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....and they say "Tidak Apa" to everything that happens in their lives. Little do they know, when they sit and reflect, they'll realise that so much has been wasted. And soon they will regret not acting upon it and say ".. I should have thought about it when I was with my mates having a sip of that strong black kopi Hang Tuah..."
Focusng on the Asian frontier under the theme 'Scaling the Efficiency Frontier - Institutions : Innovation : Inclusion', Tan Sri Dato' Seri Utama Nor Mohamed Yaakop expressed a strong point on the severe depleting status of economic resources. Malaysia cannot rely on its current resources forever. It (Malaysia) needs to adapt to changes necessary to survive the world economy
Paradigm of Production: Production alone cannot be the measurement of growth. An anti-myopic view is required to ensure that what has been utilised for production is also preserved to ensure a long term sustainability of the growth itself. One must not explore the best way to exploit but should also explore replenishment of what is exploited.Paradigm of Maximisation: There has been too much focus on short term maximisation. Many corporates in the developed countries strive to ensure highest earnings possible with a view of a fat cheque as the remuneration to its executives. They buy back shares from the market and forces the earnings per share to shoot up. In the end, the Chief Executive Officers get paid handsome bonuses. A true business should reinvest the surplus to expand its investment horizon. In short, Optimisation is the key word, not Maximisation.Paradigm of Resources Ownership: Resources are often deemed to have been owned. We, humans, are mere stewards on this Earth. We do not own the resources. Our right to derive profits from the resources is temporary and we owe the duty to ensure resources sustainability for future generations.
Do not develop what comes naturally: Being rich is not necessarily being economically developed. We cannot be blinded by the fact that we are rich with natural resources. Korea for example was rich with tungsten. Had it relied on that fact alone and be content with its strong economy that was solely backed on such resource, it would have probably be under developed now. Instead, they took a turn. Tungsten was there, yes, but a new frontier was warranted. They needed to go beyond what they naturally had. The result is magnificent. Who would have thought (back then) that Korea can be one of the leaders in World technology?Do not develop by following comparative advantage: We must not capitalise on our strength alone. This will turn us blind to other opportunities that are not so apparent when compared to our identified strength. We must not think that we are good merely because we are good at it. We must decide to be good at it. For example, why is Swiss good at making chocolates when they had never produced cocoa agriculturally? The African nations thought that their strength is only producing cocoa agriculturally and they missed the opportunity to further develop other strength - which was obviously hijacked by the Swiss.Encourage Entrepreneurship: An economy should be deregulated to support entrepreneurs so that they (the entrepreneurs) can take a leap of faith to face risks of unlimited liabilities. Entrepreneurs deserve a second chance. A failed entrepreneur should not be deemed a loser. On the contrary, they should be further supported as they have developed themselves further by virtue of learning through failure. The USA's Chapter 11 of the Bankrupcy Law embraces this restructuring and forgiving attitude. Some welfare states in Europe also have conducive environment for entrepreneurs. You can gauge this by looking at their (e.g. Finland and Sweden) income per capita growth of 2.7% that is higher than 2% registered for the USA.
Inclusive Development: Empowerment and affirmative actions for disadvantage groups (e.g. ethnic groups, women, poor families, etc) is also crucial in ensuring a more dynamically inclusive development that is both equitable and sustainable - intertwining economic platform with social platform. A powerful ingredient to achieve this is to institutionalise innovation that is inclusive of the society as a whole.
