Call for SME Masterplan custodian

NSDC says single agency should ensure implementation and track progress of the plan

PETALING JAYA: The National SME Development Council (NSDC) has called for a single agency to be the custodian of the SME Masterplan.

The NSDC said the agency should be accountable for ensuring the implementation of the plan and tracking the progress of the master plan's objectives.

“The role of SME Corp Malaysia has to be further strengthened, empowered and elevated to take on the lead role to implement the master plan,” it said, noting that “this may require some organisational restructuring and changes to the co-ordination mechanism to allow greater empowerment for the agency to function effectively in executing the plan.”

NSDC said SME Corp would need to be given sufficient authority and resources and have a more active role in the budgetary decision on SME development. Among the measures SME Corp should take is reviewing existing programmes with the ministries and agencies to rationalise those that overlap and remove those that have no significant impact.

It said SME Corp had to put in place a world-class monitoring and evaluation system where “evaluations would require accurate and credible firm level data which entails working together with the ministries and agencies to collate the necessary information from programme recipients”.

The council said SME Corp would be engaging the private sector to participate in the master plan, especially in the six high impact programmes through public-private partnerships.

“The role of industry associations, chambers and non-governmental organisations will be further enhanced in assisting in reaching out the programmes to more SMEs in the country, and in capacity building at the district, state and national levels,” it said.

A risk mitigation plan was among NSDC's recommendation, too, as the global economy will likely remain uncertain with volatility in the financial markets posing external risks to Malaysia's growth momentum.

As for internal risks, the council said that comprised policy changes on the macroeconomic front and issues associated with the implementation and operation processes of the master plan itself.

“This may include risks from resource constraints due to escalation in costs, delays in execution, lack of authority of the coordination agency in driving the policies and programmes, and challenges faced in coordination and alignment of the policies and programmes,” it said.

By LIZ LEE lizlee@thestar.com.my

Malaysia could go bankrupt by 2019?

Why Malaysia won’t go bankrupt

TRANSFORMATION BLUES By IDRIS JALA idrisjala@pemandu.gov.my
 
The Government is not in dire financial straits right now. By all measures its finances are good, but as in any situation involving finances, this is not to say it cannot be better.

I AM frequently asked why I said Malaysia could go bankrupt by 2019. I have had many queries asking for clarification and this has become one of my transformation blues.

In charting out our transformation journey in 2009, one of the first things the Prime Minister and the cabinet did was to list our current status, say where we want to be and set up a programme for transformation to get us there.

Amongst the many things on the list was a need to rationalise subsidy and so we ran a lab to do this.

During our open day, we engaged the public on the lab recommendation on the subsidy rationalisation. I wanted to be as frank as possible and to make it clear what the consequences of inaction would be.

Perhaps I was too frank but what I said has been misrepresented on a number of occasions, and I have since been saddled and hobbled with an unnecessary problem.

Habitual critics latched on to a small part of one of my first presentations where I said we have to change our spending patterns for sustained fiscal health.

Against a backdrop of several caveats and conditions, I said that we would be bankrupt by 2019 IF we continued to increase our subsidies and borrowings the same way we did before and IF our economy grows at less than 3% annually.

I've worked in Shell for more than 20 years, a company that is famous for its scenario planning techniques.

In layman terms, scenario planning means describing a future that could either be “good, bad or ugly” and doing our best to achieve the “good scenario” and avoid the “bad and ugly”.

My statement was heavily qualified but little or no mention was made of the clear caveats that I had put forward.

I still stand by what I said and it is important that my statement is taken together with the conditions.

This statement has been taken out of context so many times that it really gave me the blues - I have been talking till I turned blue in my face explaining what I meant!

Let me say in the clearest terms that my intention then was to illustrate the consequences of inaction when faced with tough decisions. We cannot continue to subsidise the way we have.

Let me also state that the Government is not in dire financial straits right now. By all measures its finances are good, but as in any situation involving finances, this is not to say it cannot be better. Here's why.

Our debt as at end 2011 is 53.8% of gross domestic product (GDP the sum of goods and services produced in the country) and the budget deficit is better than the 5.4% target of GDP.

Compare this with Greece's debt which stands at 110% of GDP and a budget deficit of 13% and it is obvious that we are not anywhere close to a crisis.

