Share to help stimulate good governance, ensure future of people & M’sia

No News Is Bad News

This is one big factor! CORRUPTION!

Why Malaysia is lagging in Asia?

KUALA LUMPUR, Jan 20, 2024: Look no further than Singapore to find out why Malaysia is losing out to all others in Asia.

Where others were once behind Malaysia, namely Indonesia, Thailand, Vietnam and even Cambodia, they are now overtaking, if not have overtaken, Malaysia in socio-economic progress and development.

Widespread corruption among the elite (especially politicians), incompetency and no accountability, and low productivity civil service are the main factors for Malaysia’s stagnant socio-economic growth, if not “reverse gear (goes stand balik).

Add racial and religious bigotry to the list and Malaysia is destined to be left behind by others.

Each of the following images from Facebook are worth a thousand words!!!

No News Is Bad News reproduces below a lengthy article that is really worth reading to understand the socio-economic works of a country’s economy:

Sukudhew Singh and Microsoft bing

How Countries Sabotage Their Own Economies

Sukudhew (Sukhdave) Singh

Former Deputy Governor, Central Bank of Malaysia | Former Independent Director, Khazanah Nasional Berhad

Published Nov 2, 2023

Five primary ways countries sabotage their own economies:

1. Political dysfunction

2. Wide-spread failure of governance

3. Macroeconomic mismanagement

4. Not investing adequately in the infrastructure for growth

5. Failing to develop and diversify the economy.

Developing countries do face exogenous challenges that undermine their economic progress, often getting entangled in not only protectionist policies, but also in geopolitics, and the mechanization of external parties lusting after natural resources in these countries. Other exogenous obstacles to growth include geography, natural disasters, wars, and now, the challenges of global climate change. While not downplaying the role that these factors in undermining growth in developing countries, what the countries do themselves is also an important determinant of their economic fate. Here, I am summarizing these determinants into five endogenous factors. Countries that do a better job at managing these have economies that are not only able grow sustainably, but also have resilience to exogenous challenges.

What inspired me to write on this topic was the recently released special report of the G30 Working Group on Latin America entitled "Why Does Latin America Underperform?" The report looks at why the countries in Latin America (actually, only 12 of the 33 countries in Latin America and the Caribbean) have experienced such low growth, especially when compared to their peer countries, including some in Asia. The report is detailed and an interesting read. Some problems mentioned in the report are not unique to Latin American countries but can also be seen in countries in other regions, including those in Asia. My main disagreement with the report concerns its key conclusion that "while many countries in Latin America share similar challenges, there are unique circumstances preventing a one-size-fits-all explanation to the question of underperformance." My own observation is key factors can be found in country after country (including those in Latin America) that usually hold back economic progress. The unique circumstances that the report highlights are nothing more than the many manifestations or symptoms of the underlying problems. Those underlying problems relate to these five factors, and the Latin American economies are among those that have suffered significant deficiencies in these areas, which has hurt their growth.

1. POLITICAL DYSFUNCTION

This is often the leading cause of economic underperformance. Bad politics often leads to bad economics. Short-term political and individual interests supersede the long-term interest of the country. Political cronyism flourishes while the economy shrivels. By bad politics, I am referring to not only frequent leadership changes, which may or may not be accompanied by violence, but also to the assumption of leadership political roles through manipulation of democratic processes, or bypassing such processes (coups, undermining a legally elected government, fraud in voting, etc.). In many developing countries, the democratic election-based political process is often subverted by privileged groups in these countries to serve their own ends. To make matters worse, there has been a trend in recent years, probably strengthened by social media, of a feedback loop between the polarization of populations and the polarization of politics. As both populations and politics have become more fragmented, it has undermined efforts at cohesive and forward-looking economic policies.

When the country experiences prolonged episodes of political instability, the economy suffers. Sustained periods of frequent changes in the leadership of a country, especially if it comes with political unrest, leads to an unstable business environment that undermines investment, and economic growth. Civil unrest, ethnic tensions, and conflicts within a country disrupt economic activity and degrade its infrastructure, undermining not only foreign investment, but also causing outflows of domestic capital.