"Natural resources do not equate to economy. We need to go beyond that and not rely solely on our strength that will blind us from opportunities. We must decide to be good at what we want and affirmative actions will help ensure a more inclusive, equitable and sustainable economy" - Dr. Ha-Joon Chang
1. Broad Base Tax Argument: CGT only applies to a few selected items such as properties and shares whereas GST is a broad base consumption tax with some exempted items like financial products, insurance, transportation and education. The magnitude of tax collection will be lower under CGT given the less product and services coverage. The Government has already quantified that implementing GST will only result in a net increase in collection of RM5.6 billion when compared to the old Sales and Services Tax. I doubt that CGT is able to produce a higher net increase.2. Revenue Stability Argument: The stability of the collection under CGT is less than GST as CGT is based on non-frequent transactions relative to the transactions under GST. How often do people buy clothes compared to buying a house? Catch my drift? You will have to wait until the purchaser of a house to sell their property in, say, year 3, before you are able to tax him/her. This will mean that the Malaysian Budget will be crippled for 3 years, hypothetically.3. Economic Growth Argument: The items that CGT is applied on are capital in nature whereas GST is applied on consumed items. Capital items are items that can generate further income and thus, boost the economy further. Why would you want to penalise such item unnecessarily well above whatever CGT that we already have now? Properties can earn rental income and shares can earn dividend income. Share trading is also a crucial activity that helps boost the economy as it allows monetary capital inflow into the country or within the country to areas that can further grow the economy. Having CGT on capital markets will only increase the cost of capital or the cost of financing – in other words, increase the cost of doing business in Malaysia - an economic contraction - very bad. GST on the other hand allows income taxes and corporation taxes to be reduced. This will attract more investments and will encourage consumer spending – both are good ingredients of a growing economy. Any university student who are studying Macroeconomics 101 will say that that is supportable by the Neo-Classical economic concepts by intellectuals such as Keynes.4. Fair Distribution of Burden Argument: GST is also about redistributing the burden of tax to a fairer audience. We already know that only 6% of the Malaysian population pays tax that is benefited by the remaining 97%. GST will allow modernisation of the tax system to ensure that those who used to evade tax can no longer do so as they are taxed at the point of consumption rather than via subsequent declaration. CGT is the opposite of all these. As mentioned earlier, GST will allow lower income taxes as a means to redistribute that burden.5. Value Chain Argument: Taxes under GST work on net basis. For example, a factory purchases raw materials for a price that includes 6% GST. The factory then sells the manufactured products to wholesalers at prices that cover the raw material costs as well as a profit margin. The prices to wholesalers will also include a 6% GST. When reporting to the Government (via the Royal Customs), the factory shall pay to the Government the net amount of 6% charged to wholesalers less the 6% already paid for the raw materials. This way, the factory can claim back taxes that have been paid for the raw materials. Likewise, the same will apply when the same product is sold by the wholesalers to the retailers. The retailers will pay to the Government a net of 6% charged to end consumers less the 6% already paid to the wholesalers. Mechanistically, since each 6% GST at each stop in the value chain is claimable, the final impact to the final consumer should only be a one time tax of 6%. For CGT, taxes are charged to the property owners when the properties are sold. The buyer of the property cannot claim the tax as a deduction; hence he/she will ensure that the cost of the property will be fully passed down in the next selling price to the next buyer in the value chain when the property is resold. So mathematically in a simplistic manner, assuming that there are 3 levels in the value chain, CGT works on Cost x 106% X 106% X 106% whereas GST works on Cost x 100% x 100% x 106%.
The Prime Minister (Y.A.B. Dato' Seri Najib Razak) started his 2015 Malaysian Budget with an overview of the Malaysian economic landscape that is thought to be conducive for a bright future: GDP growth of 6.3%, KLCI record achievement of 1,892 points, USD10,000 per capita, budget deficits of 3.5% and record breaking foreign investment level of RM38.7 billion.
944 of the goods and services that are in the Consumer Price Index ('CPI') basket are affected by the GST but the question is, 'Are they negatively or positively affected?' 56% of the goods and services will experience an average price reduction of 4.1%.
To recognise the multiracial society in Malaysia, apart from RM450 million allocation for the national schools (SRK), RM50 million each will be given to ethnic based schools (SRJK) for the Indian and Chinese communities.
On 7 July 2014 the New Straits Times under its article "Spotting, preventing global financial crisis" revealed that Zeti delivered a speech on 9 June 2014 in Basel, Switzerland at the 2014 Per Jacobsson Foundation Lecture on the subject matter "Managing financial crisis in an interconnected world: Anticipating the mega tidal waves."
Phase 1: The Onset of a Financial Crisis - The players in the financial market act as balancers that move money from areas of surplus to deficit. In simple terms, people with money get their funds given to those who needs money (loans) when they deposit money at the banks. When there is unusual quantum or trend of default on loans by borrowers, this function gets disrupted. Why? Well, the banks who suffer losses will have less cash and will lose confidence in their role as balancers. They will increase their risk adversity and are less confident to give out loans. The bank themselves will face the same issue as their financier do the same to them. When this happens, they will start to go after the assets backing those loans, if any - this is entering into Phase 2 below.