Subsidy rationalisation

Globally, many economists are cautioning the Governments against rising national debts. In 2009 the year for which the figures I used when I talked about subsidy rationalisation we had to increase government spending via our “economic stimulus package” in the face of the world financial crisis caused by the sub-prime mortgage problem in the United States.

This had spill-over effects into 2010 as well. But the debt as a percentage of GDP has begun to level off while the budget deficit, again as a percentage of GDP, has begun to significantly decline and as our economy continues to grow. We are reversing the situation.

In a simplified system to assess whether countries are in a sovereign debt crisis, the Boston Consulting Group (BCG) uses a graphical representation to identify countries with a potential problem.

Public debt as a percentage of GDP is plotted on the vertical axis while surplus or deficit in the national budget as a % of GDP is plotted on the horizontal axis.

BCG identifies a potential problem looming if public debt is 100% or over of GDP while simultaneously the budget deficit is 10% or more of GDP (see chart).

The more a country is to the left of the chart and the higher on the vertical axis, the greater the risk of a potential debt crisis but note that a country has to be simultaneously in problem in both areas to be regarded as a big risk.

If you look at Singapore, public debt as a percentage of GDP is 100% in the problem area but only for one of the two criteria but there is hardly any budget deficit to speak of in the republic.

Nobody considers Singapore a financially troubled country.

For Malaysia, it is important to notice that it has moved to the right in 2011 compared with its position in 2009 and 2010 while there is hardly any upward movement. That indicates a move in the right direction.

Based on this analysis, we are better than the United Kingdom, the United States, Spain, Italy, Portugal and Japan, to name a few. We will get into the safe zone soon enough.

The problem I highlighted using 2009 figures, making the caveat that IF debt continued to increase at previous levels we can have a serious problem in 2019 and IF we grow less than 3% annually, does not exist anymore.

Making improvements

Why? Because we are making improvements on both counts.

Firstly, as a responsible Government, in 2010, we began the process of gradually reducing subsidies for fuel, sugar, electricity and so on, knowing fully well that this was unpopular.

Secondly, our GDP grew by 7.2% in 2010 and 5.1% in 2011 and that's an average of 6.2%; we are meeting our Economic Transformation Programme (ETP) target. Of course, we can and should do much more.

As I have pointed out in previous presentations very little of our subsidies amounting to billions of ringgit every year go to the poor, the rich get most of it. We must rationalise the subsidy system not do away with it and cut other extraneous expenditures.

However, we continue to help the poor via our GTP initiatives e.g. Azam programmes and BR1M for the low income households and rural infrastructure programmes.

On the other side of the equation, we must increase government revenue sources by introducing such measures as a goods and services tax (GST) and get more economic activity going. We can exclude necessities from the tax.

We are already succeeding. We have the ETP and we are growing our revenue we had additional tax revenue of RM26bil in 2011. This has allowed us to finance rakyat-centric programmes such as BR1M.

Why, if we continue to make progress by these measures, we may even be able to balance the budget come 2020 even though that will welcomingly surpass our own target.

I know there will be critics who will say that I have changed my mind on the bankruptcy issue. I haven't changed my position vis-a-vis scenario planning.

I always believe in describing the “good, the bad and ugly” scenarios (that hasn't changed) i.e. the “good” scenario is if we successfully implement our ETP, we will achieve high income status by 2020.
The “bad or ugly” scenario is if we don't do anything to avoid it, then we can go bankrupt.

The fact is we are doing a lot of things to transform our country. So, we will not go bankrupt.

With the implementation of the ETP, we must acknowledge that Malaysia is on the right track in transforming its economy. The average annual GDP growth in two years (2010 and 2011) is more than 6%. In 2011, we met our GNI and investment targets, trade reached a record high of RM1.27 trillion in 2011.

We cut our deficit in 2011. In April, our PM will be releasing our ETP and GTP annual reports which provide all the details of our country's achievement.

Let me conclude by quoting Dale Carnegie: “It is tragic when we put off living. We dream of a magical rose garden over the horizon and miss the roses blooming outside our windows”.

Datuk Seri Idris Jala is CEO of Pemandu and Minister in the Prime Minister's Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my

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Malaysians, work hard to succeed !
Moody's declares Greece in default of debt 

Malaysians, work hard to succeed !

