over the long haul. But, these numbers overstate productivity growth because of four factors: (a) upward bias in the data - eg the US spends the most on health care per capita in the world, yet without superior outcomes; (b) government spending on military and domestic security have risen sharply, yet they don't deliver useful goods and services that raise living standards; (c) labour force participation has fallen for years. Taking lower-paying jobs out of the mix raises productivity but does not create higher value-added jobs; and (d) off-shoring by US companies to China for example, but they don't enhance American productivity. Overall, they just overstate productivity. So, the US, like Europe, needs to actually raise productivity at the ground level if they are to really grow and reduce debt over the long-term. The next wave of innovation will probably rely on the world's current pool of scientific leaders - most of whom is still US-based.



US deficit is too large

The US budget deficit is now 9.1% of GDP. That's high by any standard. According to the impartial US Congressional Budget Office (CBO), even after returning to full employment, the deficit will remain so large its debt to GDP will rise to 190% by 2035! What happened? This deficit was 3.2% in 2008; rose to 8.9% in 2010, pushing the debt/GDP ratio from 40% to 62% in 2010. This “5.7% of GDP” rise in the deficit came about because of (i) a fall of “2.6% of GDP” in revenue (from 17.5% to 14.9% of GDP), and (ii) a rise of “3.1% of GDP” in spending (from 20.7% to 23.8% of GDP). According to the CBO, less than one-half of the rise in deficit was caused by the downturn of 2008-2010. Because of this cyclical decline, revenue collections were lower and outlays, higher (due to higher unemployment benefits and transfers to help those adversely affected). They in turn raise total demand and thus, help to stabilise the economy. These are called “automatic stabilisers.” In addition, the budget deficit also worsened because, even at full-employment, revenues would still fall and spending rise. So, the great recession did its damage.

Looking ahead, the Obama administration's budget proposals would add (according to CBO) US$3.8 trillion to the national debt between 2010 and 2020. This would raise the debt/GDP ratio to 90% reflecting limited higher spending, weaker revenues from middle and lower income taxpayers, offset in part by higher taxes on the rich. Even so, these are based on conservative assumptions regarding military spending, no new programmes and lower discretionary spending in “real” terms. No doubt, actual fiscal consolidation would imply much more spending cuts and higher revenues. According to Harvard's Prof M. Feldstein, increased revenues can only come about, without raising marginal tax rates, through what he calls cuts in “tax expenditures,” that is, reforming tax deductions (eg cutting farm subsidies, eliminating deductions for ethanol production, etc). Such a “balanced approach” to resolve the growing fiscal deficit will be hard to come-by given the political paralysis in Washington. Worse, the poisonous politics of the past two months have created a new sort of uncertainty. The tea partiers' refusal to compromise can, at worse, kill off the recovery. The only institution with power to avert danger is the Fed. But printing money can be counter-productive. Fiscal measures are the preferred way to go at this time. Even so, the US fiscal problems will mount beyond 2020 because of the rising cost of social security and medicare benefits. No doubt, fundamental reform is still needed for the long-term health of the US economy.

Eurozone stumbles

Looming large as a risk factor is Europe's long running sovereign debt saga, which is pummelling US and European financial markets and business confidence. So far, Europe's woes and the market turmoil it stirred are worrisome. The S&P 500 fell close to 5% last week extending losses of 15.4% over the previous three weeks, its worse streak of that length in 2 years, and down 17.6% from its 2011 high. The situation in Europe has been dictating much of the global markets' recent movements. The eurozone's dominant service sector was effectively stagnant in August after two years of growth, while manufacturing activity, which drove much of the recovery in the bloc shrank for the first time since September 2009. Latest indicators add to signs the slowdown is spreading beyond the periphery and taking root in its core members, including Germany. The Flash Markit Eurozone Services Purchasing Managers' Index (PMI) fell to 51.5 in August (51.6 in July), its lowest level since September 2009. The PMI, which measures activity ranging from restaurants to banks, is still above “50”, the mark dividing growth from contraction. However, PMI for manufacturing slid to 49.7 the first sub-50 reading since September 2009. Both services and manufacturing are struggling.