Phase 2: The Impairment of the Financial System - Following on from Phase 1, the starting point of the meltdown, the banks will get distressed naturally forcing them to cut losses via deliberate disposal of toxic assets (i.e. liquidating on defaulted loans via foreclosing assets collateralised to the loans) as well as cashing out on their investment assets. The asset markets will fall (price) as the supply increases coupled with lesser active investors. With all these, the banks make less profit (or even losses) and pay lesser interests to those who deposit money with the banks. The depositors then lose confidence and seek alternative and more attractive investments. The spiral (downward) continues. As you can see, what started off as a consumer credit issue has now transformed itself into a depression in investors' activity and finally becomes a banking crisis. The throughput time from the loans defaulting stage to a banking crisis stage were 6 months and 8 months for the 1998 Asian Financial Crisis and the 2008 American Subprime Crisis respectively.
Phase 3: The Onset of the Economic Slowdown - As the banks struggle to cut losses, they will reduce their lending activities. Credit becomes tougher. Even when consumers or businesses are able to get loans, the value of those loans will be low given that the value of assets (that are collateralised) has now fallen. With such reduced level of lending, there will be less businesses to flourish as businesses need loans to grow their operations. Consumers who now have less money will spend lesser. Collectively, this will discourage economic activity. Employment will fall. Income to workers will fall. There will be less money to spend. There will be less goods and services sold and less international trade. The businesses that offer the goods and services will also slow down. Credit depression will also extend itself to dampen the availability of international credit lines. Such depression in international credit lines coupled with the reduced trade transactions will dampen currency exchanges for imports and exports. What do we have then? Currency devaluation. This spiral and cascading effect will depress the entire economy. The 1998 Asian Financial Crisis saw Indonesia experiencing negative Gross Domestic Product (GDP) growth of -13% and the 2008 American Subprime Crisis caused negative GDP growth of -6%.
Phase 4: The Crisis Runs Its Course - As the saga continues, wrong policies or lack of policies to address the condition will cause the crisis to worsen. Credit will continue to be unavailable. Assets will continue to be liquidated. Asset prices will continue to fall. Investors will retreat further. Businesses and individuals will start to be declared as bankrupts. Unemployment will continue to rise. Consumer spending and trade will be inactive. Currency devaluation will worsen. Credit agencies will then down grade economies and corporations. Capital market will contract as foreign investors leave and domestic investors become dormant. The equity (share) market will collapse. National reserves will deplete. With these, social unrest and political instability emerges. All hell breaks loose.
Phase 5: The Aftermath of the Financial Crisis - This phase is the hopeful one. Recovery! Banks will regain its courage to leverage on financing again, i.e. the banks themselves starts taking financing arrangements to re-grow their banking business. Asset market will recover as buyers begin to purchase assets in the market resulting in price rise. The banks will reconvene their role as balancer in the equation flowing funds to those in need (loans). Businesses will turnaround to re-grow. More jobs will be available in the market. More monies are spent resulting in an increased level of consumption and trading. Import and export will increase. Currency will appreciate as trading activities grow. Investors will start to pour their money again from both foreign and domestic sources. Whilst all these conveniently give birth to optimism, market confidence remains vulnerable to unexpected setbacks that could undermine the sustainability of the recovery.
These Guiding Principles should be incorporated in remedial action stages as follows:Guidance Principle 1: The different stages of financial crisis require different policy interventions with different timing and mix.Guidance Principle 2: Anticipatory policy actions which recognises the next eventuality as mitigating tool.Guidance Principle 3: The focus of the policy should reach beyond the distressed financial markets and institutions to have impact on the asset markets and distressed borrowers.Guidance Principle 4: The recognition of cost escalation if policies are only implemented at later stage rather than up front.Guidance Principle 5: Entire evolutionary perspective in policies is crucial to avoid partial policy response that does not address all necessary angles.