Hard work, long hours and a focused approach ensure the country and rakyat succeed

I AM an amateur musician and I play the guitar and I sing. I like all types of music but one that tugs at my heartstrings is the blues.

We all know what the blues are: simple, direct, strongly expressive music with a steady beat and rhythm, leaving plenty of space for singing and solo instruments. Letting it all hang loose, so to speak.

But to me singing the blues means eventually rising above the blues, even if you have to pour out all your problems and wail for a while. That's what this column is about.

I am fortunate to be involved in and driving one of the most exciting projects around. What can be more meaningful than raising incomes and the quality of life for all Malaysians, irrespective of race, creed or religion?

But as hopeful as I am that we can do this, I am not so naive that I do not know that there are many problems and obstacles to overcome before this dream becomes reality.

So I will sing the transformation blues here: I will air the problems, the big ones, which face us in our programme to transform us into a high-income nation. And then we will say what we are doing to overcome them.

Idris: ‘I like all types of music but one that tugs at my heartstrings is the blues.’ 
 

A big part of this is putting right misinformation. We will need your help as Malaysians to understand what we are trying to do and to tell us what it is that we are not doing right and what we should be doing instead. The e-mail contact is in the logo above.

We promise to read every response and if appropriate respond to some here. We ask only three things: that you are fair, reasonable and realistic.

Concept of income

The first thing I would like to explain is the concept of income, which is key to the entire concept of transforming into a high-income country. At what level of income do we become developed and achieve high income? How do we do it? How do we measure this? And can we achieve it?

A lot has been said about how we measure income and the level of income in 2020, and how we have not taken the right things into account. It's been said that we have used the wrong measures. We have not.

Intentionally, we have used globally accepted definitions and methodologies, i.e. the World Bank approach and benchmarks. Without getting too technical, we used the current definition for high-income countries in nominal terms and then using projected inflation rates, derived what it would be in US dollars in 2020.

Hence, the figure of around US$15,000 per person was arrived at RM48,000 based on a projected exchange rate of RM3.20 to the US dollar. The current rate is close to RM3 which means that if this rate prevails, the target will be lower at RM45,000. In 2009, our income, using prevailing exchange rates, was US$6,700 per capita. Yes, we have a long way to go but we are well on the way.

From here, we project the population at 2020 and multiply that by the income per capita to obtain the total income of the nation in 2020, in nominal terms.

Working backwards, we then estimate the growth rate needed to get there, again in nominal terms.

Then we take out the projected inflation rate from this figure to arrive at the real rate of income increase that we need for the nation as a whole to achieve high-income status which is on average around 6% annually, assuming all other factors hold equal.

“Real” here means the income is adjusted for inflation and reflects the actual rise in income even after taking into account price increases. The real gross national income or GNI is just the real gross domestic product plus net income from abroad.

Our methods are rigorous and our results were reviewed in January 2012 by an international accounting firm and a globally renowned panel of experts.

The latter also shared outside-in feedback and global best practices. We have no interest in deceiving anybody on how we are performing.

That is how we set the target.

Getting there

The next thing is getting there. Basically, we identify all the major projects on hand and estimate their contribution to economic and, ultimately, income growth. We don't pretend that these are accurate but they are the best estimates we can get. No country in the world can accurately measure and predict with precision its economic growth.

These estimates are also targets. If we can meet them year-to-year, we are on our way. If we run short we have to do more, and if we are doing very well we can lift up our hands to the heavens and give our thanks to God. It's a moving, dynamic target and it changes all the time.

Yes, there are risks to the achievements we have set out for ourselves. What worthwhile endeavour comes without risks? The world economic growth can remain low for longer than expected. We are not completely insulated from the world. The private sector may not invest as much as it should.

But what we are doing at the Performance Management and Delivery Unit is to get the Government to facilitate all efforts to increase incomes, no matter by whom. And we will monitor to see if we are on track and recommend the appropriate changes to put us back on track, as and when necessary.

According to Tan Sri Nor Mohamed Yakcop, Minister in the Prime Minister's Department: “At the end of last year, annual per capita income in Malaysia rose to more than RM29,000 (US$9,400).”

At current prices, this is 12% growth compared with RM26,174 (US$7,985) in 2010 and RM23,850 (US$6,677) in 2009. This is a big improvement compared with only RM1,070 (US$347) in 1970.