Going forward, poor data show neither Germany nor France (together making- up one-half the bloc's GDP) is going to be the locomotive. Indeed, the risks of “pushing” the region over the edge are significant. Germany faces an obvious slowdown and a possible lengthy stagnation.

European financial markets just came off a turbulent two weeks, with investors fearing the debt crisis could spread further if Europe's policy makers fail to implement institutional change and new structural supports for the currency bloc's finances. In the interim, the ECB has been picking up Italian and Spanish bonds to keep borrowing costs from soaring. The action has worked so far, but the ECB is only buying time and can't support markets indefinitely. So far, the rescue bill included 365 billion euros in official loans to Greece, Portugal and Ireland; the creation of a 440 billion euros rescue fund; and 96 billion euros in bond buying by the ECB. Despite this, market volatility and uncertainty prevail. Europe is being forced into an end-game with three possible outcomes: (a) disorderly break-up - possible if the peripherals fail in their fiscal reform or can no longer withstand stagnation arising from austerity; (b) greater fiscal union in return for strict national fiscal discipline; and (c) creation of a more compact and more economically coherent eurozone against contagion; this implies some weaker members will take “sabbatical” from the euro. My own sense is that the end-game will be neither simple nor orderly. Politicians will likely opt for a weak variant of fiscal union. After more pain, a smaller and more robust euro could emerge and avoid the euro's demise. Nobel Laureate Paul Krugman gives a “50% chance Greece would leave and a 10% odds of Italy following.”

Leaderless world

The crisis we now face is one of confidence. Starting with the markets across both sides of the Atlantic and in Japan. This lack of confidence reflected an accumulation of discouraging news, including feeble economic data in the US and Europe, and signs European banks are not so stable. The global rout seems to have its roots in free-floating anxiety about US dysfunctional politics and about euroland's economic and financial stability. Confidence is indeed shaky, already spreading to businesses and consumers, raising risks any fresh shock could be enough to push the US and European economies into recession. Business optimism, at best, is “softish.” Consumers are still deleveraging. Unfortunately, this general lack of confidence in global economic prospects could become a self-fulfilling prophecy. In the end, it's all about politics. The French philosopher Blaise Pascal contends politics have incentives that economics cannot understand. To act, politicians need consensus, which often does not emerge until the costs of inaction become highly visible. By then, it is often too late to avoid a much worse outcome. So, the demand for global leadership has never been greater. But, none is forthcoming not for the US, not from Europe; certainly not from Germany and France, or Britain.

The world is adrift. Unfortunately, it will continue to drift in the coming months, even years. Voters on both sides of the Atlantic need to demand more from their leaders than “continued austerity on autopilot.” After all, in politics, leadership is the art of making the impossible possible.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.

Trends in US, Europe will affect the Malaysian Economy

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Economist: Trends in US, Europe will affect M’sia

By LIZ LEE lizlee@thestar.com.my

KUALA LUMPUR: Malaysia should keep an eye on political trends and unemployment rates in the United States and European countries as these factors will affect the local economy, says UBS Investment Bank managing director and global economist Paul Donovan.

Due to persistent long-term unemployment in the United States and Europe, governments in these countries would want to protect their local jobs and therefore limit international trade, he said at a roundtable session with the media yesterday.

As a result, Donovan said, politicians would try to run economies, which meant rising political risk in the global economy.

Donovan: I believe we will now see a period of relative stability.

 

Donovan said while politics had always influenced Asian economies, the United States and European governments had for the past two decades maintained a declining role in managing their economies.

“If we look back, the trend of reducing political risk will be reversed as politics is rising in the United States and Europe (now). What happens there will affect this region significantly.

“Malaysia, as a global open economy, will have to take note as decisions made in these foreign countries will have implications as to where the Malaysian economy is heading in the next few years,” he added.

Donovan said the Middle East remained potentially volatile but would not be the biggest political risk for this region.