Often, political instability is related to the extreme economic inequality found in many of these countries. Historically, societies with a high level of inequality, usually had less social cohesion, preventing them from dealing effectively with major challenges, be they economic, social, or environmental. So addressing inequality is a key part for creating political stability and an economy that can grow sustainably. Reducing inequality is not only a facilitator of growth, it is must also be the outcome of growth. As in the past, the major stumbling block is the state capture by privileged groups that rarely have the long-term interests of the country as their priority.

Many countries, both developed and developing, have abandoned their legacy of monarchies. Where such monarchies still exist, they can have a positive or negative impact on the country's development. Where the monarchy is independent and has a clear vision of its role in society, it can play a positive role in making sure politics and vested interest do not undermine the long-term development of the country. However, what is often the case is that the monarchy, and its various extensions, have extensive business and commercial interests in the economy. This not only leads to the prioritization of those commercial interest over the interest of the citizens, but also to active involvement of the monarchy in politics, if not overtly, then covertly. In these countries, corrupt politicians often look at the monarchy as a facilitator rather than a hindrance to their self-serving schemes. When this happens, the monarchy becomes part of the problem holding back a country's economic progress.

The quality of political leadership determines the fate of a country. While a single good leader does not make a country, a single bad leader can break a country. Many developing countries are plagued by bad leadership. Notorious examples include Mugabe in Zimbabwe, Idi Amin in Uganda, Marcos in Philippines, Sukarno in Indonesia, and Pinochet in Chile. They set back their countries' social and economic progress by decades. In the ASEAN region, a sequence of bad leaders and more fragmented politics in countries like Thailand and Malaysia have eroded the economic dynamism that these economies were at one time renown for. Under President Joko Widodo, Indonesia is experiencing its own period of economic dynamism. However, to sustain that dynamism would require the country to continue having high caliber leaders, failing which, Indonesia could face a reversal of its fortunes, as has happened to its neighbors.

2. WIDE-SPREAD FAILURE OF GOVERNANCE

When there is proper rule of law, the laws of the country apply equally to everyone in the country, regardless of their position or social status. This is not the case in many developing countries. Either they do not have the laws, or if they do, the laws are not effectively enforced and there are parts of society effectively above these laws. Anti-corruption legislations and integrity campaigns mean nothing if there is no effective investigation and prosecution of those who commit these offences. The privileged in many developing countries plunder the economy and government funds but are effectively above the law. Corruption and political interference undermine the integrity of the entire chain of law enforcement. When the government machinery and its enforcement agencies become a rent-seeking bureaucracy, it imposes a huge burden on the economy. Trust in public institutions is eroded. The informal economy flourishes and tax avoidance is widespread. When the legal system is ineffective, property rights are not well-protected, contracts are difficult to enforce, and disputes are not resolved fairly; businesses and investors will understandably be reluctant to invest.

Weak governance and a high level of corruption significantly increases the cost of investment and doing business in a country. It distorts markets by giving economic power to politically connected companies, and by carving out markets for politically favored groups. These distortions not only discourage competition, but also increase the cost of goods and services to consumers.

Without effective separation of power between the three branches of government (legislative, executive and Judiciary) there are no checks and balances against abusive use of power. Cronyism prevails in appointments to important positions within the government and private sector. Major corporations belong to politically connected individuals; and when they get into trouble (as they often do) taxpayers funds are used to bail them out, with little in the way of accountability from those managing these corporations. Government projects are awarded though non-transparent processes, giving ample opportunity for politically connected parties to obtain them, usually at inflated pricing and inferior deliverables, and often, no deliverables and no accountability. The collapse of the two dams in Libya this year, the subsequent flooding and loss of life, is sadly, just the latest example of the effects of corruption.

Many developing countries have ample natural resources to provide a healthy standard of living to most of their population if these resources are managed responsibly. Unfortunately, they are not. Those in power and their cronies often divert the wealth into their own pockets and the rest of the population gets no benefit. In this environment, much of government planning and expenditures are short-term and to benefit vested interests. The enablers of economic growth are neglected, and the economy and the citizens are burdened with the consequences.