In April, the Government will release a full report on the performance of Economic Transformation Programme (ETP) in 2011.

Our income growth in the last two years shows that we can achieve the targets that we have set for Malaysia as a nation. If the projects under the ETP and others come through, we will do it.

We may also see others setting up their own projects to take advantage of opportunities, and that would definitely be a bonus.

This shows that we have made good progress as a country. Under the leadership of our Prime Minister, we are on our way to transforming Malaysia to become a high income economy. Hard work, long hours and a focused approach are being put into ensuring that Malaysia and Malaysians succeed locally and globally.
Any Malaysian can join us on this journey. Simply by working harder and smarter you can contribute to increasing your employer's revenues and growing yourself, hopefully.

That way, all of us Malaysians can move forward together to achieving our goal of becoming a higher income nation and creating a better life for all of us. That's what transformation is about.

Together, we can do it.

● Datuk Seri Idris Jala is Minister in the Prime Minister's Department and CEO of Pemandu. Feedback and comments are most welcome. 

Unconventional Thinking: Small is Beautiful!

Cover via Amazon

Lessons from unconventional thinking

THINK ASIAN By ANDREW SHENG

AT a time when there is great awareness that mainstream economic theory is seriously flawed, many of us are looking for alternative models of economic thinking.

I have in my collection a book by an English economist EF Schumacher called Small is Beautiful, first published in 1973, but never read it. Last month, I finally read it and was overwhelmed by its brilliant and unconventional approach to economic thinking.

The book became almost cult reading when it came out 40 years ago, in the aftermath of the first energy crisis.

The author was a Jewish refugee from Germany to England who studied in Oxford and Columbia Universities. He became the Economic Advisor to the British National Coal Board and was sent in 1955 to work in Burma as an economic development advisor.

It was from his experience there, including staying in a Buddhist monastery that he evolved highly a non-Western way to consider human development, including living within the limits of natural resources and using intermediate technology.

This explains why Chapter 4 of this book was called Buddhist Economics.

The book is actually a collection of essays written at different times. Like his teachers, Keynes and John Kenneth Galbraith, Schumacher wrote in elegant and striking prose:-

“One of the most fateful errors of our age is the belief that the problem of production has been solved. The illusion... is mainly due to our inability to recognise that the modern industrial system, with all its intellectual sophistication, consumes the very basis on which it has been erected. To use the language of the economist, it lives on irreplaceable capital which it cheerfully treats as income.”

He immediately plunges into an attack on the whole philosophy of modern economics that reduces everything into monetary values as measured by GDP, arguing that the logic of limitless growth is wrong: “... that economic growth, which viewed from the point of view of economics, physics, chemistry, and technology, has no discernable limit must necessary run into decisive bottlenecks when viewed from the point of view of the environmental sciences. An attitude to life which seeks fulfilment in the single-minded pursuit of wealth in short, materialism does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited.”



Being a system-wide thinker, he deplored the narrowness of economics:-

“Economists themselves, like most specialists, normally suffer from a kind of metaphysical blindness, assuming that theirs is a science of absolute and invariable truths, without any presuppositions.”

He was probably the earliest to recognise that the concepts of GDP ignored the costs of depletion of natural resources and the high social damage through pollution: “It is inherent in the methodology of economics to ignore man's dependence on the natural world.”

Most recent reviewers of his book commended him on the accuracy of his forecasts (forty years ago) on population and the rate of consumption of energy resources.

Some reviewers consider that the book brilliantly explained the “Why” of the need to conserve, but not the “how”. I think he went deeper than that.

Schumacher was not just a social philosopher but a practical observer of large scale social organisations, particularly bureaucracies. The realist side of him can be found from this quote: “An ounce of practice is generally worth more than a ton of theory.”

Indeed, he was very insightful of the importance of smallness in large organisation. This was because as organisations become larger and larger, they become more impersonal.

He recognised the inherent contradictions within large organisations that have alternating phases of centralising and decentralising.

Here, he noted that the solution is not either-or, but the-one-and-the-other-at-the-same-time. In other words, contradictions and illogical situations are inherent in large systems.

This is because all organisations struggle to have “the orderliness of order and the disorderliness of creative freedom.” Every organisation struggles with the orderly administrator versus the creative (disorderly) entrepreneur or innovator.