Stage 1: Containing the Onset of the Crisis - 3 objectives are required here - 1. To restore short term money markets and access to liquidity; 2. to stabilise the conditions of the asset markets in which turmoil originated; and, 3. To address the consequent erosion in confidence. Loans will need to be restructured instead of declaring them as default and/or being set for foreclosure. Other forms of incentives will be required to inject liquidity back into the market including attracting capital inflows or reduce outflows. Controls over asset markets pricing will need to be controlled. Currency exchange policy is required to stop further deterioration. During the Asian Financial Crisis in 1998, as part of the International Monetary Funds (IMF) bailout package for Thailand and Indonesia, widespread closures of stressed financial institutions were imposed by the programme - this resulted in further deterioration of asset prices and further sharp depreciations of the domestic currencies. On prices, policies need to be in place to avoid inflationary direction as it will be counter effective to re-start the economic growth.Stage 2: Repair and Resolution - Policies need to be in place to stop widespread of financial institution failures and distressed businesses and households. This includes debt restructuring arrangements for the business and household debts before they start to get worse. Distressed assets, or Non Performing Loans (NPL), are to be carved out from financial institutions and orderly unwinding of insolvent institutions is required if restructuring is unavoidable. The banks will then need to be recapitalised. The banks will need to take a hair cut for those assets/NPLs carved out. However, if the recovery of those assets/NPLs show an upside, it needs to be shared back with the original financial institution. All these require support from the Government particularly in legislative changes. This was evident in the Malaysian parliamentary act Pengurusan Danaharta Nasional Berhad Act that allowed asset/NPLs carve out, restructuring and subsequent recovery arrangements.Stage 3: Supporting the Economic Recovery - Both macroeconomic policies and microeconomic policies are required. The former involves fiscal policies in reducing the interest rates necessary to set the platform for an economic recovery and the latter involves improving the conditions of households and businesses, both corporates as well as small and medium enterprises. Fiscal policies alone are insufficient. Prolonged lowering of interest rates will have detrimental effect to the banks as their earnings are impaired. Direct intervention in the factors that contribute to the livelihood of businesses is required. This includes business restructuring and labour market reorganisation. In 1998, Malaysia introduced Corporate Debt Restructuring Committee (CDRC) to look into reshaping selected key corporations that were under distress. Other initiatives include specialised funding schemes and credit guarantee facilities. A more pervasive socialist initiative is also required at household level which includes but not limited to financing ease and funding aids for food, shelter, education, health, entrepreneurship and finally, job market reorganisation.Stage 4: Recovering from the Through - It may sound impossible but to make recovery efforts successful, political stability and national consensus in Government policies are crucial. Many countries fail to save themselves (economically) as efforts were disrupted by unwanted political turmoil. One of the main causes of unwanted political turmoil is the scrutinisation of weaknesses (on the Government's side) that are not at all related to the underlying economic turmoil. Instead of focusing on addressing the economic issues, both the Government as well as the citizen will channel efforts to address political matters that seem out of priority at the point where a particular country is experiencing an economic downturn. This was the case when IMF was looking into some of the South East Asian Countries in 1998.Stage 5: The Unfinished Business in the Aftermath - At the recovery stage, there are still loads of work to be done. There is the challenge to unwind the extreme measures taken earlier to address the crisis instantly. Premature lifting of life support system may derail the recovery if not done at the appropriate time. Take for example the Malaysian Ringgit that was pegged to the US Dollars (USD1 = RM3.8). It was only lifted when the need has lapsed, which was after 6 years! Both supply and demand side of the economy needs to have continued monitoring. This includes sustaining initiatives such as attracting investors, developing infrastructure and many others until the economy recovers. However, a prolonged implementation may proof to be too costly and may have political backlash. A balancing act is truly required here. Obsolete institution or legislation will need to be replaced with new ones that will uphold the renewed composition of the economy post-restructuring. In a more holistic manner, whatever decision is being made at this stage, it cannot jeopardise the recovery phase.
There you go. I would like to simply take these points as "Zeti's Recipe to Save the World from Financial Crisis"Issue 1: The need for active interface with other agencies and the Government while avoiding being compromised by the actions that may be taken.
Issue 2: The central banks may be required to do more than they are mandated due to constraints experienced by other authorities.
Issue 3: Potential erosion of the central bank's autonomy as the Government is leading the decision-making process that may be blurred by political motives rather than economic.
Issue 4: The need to speed the actions during crisis is necessary especially when there are legacy red tapes bureaucracy.
Issue 5: Ensuring consistent and effective communication at a time when there is great uncertainty.