No country is completely free of corruption, but those that can have good rule of law and minimize corruption have a significantly better chance of advancing up the development ladder.

3. MACROECONOMIC MISMANAGEMENT

Bad leadership and corruption often lead to the prioritization of personal interest over the interest of the country. Malaysia’s 1MDB scandal laid bare for the whole world to see the extent of the mechanizations used by the privileged to enrich themselves at the expense of the country. With a large part of government fiscal revenues being diverted into private pockets rather than into providing facilities and services that support the economy, fiscal income is negatively affected by the resulting slow economic growth, as well as tax evasion by businesses owned by the privileged, and significant economic activity being done in the informal sector. These countries face sustained fiscal deficits financed either domestically or from foreign borrowings. Accumulation of unsustainable amounts of external debt has led to the downfall of many developing countries, playing a key role either as the instigator or exacerbator of economic and financial crises.

The situation is often aggravated when an economy relies primarily on commodity exports and is subject to the volatility in pricing and demand. Meanwhile, imports are often driven by necessities that the domestic economy does not produce or by the taste of the privileged for foreign goods and services. Capital outflows often exceed capital inflows. This leads to persistent deficits in the current account and the overall balance of payments, pressuring the exchange rate, which pressures domestic inflation.

When the government debt is high and financing it becomes burdensome and expensive, politicians often look towards their central banks to bail them out. First, they will look at central bank foreign exchange reserves to finance imports or to repay external debt. Second, they will ask the central bank to finance the fiscal debt. The first strategy weakens the country's international liquidity position and makes it vulnerable to a BOP crisis. The second causes excessive growth of money supply, way more than can be justified by the level of economic activity. This invariably leads to high inflation and creates a feedback loop between the higher domestic inflation and a weakening exchange rate. Central bank governors of integrity rarely last long in many developing countries and are likely to be replaced by those more obliging to the demands of political leaders. So central bank independence has little meaning if the central bank leaders are chosen by politicians for their sycophantic character, rather than their technical and leadership abilities for the job.

Episodes of high inflation and exchange rate depreciation/devaluation undermine trust in the domestic currency. When trust in the domestic currency is lost, citizens start holding their savings in foreign currencies (usually the major currencies, with the US dollar a favorite, and often outside the formal banking system). Often, there is growing dollarization of the economy, whereby economic transactions are denominated in foreign currencies. The influence of monetary policy over the economy becomes weaker.

Interest rates are often kept lower than necessary to support the government, resulting in over-indebtedness across the economy. As noted by the G30 report, many Latin American economies have low savings and must rely on foreign savings, which is an important vulnerability for these economies. This is not surprising given the history of financial crises, inflation and sharp exchange rate depreciations in many of these economies. Even in Asia, domestic savings in bank deposits in several economies have declined since the Asian Financial Crisis in 2008. Changing demographics, incomes, lifestyle preferences, and cost of living could be factors behind this trend. It could also be related to the experience of erosion of savings caused by both the exchange rate depreciations and the extended period of low or negative real interest rates on bank deposits, leading to changes in household and business preferences in terms of how they save, where they save, and how much they save. At the same time, private debt levels have risen. While this may not necessarily be an immediate problem for most households and the financial system, it reduces the overall resiliency of the economy. Even if the financial system is prudently regulated and supervised, it will still not eliminate the financial risks to the economy created by imprudent macroeconomic policies.

Natural disasters, terms of trade shocks, and pandemics can worsen the fiscal position of governments, but the usual reason countries reach fiscal precipices is imprudent spending combined with deficient revenue collection over sustained periods. And without good fiscal policy, it is often difficult to have good monetary policy. I have written how this had played out in the Sri Lankan crisis. Bad macroeconomic policies in developing countries have enriched a few but caused misery to countless millions.

Putting the fiscal house in order, especially through proper governance and oversight over spending, is an essential starting point to economic rehabilitation. This must be accompanied by a strong, competent, and independent central bank. When these two pillars are in place, they support the pedestal on which sustainable economic growth can take place.