From this basic contradiction, Schumacher has a theory of large-scale organisation divided into five principles, which are worthwhile researching further.

The first principle is Subsidiarity which is that the upper authority should delegate to the lower level powers where it is obvious that the lower levels can function more efficiently than the central authority.

The second principle is Vindication namely, governance by exception. The centre delegates and only intervenes under exceptional circumstances which are clearly defined.

The third principle is Identification the subsidiary must have clear accounting in the form of balance sheets and profit and loss account.

The fourth principle is Motivation here he recognises that motivation at the lower levels of large organisation is low if everything is directed from the top. This is where the values of the organisation become critical in addition to rewards in terms of money.

The fifth is the Principle of the Middle Axiom. He notes that “the centre can easily look after order; it is not so easy to look after freedom and creativity.”

The word “Axiom” means a self-evident truth. The Principle of the Middle Axiom is “an order from above which is yet not an order.”

In practical terms, you set out an objective, but do not detail and direct how that objective is to be achieved, giving some degree of innovation and freedom for the subsidiary levels of the organisation to achieve the objectives.

What is amazing is that 40 years ago, Schumacher quoted Chairman Mao for the best formulation of the necessary interplay between theory and practice: “Go to the practical people, learn from them; then synthesise their experience into principles and theories; and then return to the practical people and call upon them to put these principles and methods into practice so as to solve their problems and achieve freedom and happiness.”

All these sound very simple, but are actually quite hard to practice. Schumacher has certainly convinced me that there are good alternatives to current conventional economic thinking.

Tan Sri Andrew Sheng is President of the Fung Global Institute (as@andrewsheng.net)

  Related articles

• Small is beautiful ... but Schumacher's economics of scale runs deeper | Andrew Simms (guardian.co.uk)
• The Top Ten Management Primer on Buddhism and Its Economic Implications: All That You Need to Know About &Ldquo;gross National Happiness" (socyberty.com)
• The Big Ideas podcast: EF Schumacher's 'small is beautiful' (guardian.co.uk)
• Economics is lost - it must rediscover life's values | Victoria Chick (guardian.co.uk)
• An Indexing Matter - Part 2 (astoried.wordpress.com)

America’s Vanishing Middle Class

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E.D. Kain, Contributor




Any analysis of wages earned in prior decades and wages earned today needs to take into account the fact that a lot of non-white-males have entered the workforce. Still, these are troubling numbers from John Cassidy of The New Yorker:

Median earnings for full-time, year-round male workers: 2010—$47,715; 1972—$47,550. That not a typo. In thirty-eight years, the annual earnings of the typical male worker, adjusted to 2010 dollars, have risen by $165, or $3.17 a week.

If you do the comparison with 1973 it is even worse. The figure for median earnings of full-time male workers in that year (when O. J. rushed two thousand yards and Tony Orlando had a chart-topper with “Tie a Yellow Ribbon Round the Old Oak Tree”) was $49,065. Between now and then, Archie Bunker and Willie Loman have suffered a pay cut of more than twenty-five dollars a week.

Now check out this chart from Mother Jones:


The gap is only growing wider, and the structural issues at the heart of the gap are becoming more entrenched in this current recession. The problem isn’t with income inequality per se. There will always be income inequality, and that’s not necessarily a bad thing so long as the people at the bottom aren’t living in poverty. The problem is that you reach a certain point where income inequality becomes a destabilizing force both economically and politically.




And while a number of consumer goods have gotten cheaper over the years – like personal computers and all the stuff you can waste time with online – important and essential items like healthcare have gotten much, much more expensive:



Now we can quibble about why costs have risen so much, and really there’s a number of reasons. If you want an in-depth look at those reasons, you should read Aaron Carroll’s series on health costs. One way or another we’re talking about a major expense for middle and working class people, and that’s on top of growing education and housing costs. The big essentials are breaking the bank for many Americans, even if we can afford refrigerators and flat screen televisions.