“Through regulation, governments are playing a direct role in managing the economy. Certain countries will impose capital control and restriction on investments, which changes capital flow around the world.

“The trade protection that the United States and Europe has put in place means that Asia has to change the way it generates growth,” he said.



Donovan noted that exports would no longer be a reliable source for economic expansion. “Malaysia should look into (having a) domestic-focused economy with more domestic investments and consumption,” he said.

As for the world economy, Donovan said the forecast 3.9% growth had been slightly revised downward to 3.6% following the natural disasters in Japan recently.

“At the start of this year, growth momentum was quite good. First-quarter GDP numbers were better than expected in Malaysia but economists say there will be a levelling off of growth.

“I believe we will now see a period of relative stability,” he said, attributing that to continued fair growth in the United States and Europe.

He added that there would be limited slowdown in Malaysia in the second and third quarters.

“We will see a trend-like growth globally, which will continue to keep the Malaysian economy at a reasonable growth rate of 4.5% or 5% over the next two years,” Donovan added.

However, he said, this also meant that things did not get worse or better, reflecting the unchanging unemployment rates and spare capacity in countries that had not recovered well from the recession in 2008 and 2009.

The United States is facing its highest unemployment rate since 1983, with more than 40% of its citizens unemployed for more than six months.

How can Malaysia stem the tide of talent migration?

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Migration of talent – how can Malaysia stem the tide? 
By THEAN LEE CHENG and FINTAN NG starbiz@thestar.com.my

Brain drain stands in the way of a high-income Malaysia, a World Bank report says. But the solutions are not easy.

FOR over 25 years, Malaysia was one of the few Asian countries blessed with an annual growth of 7% and up. The country's growth spurt occurred between 1967 and 1997, which paved the way for the shift from low-income to middle-income. Among developing countries, Malaysia made tremendous progress in poverty reduction. In the 1970s and 1980s, income inequality was reduced dramatically while a Malay middle-class emerged.

World Bank’s Philip Schellekens ... ‘Whatever we present here we can stand by.’

These are laudable achievements no doubt. Nevertheless, in today's fiercely competitive global landscape and Malaysia's eye-popping data of escalating brain drain, the challenges for the country to move forward are far, far more complex.

Last year, Malaysia had recorded a strong recovery but the momentum appeared to have tapered off with jittery growth in the last two quarters. While business sentiment has improved in the first quarter of this year, consumer confidence has weakened on concerns of rising inflation.

Growth is expected at 5.3% this year and 5.5% in 2012. The three key risks in the near term are:

• A weaker-than expected global recovery, which will dampen growth momentum,
• A further strengthening of inflationary pressures, which may undermine consumer spending, and
• Weak fiscal consolidation.

Over the medium term, various government initiatives are being put in place to boost economic growth. But over and above the Economic Transformation Programmes and New Economic Models, the heart of Malaysia's transformation hinges on two fundamentals productivity, which requires a revamp of the education system, and policies of inclusiveness. Discontent with Malaysia's inclusiveness policies is a key factor, particularly among the non-bumiputras who make up the bulk of the diaspora.

Human capital is, after all, the bedrock of a high-income economy or for any economy for that matter. Sustained and skill-intensive growth needs talent going forward. Malaysia needs to develop, attract and retain talent.

Brain drain does not square with this objective. Malaysia needs talent, but talent seems to be leaving.

Brain drain the migration of talent across borders has long been a subject of debate and controversy. Of late, it has been openly discussed in the media, which is to be viewed positively. At least there is that openness today which was not there 10 years ago. The creation of Talent Corp Malaysia Bhd to bring back our own, and to attract new talent, is also a tacit acknowlegement by the Government that we need to manage our human capital carefully and diligently.

Brain drain is by no means something unique to Malaysia. It is something faced by many others. Taiwan saw many of its talented leave for Silicon Valley; the former Irish president Mary Robinson, during her presidency, did much to engage the Irish diaspora.