Finally, there is a caveat when looking at the effectiveness of macroeconomic policies in more than a few of these economies in that they often have weak governance around the collection and dissemination of economic statistics. Due to political interference in the national statistical agencies, figures around inflation, GDP, the balance of payments, poverty levels, etc., are often manipulated to please those who hold political power. Statistics that cast an unfavorable light on the government are often suppressed. Therefore, the true situation often tends to be worse than what is shown by the official statistics.

4. FAILING TO INVEST IN THE INFRASTRUCTURE FOR GROWTH

A healthy growing economy needs several enablers. Often it falls upon the government to provide those enablers. I refer to these enablers as the infrastructure for growth and it refers to the physical and human resources on which a healthy economy is built.

The physical infrastructure of an economy includes transportation, utilities, and communications. Where the government efficiently develops this infrastructure, or creates the environment for the private sector to competitively provide this infrastructure, it will facilitate economic activity, boost demand, and attract investment. For example, construction of efficient highways or public transportation let citizens travel to the cities where they work, while living in cheaper housing outside the city. This infrastructure enhances logistics and enables economic activity to become more regionally dispersed, providing economic opportunities and employment across a broader region. Employment and cheaper housing boosts household demand for other goods in the economy, further stimulating the economy.

The human infrastructure refers to those facilities that make sure the workforce of the country is healthy and well-educated, i.e., healthcare system, education system and housing. Poor quality healthcare and education directly affect the quality of the labor force. Years of schooling has shown a positive trend in many countries but fails to provide an accurate picture. Whether it is in Latin America or Asia, students are often kept in school longer to keep them off the streets, but they are still poorly educated and under-skilled. This is often accompanied by grade inflation, which leads to many having paper qualifications but having neither the knowledge or the skills to contribute meaningfully to the economy. Health problems and low skill levels reduce both employability and productivity. The economy is deprived of the quality labor force that its businesses need to compete internationally and to attract domestic and foreign investments into the economy. These economies have high unemployment, especially among their young people, while business cannot obtain enough skilled labor. Weak labor protection leads to exploitation of workers. With a lack of economic opportunities, those with the skills often leave, creating a brain drain that worsens the skills shortage.

Environmental degradation and pollution have eroded the environment in which the much of the populations in developing countries live. The power of politically connected corporations, combined with weak government enforcement, has led to pollution of the land, water, and air in areas where the bulk of the population of these countries live. Further adding to their misery now are the climate-related events that have become more frequent in many countries.

Regrettably, leaders in developing countries do not invest enough in the physical infrastructure and invest even less in the human infrastructure. Even if the budget allocations for these purposes look impressive, because of corruption and poor governance, the amount that gets spent is a lot less and the quality of outcomes is often poor. The infrastructure that gets priority benefits the elite directly, which may or may not benefit the economy.

5. FAILURE TO DEVELOP AND DIVERSIFY THE ECONOMY

A failure to develop and diversify the economy leads to excessive dependence on a narrow range of products, and limited export markets, resulting in vulnerability to external economic shocks. This is a key problem for the Latin American economies covered in the G30 report. It is also a problem for many other developing countries.

While countries may wish to move up the value chain, domestic conditions often prevent them from doing so. Aside from the factors I mentioned above, these markets are usually so distorted that they impede free competition. Government regulation, especially when it is discriminatory, can stifle competition and the incentive to invest. The markets are also distorted by government linked companies and businesses owned by privileged groups that receive special concessions from the government. These entities have little incentive to be competitive given their market power. The outcome is that competition is stifled, opportunities in the formal economy are limited, and entrepreneurship flourishes only in the informal economy. The development of the economy is retarded.

A competitive environment is necessary to develop a dynamic economy. Only in a competitive environment would businesses learn to leverage on opportunities. Competition drives adaptation that allows businesses to respond to changing business conditions. The proper role of the government is to stay out of active participation in the economy, limiting itself to the efficient provision of public services, addressing issues of externalities and market failure, and using its revenues and taxation policies to encourage domestic and international companies to invest in the economy. It is private investment that will transform the economy. This is important when the government wishes to move beyond resource-based extractive industries into higher value-added processing and manufacturing.