Does this mean we need more regulation or less? Does it mean we need higher taxes and more redistribution? I would propose a grand bargain along these lines:

• Let’s deregulate the economy as much as possible, eliminating barriers to entry from as many fields as possible, and allowing the DIY economy to flourish. This includes a bunch of supply side stuff in the health sector.
• Let’s do away with the corporate income tax altogether to encourage domestic investment, especially since this tax is just passed along to consumers.
• Let’s reform the progressive tax code to be way more progressive – especially on the top tiers. The top earners in this country can afford to spread the wealth around.
• Let’s get rid of Medicare, Medicaid, and the ACA and replace them with straight-up single payer health insurance for everyone. Simplify and save money in the process. Take the burden off of employers.
• Let’s let markets do their thing and public options do theirs. We don’t need Romney’s “unemployment accounts” – unemployment insurance works just fine. I’d be more sanguine about private savings accounts if markets weren’t so prone to crashing, but as it stands Social Security just needs some tinkering to be perfectly sustainable.
• We should invest more in our public institutions, from schools to universities to public libraries. We should also invest a lot in our public infrastructure, and we should use higher fossil fuel taxes to make those investments.

That’s a broad sketch – and I do mean sketch – of my basic blueprint for market-social-democracy (or something like it). Less government in how we actually interact with people, whether that’s running a business out of our home or smoking marijuana, coupled with a more focused public sector geared toward providing basic services (transit, healthcare, education, etc.).

Oh, and quit spending nearly a trillion dollars a year on war. Keep those dollars here in America and put them to better use. We can defend our country just fine without getting our nose in everybody else’s business.

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Will There Be Any Jobs in the Future At All?

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Alex Knapp, Contributor

“You could not step twice into the same river; for other waters are ever flowing on to you.” – Heraclitus

Douglas Rushkoff has an interesting piece at CNN.com asking whether the economy of the future will be set up in such a way that jobs as we know it make any sense at all.


The question we have to begin to ask ourselves is not how do we employ all the people who are rendered obsolete by technology, but how can we organize a society around something other than employment? Might the spirit of enterprise we currently associate with “career” be shifted to something entirely more collaborative, purposeful, and even meaningful?

Instead, we are attempting to use the logic of a scarce marketplace to negotiate things that are actually in abundance.

In considering what an economy has to look like, Rushkoff tries to imagine past capitalism and communism into a different way of looking at economics going forward – which sort of ends up looking like the economy of the United Federation of Planets, where everyone’s basic needs are provided for but you have to do creative work to obtain status and other things you might want.



Ultimately, I’m not convinced that Rushkoff’s solution works – it suffers a little too much from what I think of as “information class myopia”, in which writers about technology, who spend most of their days involved with gadgets and electronic media while creating intellectual property for a living confuse their own experiences with universal ones. These pieces rear their heads every now and again when people ask questions like, “Why do we need a post office? I always text!” while proclaiming ubiquitous, frequently used technologies like the phone and email dead simply because they don’t use them that often as texting, Twitter, etc. Rushkoff doesn’t usually suffer from this syndrome, but I think his concept in this column does.



That said, I think Douglas Rushkoff is a pretty brilliant guy, and while I may not agree with where he’s going in this column, I do think he’s absolutely right to think about the future of our economic systems. I think he’s absolutely right to point out that now might be a good time to completely reconsider what we value in terms of work, employment, and career, and that we need to figure out what the technological and social changes of the past few decades mean for those concepts.

It’s important to remember that the economic systems that we live with today won’t last forever. As technology changes and innovation continues, so too will the very nature of what the economy is will evolve. Paradigm shifts like the rise of the corporation in the late Middle Ages, paper money, free labor and central banking, among many others, all came about as a response to particular political, social and technological pressures, needs, and problems. And as times change and different technologies and social needs come to the fore, economic institutions and rules will change accordingly – sometimes quickly, sometimes slowly. Sometimes at the behest of government and sometimes whether government likes it or not.

It’s not far-fetched to imagine that the nature of employment and entrepreneurship may well be very different a century from now than it is today. Indeed, they may not even be recognizable a century from now. That’s because economic institutions and ideas aren’t natural laws – they’re practical tools that are always evolving.

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Putting finance to work

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 The financial sector must be transformed and serve the real economy

THINK ASIAN By ANDREW SHENG

FINANCE is a service industry, but in the past three decades it seems to have gone its own way.

The functions of the finance sector are to protect property rights for the real sector, improve resource allocation, reduce transaction costs, help manage risks and help discipline borrowers. Financial intermediaries are agents of the real sector. Bankers were traditionally among the most trusted members of the community because they looked after other peoples' money.