Within Asia, the brain drain is most pronounced in South-East Asia, according to the Malaysia Economic Monitor: Brain Drain released on Thursday (www.worldbank.org/my). The report says emigration rates are the highest in middle-income countries, which have both the incentive and the means to migrate. The incentive would be less strong for high-income countries. For low-income countries, financial and human capital constraints may make emigration less likely. Malaysia falls into the middle-income category.

The World Bank's Bangkok-based senior economist Philip Schellekens, who produced the report after an online survey among 200 respondents from the 1 million Malaysian diaspora around the world acknowledges that this number is small.

Click on image for actual size.
 

“But the World Bank, in the first place, does not wish to present this as a definite conclusion. Instead, it wishes to convey a qualitative feel of what is going on. The study can be seen as the first step towards understanding what has been driving brain drain in Malaysia and how policymakers can address it.”

The report measures the size of the Malaysian diaspora and brain drain, its key characteristics and its evolution over the past 30 years. It gives an updated picture on the basis of the most recent information available, including Singapore's census results which were released early this year.

“We've avoided at all costs to use anecdotal sources for such a sensitive topic. So, whatever we present here we can stand by. We also document our sources of information so that other people, as part of this process, can continue the work, refer to our study, look at the numbers and update or improve them.”

It is an extension of previous reports on Malaysia, Growth through Innovation and Inclusive Growth. 

Why do people leave?

Brain drain is a symptom, not a problem in itself. It is the outcome of underlying factors as all of us respond to push and pull factors. While not every person leaving Malaysia constitute a brain drain, about a third of them do. Seen from the long lens of emigration and its effect years from today, Malaysia is not only losing talent today, it is also losing talent tomorrow, because children who leave with their parents, and who spend their formative years abroad, are less likely to return.

The report removes the veil of doubt and uncertainty over some numbers. Some of the key highlights are:

● The Malaysian diaspora is large and expanding, with a conservative estimate of about 1 million worldwide last year. The diaspora has quadrupled over the last 30 years, and is geographically concentrated and ethnically skewed.

● Singapore alone absorbs 57% of the entire diaspora, with the rest residing in Australia, Brunei, Britain and the United States. - Malaysia's brain drain is intense relative to its narrow skill base. - The brain drain is aggravated by a lack of compensating inflow. While many Singaporeans leave the city-state for greener pastures, many highly skilled expatriates also enter the republic.

The situation is different in Malaysia. While Malaysia receives many, most who come have low skills. Coupled with this dire situation, Malaysia's high-skilled expatriate base has shrunk by a quarter since 2004.

● The number of skilled Malaysians leaving for Singapore has increased from 10% in 1990, 23% in 2000 to 35% last year. This is defined by those who have tertiary education. About 47% of all skilled foreign-born residents in Singapore were born in Malaysia.

Malaysia is not on the brink of a crisis, but it can do better as it has a lot of potential. Brain drain, says Schellekens, should not be viewed as potentially negative. It has its positive potential, as when it aspires a young person to pursue tertiary education, as when it allows those who remain to leverage on those who have succeeded abroad.

“There is an increased openness in Malaysia to discuss these issues and this is a welcome development,” he says.

The report goes beyond stating numbers and facts. It also identifies two areas the government needs to seriously look into the need to improve productivity and to strengthen Malaysia's policies of inclusiveness.

Talent Corp CEO Johan Mahmood Merican says the report is not something new. “It lends credence to what the Government already knows and we have taken action even before the World Bank report was released. There is a lot of work-in-progress which supports the direction that we have initiated.

“What is important is there is an urgency for us to change the business model if we are to advance. It is not a case of whether we stand still or we advance. If we stand still, we are effectively regressing. Vietnam and Indonesia are getting their act together and recording high growth. In that sense, it is consistent.”

Johan says the usefulness of such a report is that while it highlights the potentially negative effects of brain drain, it also highlights the flip side, its positive effects.