There are good reasons countries would want to grow their manufacturing sectors – productivity in manufacturing is generally higher than in the services sector, and the wages are better. Manufacturing also diversifies the exports away from reliance on commodities. However, without the preconditions, making manufacturing large enough to be a significant employer of the workforce is a difficult task. Even more difficult is making the transition from low-end manufacturing into high-end manufacturing, and into more advanced industries beyond manufacturing. Even in Asia, there are only a few economies that have successfully transitioned into advanced diversified economies. For the rest, some of those who had moved to manufacturing, mainly due to foreign direct investment, have faced difficulties in moving further up the value chain.

The emergence of China as the "workshop of the world" siphoned many manufacturing industries away from not only the developed world, but also from many developing countries. This premature deindustrialization of developing countries reduced their manufacturing exports and made them again more dependent on commodity exports, for which China became a large market. Admittedly, trade frictions in recent years have pushed some manufacturing out of China back into selected other countries, but the sustainability of this trend remains to be seen, especially when considering the trends in near-sourcing and technology, which would affect the location and nature of manufacturing.

A strong and diverse domestic financial system, that is well-regulated, has an important role in supporting the creation of a diversified economy. Aggregating domestic savings and channeling those savings into productive economic activity is a fundamental role of the financial system. When the financial system fails at this function, the economy suffers. A diverse financial system, with institutions of different risk-bearing capacity, is also better able to support economic transitions by financing new areas of economic activity. Behind every successful economy is a financial system that made it possible. Unfortunately, financial systems in many developing countries are compromised and underdeveloped, and often captive to the politically connected.

TO CONCLUDE

Becoming a developed country with a diversified economy is difficult. This is why even in Asia, over the last half-century, there are only a few countries that have achieved that feat: Singapore, South Korea and Taiwan. But difficult does not mean impossible. The five factors often interact in complex ways and addressing them requires a comprehensive and multi-dimensional approach. However, I believe there is an order of priority. The starting point must be with addressing political instability and the failure of governance. Without this, it is difficult to put the other three economic factors in place. Countries at one time well on the way to becoming developed economies have found their economic progress slowing, and sometimes, reversing, primarily in reaction to a deterioration of both politics and governance.

Countries like Canada, Australia and New Zealand became developed economies by leveraging primarily on agricultural and resource-based industries. Their economies do not rank highly in terms of economic complexity, with the global ranking of all three economies showing a declining trend. However, because they had relatively stable political environments and relatively good governance, their economies were largely based on free competition, within a rules-based environment, and the wealth benefited their citizens, especially through the provision of quality healthcare and education. A notable feature of these three economies and Singapore, South Korea and Taiwan, has been the attention to education which created the well-educated workforce to support their economic development. By contrast, in many resource-rich developing countries, the wealth from their resources goes to the politically connected and privileged groups and is often taken out of these countries; only a small amount goes towards improving the welfare of the population. These countries do not need more foreign financial aid; they need more responsible management of the own resource-based wealth.

In summary, developing countries that have a stable political environment and create an effective system of governance, have a much better chance of putting in place the other three conditions necessary for economic progress. Let me be clear, the existence of stable politics and governance does not guarantee economic success, but it increases the probability of success. But when these conditions do not exist, the probability of sustainable economic success is low or zero. The existence of these conditions provides the foundation on which good economic policies can create strong and resilient economies. Without them, these countries are likely to continue undermining their own economies.

It would be helpful if the major economies could get together and improve governance at the global level and make it a priority for the multilateral agencies in their dealings with developing countries. That, and being less welcoming to the stolen wealth flowing across their borders from developing countries, and to those who are responsible for the doing the stealing.

Appendix:

Some charts covering data relevant to the issues discussed in this article, covering the Latin American countries in the G30 Report, ASEAN countries, selected developed economies, and China (where relevant).

1. Political Stability and Governance