The divide between bankers and their customers (the real sector) is epitomised by a recent report which said that the mantra of a large British bank is about “increasing share of wallet of existing customers”. It recalls Woody Allen's joke that the job of his stockbroker was to manage his money until it was all gone. And despite what bankers say, a lot more would have gone between 2007 and 2009 without massive bailouts from the public purse.

The heart of the problem is the principal-agent relationship, where trust is everything. The real sector (the principal) trusts the finance sector to manage its savings, and the banks, as agents, have a fiduciary duty to their customers. Agency business is a big public utility because the intermediary does not take risks, which are those of his customers. All this changed when the drive for short-term profits pushed banks more and more into proprietary trading for their own profits. All this was in the name of capital efficiency, a misnomer for increasing leverage.

In the past 30 years, with growth in technology and financial innovation, finance morphed from a service agent to a self-serving principal that is larger than the real sector itself. The total size of financial assets (stock market capitalisation, debt market outstanding and bank assets, excluding derivatives) has grown dramatically from 108% of global GDP in 1980 to over 400% by 2009 . If the notional value of all derivative contracts were included, finance would be roughly 16 times the size of the global real sector, as measured by GDP. The agent now dwarfs the real sector in economic and, some say, political power.

Can finance be a perpetual profit machine that makes more money than the real sector? In the US, finance's share of total corporate profits grew from 10% in the early 1980s to 40% in 2006. Since wages and bonuses make up between 30% to 70% of financial sector costs, there are tremendous incentives to generate short-term profits at higher risks, particularly through leverage.



The key thrusts of the post-crisis reforms in the financial sector are - caps on leverage, strengthened capital and liquidity, more transparency in linking remuneration with risks, and a macro-prudential and counter-cyclical approach to systemic risks. What the current reforms have not addressed is the increasing concentration of the finance industry at the global level and increasing political power that may sow the seeds for another Too Big to Fail (TBTF) failure in the next crisis.

In 2008, the 25 largest banks in the world accounted for US$44.7 trillion in assets equivalent to 73% of global GDP and 42.7% of total global banking assets . In 1990, none of the top 25 banks had total assets larger than their “home” GDP. By 2008, there were seven , with more than half of the 25 banks having assets larger than 50% of their “home” GDP.

Post-crisis, the concentration level has increased as there were mergers with failed institutions. With this rate of growth and concentration, the largest global financial institutions simply outgrew the ability of their host nations and the global regulatory structure to underwrite and supervise them. Such concentration of wealth and power is a political issue, not a regulatory one.

Finance is not independent of the real sector, but interdependent upon the real sector. It is a pivotal amplifier of the underlying weaknesses in the real sector that led to the financial crisis over-consumption, over-leverage and bad governance. In the past 30 years, the finance sector has helped print money, encouraging its customers and itself (particularly through shadow banking) to take on more leverage in the search for yield. Instead of exercising discipline over borrowers and investors, it did not exercise discipline over its own leverage and risks.

Unfortunately, there was also supervisory failure. To bail out the financial sector from its own mistakes, advanced countries, already burdened by rising welfare expenses, have doubled their fiscal deficits to over 100% of GDP.

In spite of these trends, we should not demonise finance or blame the regulators, but examine the real structural and systemic issues facing the world and how finance should respond. The greatest opportunity for finance is the rise of the emerging markets.

An additional one billion in the working population and middle class over the next two to three decades will have more to spend and more to invest. At the same time, the world needs to address the massive stress on natural resources arising from new consumption, which is likely to be three times current levels. Ecologically, financially and politically, the present model of over-consumption funded by over-concentrated leverage is unsustainable.

Indeed, to replicate the existing unsustainable financial model in the emerging markets may invite a bigger global crisis.

Sustainable finance hinges on sustainable business and on a more inclusive, greener, sustainable environment.

Financial leaders need to address a world where consumption and investment will fundamentally change.

To arrive at a greener and more inclusive, sustainable world, there will be profound changes in lifestyles, with greener products, supply chains and distribution channels.

Social networking is changing consumer and investor feedback so that industry, including finance, will become more networked and more attuned to demographic and demand changes.

As community leaders, finance should lead that drive for a more inclusive, sustainable future.