“Malaysia has been spared from the detrimental part of it in the sense that our industries have not come to a halt, as in some other countries. At the same time, it has not been as beneficial to us as a country, as it has to some other countries. So at this point in time, it is neutral. The question is, how do we make it net positive? This is where Talent Corp comes in. We are beginning to engage with Malaysians abroad and with the private sector,” Johan says.



Courting talent back

Four months after its establishment, Talent Corp is primarily focused on facilitating initiatives to attract, nurture, engage and retain talent to support human capital needs of the Economic Transformation Programme (ETP). This has resulted in the Residence Pass that enables top foreign talent, especially those in the ETP, to continue working in Malaysia for a longer tenure and fewer restrictions. There has also been revisions to the Returning Expert Programme to encourage more Malayisan professionals working overseas to come home and help drive the nation's economic transformation, especially in the ETP. Because of Malaysia's base in manufacturing, parcticularly in electrical & electronics, an industry-led initiative to address the sector's talent requirements, with an emphasis on nurturing local talent was launched last week. Similar groups in other key economic sectors are currently in the pipeline.

“This is clearly a long-term project. We are looking at small starting steps this year to ease the mobility of talent and to establish a baseline for future work,” says Johan. Other initiatives in the works will be announced later this year in due course.

Johan also brings up the success story of Pua Khien Seng, the Malaysian who invented the pen drive, and who has been residing in Taiwan for 16 years. Pua is now president and co-founder of Phison Electronics Corp, a listed technology company in Taiwan with a market capitalisation of almost NT$40bil (RM4.3bil).

“His business will always be in Taiwan. So how do we leverage on that? How can we facilitate that engagement with Pua, and other Malaysians, who are residing abroad?”

The larger question is: Can targeted measures such as talent management and diaspora engagement substitute more comprehensive reforms?

Schellekens thinks not. “Our observation is that the targeted measures developed by Talent Corp are helpful. These are first steps in the right direction but if the underlying deterrents are not addressed comprehensively, then these measures will only have a marginal impact.”

The fundamental issues, or underlying factors why people leave relate to economic incentives, which can be captured under the umbrella of low productivity, and social disincentives which reflect discontentment among the non-bumiputras with Malaysia's inclusiveness policies.

“If you want to tackle the brain drain in a comprehensive fashion, it is not through reversing it or trying artificially to stop it. Tackle the fundamentals and things will happen automatically; people will feel incentivised not to leave the country, or to return if they have left,” Schellekens, the lead author of the report says.

The report highlights the progress made by South Korea. It was a third poorer than Malaysia in the 1970s in terms of average income but nowadays it's three times richer. One remarkable aspect of South Korea's development path has been its attention to investment in quality education. As with Singapore, Hong Kong, China and Japan, the bedrock of any country's progress is its human capital.

A statement from RAM Ratings Services Bhd says: “While we may be comforted by the report's finding that the brain drain has not reduced significantly the country's stock of educated workforce, it highlights the disconcerting fact that the country has a narrow skills base and that its skilled human capital base continues to slide, exacerbated by the brain drain. We need to actionalise inclusiveness under the clarion call of 1Malaysia and sharpen the focus on competitiveness, meritocracy, good governance and productivity in both the government and private sector. Only by unleashing private sector dynamism, entrepreneurialship and innovativeness can we sustain the virtuous circle of high investment-growth-productivity increases.”

Its chief economist Dr Yeah Kim Leng adds: “It would be difficult to achieve the high income target by 2020. Productivity growth would slow as the labour market would be more confined to lower-skilled sets. The country's industrial and technological upgrading and its shift up the value chain would be hampered by skills shortages, higher cost of foreign skilled manpower and deficiencies in innovation and entrepreneurship.”

While our challenge is to tap into our potential and we are blessed with an abundance in myriad areas and sectors this has become more difficult than a decade or two ago because competition in the region for trade, talent, and foreign direct investment has intensified. While we bicker among ourselves, other countries are forging ahead very quickly.