The greatest transformation of the financial sector is less likely to be driven by regulation than by the enlightened self-interest of the financial community.

Only when trust is restored, when finance cannot thrive independently of the real sector, will we have sustainable finance.

The incentive issues are very clear. If financial engineers are paid far more than green engineers, will a green economy emerge first or asset bubbles?

■ Andrew Sheng is president of the Fung Global Institute.

Malaysia still in pursuit of full independence

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Still in pursuit of full independence

Global Trends By MARTIN KHOR

Fifty-four years after Merdeka, Malaysia, like other developing countries, is still fighting for full independence in a globalised world which has grown more complex and crisis-laden.

THE Merdeka season is a good time to ponder over what independence means to Malaysia and the other developing countries that are still battling to overcome the disadvantages that the colonial era brought.
The problems of governance in a developing country, 54 years after independence, are still as complex or even more so when compared with the immediate post-colonial days.

In that first phase of independence, the developing countries were preoccupied with domestic battles – how to install domestic political processes and how to chart new economic strategies to get out of the shadow of colonial influence.

Most countries tried to shake loose from the control of foreign-owned mining and plantation companies, banks and retailers, by boosting their domestic public and private enterprises.

However, they were over-dependent on a few export commodities for a long time.

In the social sphere, there was the monumental battle to provide jobs, build up housing, schools and health systems, besides reducing poverty.

Today, many developing countries like Malaysia have succeeded, to a significant extent, to break the foreign-ownership grip on the economy and to diversify from commodities to resource-based processing, boosting manufacturing and property development.



While some countries remain poor and dependent on foreign aid, other middle-income countries have broken through into the development sphere.

Indeed, countries like Malaysia are now worried about being stuck in the “middle-income trap”.

They are no longer so competitive in the labour-intensive industries like textiles and electronics assembly because lower-wage countries have entered the scene, yet they find it difficult to break through into higher value-added sectors and activities, in order to upgrade their economic status.

While the colonial grip on their economies has loosened, the middle developing countries are now caught in the complex web of global inter-dependence, in which they have become significant players but are still not able to call the shots, nor equitably participate in decision-making.

The dependence of immediate post-colonialism is now replaced with the inter-dependence that comes with globalisation. In good times, the country soars with the world economy.

But in bad times, the domestic economy is at the mercy of rapidly falling exports and foreign-capital outflows, as the 1998-99 Asian crisis and the 2008-09 “global great recession” showed.

With the United States and Europe caught in a deflationary situation, the next few years will be another great challenge.

Will the middle developing countries sink with the major players, or break free to chart their own course?
The answer will probably be in between.

But “decoupling” from the crisis in the rich countries can properly be achieved only if there are vision and action plans, including national economic restructuring and greater regional collaboration.

Intense inter-dependence is also evident in the physical world, where the environment worldwide is collapsing because the pursuit for economic growth did not take into account resource depletion and pollution.

The science of climate change and the recent radiation from damaged nuclear plants both reveal that emissions in one part of the world affect health and life in other parts.

Global solutions are thus necessary, but negotiations to find them are bogged down by basic issues of North-South equity and the need for balance between the imperative for environmental protection and the immediate needs for development.

International negotiations are also stuck in the area of economics.

The World Trade Organisation’s Doha talks have stalled because of the unreasonable demands made by major developed countries on the big developing countries.

Despite the G20 Summits, the world is further away today from global solutions to the financial crisis than in 2008-09 when concerted actions were agreed upon to stimulate a recovery.

It appears that the US, Europe and Japan, all former colonial countries, are now afraid that their mastery over the global economy is being challenged by China, India and some other developing countries – Asean included.

The middle developing countries like Malaysia are no longer one-sidedly dependent on their former colonial masters.

But in the web of an inter-dependent and globalised world, they are still in the mode of responding to initiatives and policies of the major developed countries, or to the unfolding situation.

They do not yet have the power or confidence to initiate and coordinate their policies and take the initiative to put forward solutions to global problems.

But they now have the growing capacity to do

Fifty-four years after Merdeka, the world is still an imbalanced one, and our country is building more stepping stones towards full independence.

It must join other developing countries to get a full voice and a fair share in the benefits of the global economy.

In this complex globalised economy, the developing countries’ battle for independence continues.

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