As Malaysia climbs up the income ladder, new challenges in form of innovation will come our way.
Says Schellekens: “Malaysia aspires to base its future growth on innovation. This means that growth will become more skills-intensive, creating a demand for skilled people as well as leading to rising wage levels for the skilled. This may accentuate the income disparity between the skilled and the unskilled, leading also to social challenges between the city and countryside.

Another challenge is the need for more internal competition. Iron sharpens iron.

“There is a sense of urgency for Malaysia to implement the structural reform agenda more quickly as well as comprehensively, else the underlying momentum of growth will deteriorate through an erosion of competitiveness. We are concerned that some of these trends may be happening already, as with the parts and components trade within the electrical and electronics of Malaysia,” he adds.

Malaysia Economic Monitor, April 2011

Click on a thumbnail to access the higher resolution version (you may want to enlarge the resulting browser window to get the largest view possible). To save a copy, right-click on the hi-res image and choose "save as" or "save image as".  The Brain Drain Challenge in Pictures
The Malaysian diaspora in 2010 is estimated at 1 million, a third representing brain drain	The diaspora is geographically concentrated	The pace is brain drain is elevated
Relative to narrow skill base, brain drain is intense	Brain drain is a symptom driven by productivity and inclusiveness concerns	Boosting productivity will require up-skilling through education and innovation policies
Reducing the ethnic skew in the diaspora will require updating inclusiveness policies	Targeted policies to tap into global talent and engage with the diaspora would complement

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World Bank says: NEP, brain drain holding back Malaysia

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Malaysia’s brain drain getting worse, says World Bank
By Lee Wei Lian

KUALA LUMPUR, April 28 — World Bank senior economist Philip Schellekens painted a gloomy picture of the Malaysian brain drain situation today saying that it not only grew rapidly but is likely to intensify, further eroding the country’s already narrow skills base.

Schellekens said that the number of skilled Malaysians living abroad has tripled in the last two decades with two out of every 10 Malaysians with tertiary education opting to leave for either OECD (Organisation for Economic Cooperation and Development) countries or Singapore.

“Brain drain from Malaysia is likely to intensify in the absence of mitigating actions,” he said at the launch of the World Bank report titled “Malaysia Economic Monitor: Brain Drain”.

The report defined brain drain as the outflow of those with tertiary-level education.

The economist said Malaysian migration was increasingly becoming a skills migration with one-third of the one million-strong Malaysian diaspora now consisting of the tertiary educated.

“Expect the trend to continue,” he said.

He added that the outflow of talent was not being replaced with inflows, thus damaging the quality of Malaysia’s “narrow” skills base, noting that 60 per cent of immigration into Malaysia had only primary education or less, even as the number of skilled expatriates declined by 25 per cent since 2004.

The report also noted that there was a geographic and ethnic component to the brain drain, with about 88 per cent of the Malaysian diaspora in Singapore being of ethnic Chinese origin.

“The numbers for US and Australia are similar,” said Schellekens.

Report figures also show that 54 per cent of the Malaysian brain drain went to Singapore while 15 per cent went to Australia, 10 per cent to the US and 5 per cent to the UK.

The top three drivers for brain drain identified by the report were career prospects, compensation and social justice.

“(Lack of) Meritocracy and unequal access to scholarships are significant push factors and a deterrent to coming back,” said Schellekens. “Non-Bumiputeras are over-represented in the brain drain.”

He suggested that Malaysia implement important structural reforms in tandem with introducing targeted measures such as income tax incentives to reverse the brain drain.

“Once the highway is built, you must compete for traffic,” he said. “One suggestion is to hold a competition among members of the diaspora to get ideas on what can be done to attract them home.”

He added that while this report estimated the Malaysian diaspora at one million compared with about 1.4 million in a previous World Bank report, it was due to the lack of Singapore government information on the breakdown of its non-resident population.

“This is a conservative estimate and the diaspora could well be larger,” he said.



NEP, brain drain holding back Malaysia, says World Bank

KUALA LUMPUR, April 28 — More than one million Malaysians live abroad, the World Bank said today, adding that policies favouring Malays are holding back the economy, causing a brain drain and limiting foreign investment.

In a Bloomberg news service report today, World Bank senior economist Philip Schellekens was also quoted as saying that foreign investment could be five times the current levels if the country had Singapore’s talent base.

“Migration is very much an ethnic phenomenon in Malaysia, mostly Chinese but also Indian,” Schellekens (picture) told Bloomberg in Kuala Lumpur on Tuesday ahead of the report’s release today.

Governance issues and lack of meritocracy are “fundamental constraints” to Malaysia’s expansion because “competition is what drives innovation,” he said.

Malaysia’s growth fell to an average 4.6 per cent a year in the past decade, from 7.2 per cent the previous period.

Singapore, which quit Malaysia in 1965, expanded 5.7 per cent in the past decade and has attracted more than half of its neighbour’s overseas citizens, according to the World Bank.

Malaysia has in recent years unveiled plans to improve skills and attract higher value-added industries.
The World Bank conducted an online survey in February of 200 Malaysians living abroad in conjunction with the Kennedy School of Government at Harvard University.

They cited better career prospects, social injustice and higher wages as their main reasons for leaving, the Washington-based lender said in the Bloomberg report.

Singapore has absorbed 57 per cent of Malaysia’s overseas citizens, with almost 90 per cent of those crossing the border ethnic Chinese, the World Bank said.

“If Malaysia has the investment environment of Singapore and also had the innovation and skills environment of Singapore, then foreign direct investment inflows into Malaysia could be about five times larger,” Schellekens said in the Bloomberg report.

“They need to boost productivity and strengthen inclusiveness.”

Prime Minister Datuk Seri Najib Razak has pledged to roll back the country’s NEP-style policies but he also told the Umno assembly last year that the government’s social contract of providing benefits to Bumiputeras cannot be repealed.

According to the Bloomberg report, Najib has eased some rules to woo funds, including scrapping a requirement that foreign companies investing in Malaysia and locally listed businesses set aside 30 per cent of their Malaysian equity for indigenous investors. Last year, he unveiled an economic transformation programme under which the government identified US$444 billion (RM1.3 trillion) of projects from mass rail transit to nuclear power that it would promote in the current decade.

“If everything is implemented as they say, Malaysia is going to be a star economy,” Schellekens told Bloomberg. “The problem is implementation.”

World Bank: Reforms under New Economic Model should accelerated

KUALA LUMPUR: Although Malaysia has taken steps to restructure its economy via the Economic Transformation Programme, more deep-seated reforms as laid out in the New Economic Model (NEM) have slowed as the Government seeks a balance between tackling more immediate problems and long-term transformation.

The World Bank, in the fourth edition of the Malaysia Economic Monitor, noted that while the project-based initiatives as represented by the National Key Economic Areas had demonstrated “notable progress,” cross-cutting reforms under the NEM should be accelerated.

Minister in the Prime Minister's Department Tan Sri Nor Mohamed Yakcop told reporters after the launch yesterday that there was more to be done.

 

Tan Sri Nor Mohamed Yakcop says resources are needed to overcome major challenges.

 He added that the resources were needed to overcome major challenges. “It's all a matter of sequencing,” he said.

The World Bank in the economic report observed that foreign investors remained “skeptical” about the impact of the cross-cutting reform announcements under the NEM.

“Most do not price the NEM measures into their medium-term forecasts, considering them instead as upside risk factors,” the Washington-based international financial institution said.

The World Bank said the skepticism was likely reflected in two issues - the difficulty in implementing cross-cutting reforms and the perception, likely due to a lack of communication, that the Government was not doing enough in pushing the NEM reforms.

Statistics revealed in the report included a conservative estimate of a one-million strong Malaysian diaspora, largely located in Singapore, Australia, Brunei, Britain, the United States and New Zealand.

Of this, nearly 90% were of ethnic Chinese descent while for the diaspora as a whole, one-third had tertiary education with the rate of the qualified migrating having risen in recent years.

The report added that Singapore was the destination of 57% of those who had left.