The state as market

THE more I study the Indian and Chinese growth models, the more I realise that the current debate over the state versus the market is a false dichotomy.

Both the state and the market are social institutions that are not independent of each other. Indeed, they are inseparable, interactive and interdependent.

Human development or evolution is a complex interaction or feedback between the two. In Small is beautiful author EF Schumacher's view, “Maybe what we really need is not either-or but the-one-and-the-other-at-the-same-time”.

India and China could not have become global powerhouses of growth, without the leading role of the state in planning for development. But those states that have worked with markets have succeeded better than those that worked against markets.

London Business School Prof John Kay defines the market as a relatively transparent, self-organised, incentive-matching mechanism for the exchange of goods and services, usually in monetary terms.

In plain language, the market helps to match willing buyer, willing seller under certain rules of the game to determine market price. The market clears when it functions properly, but market failure happens when the market is imbalanced.

Kay reminds us that capitalism is less about ownership than “its competitive advantages its systems of organisation, its reputation with suppliers and customers, its capacity for innovation”.

Because of globalisation and technological change, we are living in a situation of change within change, as if the national state is not in total control of our destinies. Because of the global economy, state policies such as monetary, exchange rate and trade, cannot be independent of what is happening globally.

No man, no company, no state is an island. Globalisation has changed the rules of the game irreversibly.
Why is the state so much bigger and more powerful than before?

In the 19th century, most governments were not larger than 15% of GDP. By 1960, the size of governments in OECD countries had doubled to 30% of GDP. Today, the average has increased further to 40% of GDP.

The state has grown because there has been demand for more and more state services, but there is also concern that bureaucracies tend to grow to perpetuate itself.

I find it useful to think about the state as a market-like institution for exchange of power (in non-monetary terms). Power comes from social delegation the people give the power to the state to protect them and to fairly enforce social rules and laws. Hence, the “state as market” has the same dilemmas as the market information asymmetry and the principal-agent problem.

In large countries like India and China, there are many levels of government central, provincial, city, town, village and rural governments, each with their own departments and even enterprises. Most citizens find it difficult and confusing to deal with complex bureaucratic power. The Peruvian economist Hernando de Soto was one of the first to point out that rural poverty exists, because the poor's property rights are not protected adequately and their transaction costs are extremely high because of complex government.

In other words, markets are efficient and stable when the state is efficient and stable. It is not surprising from recent experience that financial crises are results of governance failures. As the European debt crisis amply demonstrates, financial markets cannot clear when the fiscal condition of the state is on shaky grounds, and there is no mechanism to make fast, simple, clear decisions.

Finding the right balance between state and market is the real challenge in all economies today. As 20th century British philosopher Bertrand Russell reminded us, “people do not always remember that politics, economics and social organisation generally belong in the realm of means, not ends”.

Today's demands on the state to provide stability, growth and social equity are complex, because recent dominance of free market ideology has ended up with serious problems of wealth and income disparities and environmental degradation.

Realising that large states with geopolitically significant human and ecological footprints cannot consume like the United States or Europe on a per capita basis, China and India are embarking on ambitious 12th five-year plans to change their growth models to become more environmentally sustainable economies with greater social inclusiveness.

But large economies with many layers of government struggle between centralisation and decentralisation of people, resources and power.

For systems to be stable and sustainable, they have to be adaptable to complex forces of change from internal and external shocks.

To maintain integrity, there are complex trade-offs between winners and losers in each society. Such rules and bargains are difficult when the causes and effects of losses are unclear (such as crisis) and when vested interests resist change for fear of losing what they have. Vested interests are often unwilling to change because they value present gains far more than uncertain futures. Politics is the compromise of contending interests.

The belief that markets are always right assumes that markets always balance. The market cannot balance when the state cannot balance the contending interests. The main reason for the advanced country debt crisis is because their consumption has happened today by postponing the costs to future generations.

This raises a fundamental problem. Whichever way you term it, central bank quantitative easing is ultimately state intervention.

The rise in Spanish bond yields, despite ECB long-term refinancing operations, suggest that the markets are saying there are limits to the growing euro public debt.

At the same time, global financial markets are watching carefully whether inflation in China and India will rekindle global inflation.

In other words, the anchor of global financial stability rests on state debt stability. The state cannot escape being priced by the market.

  THINK ASIANBy ANDREW SHENG - Andrew Sheng is president of the Fung Global Institute.

Related articles

• Has China ALREADY Passed the U.S. as the World's Largest Economy? (zerohedge.com)
• Yuan or not to Yuan? Yuan way to new monetary order Jan 28, 2012

Europe puts its head in sand over growth crisis

Tweet


LONDON | Mon Sep 5, 2011 By Alan Wheatley, Global Economics Correspondent

(Reuters) - Japanization is shorthand for slouching toward that country's noxious mix of low growth and high debt. Euro zone governments will find it tough to keep the ugly new word out of their lexicon.

Concern is mounting over a deterioration in Europe's long-term growth prospects that, unaddressed, will make it even harder to tackle the banking and debt problems underlying the current life-or-death struggle over the euro.

The financial crisis that has been rocking the global economy since 2008 has permanently reduced trend growth across the industrial world. The Organization for Economic Cooperation and Development in Paris reckons the potential output of its 34 member countries has dropped by about 2.5 percent.

"A lot of countries are going to take a permanent hit to their trend rate of growth. This is not an ordinary recession and so we're not going to see countries bouncing back to pre-crisis rates of growth," said Philip Whyte, a senior research fellow at the Center for European Reform, a London think-tank.

As firms have gone bust, capacity has been lost for good. With demand subdued, profitable companies are not replacing old plants.

And as high unemployment persists, skills atrophy. This weakens productivity and shuts people out of the job market for longer and longer periods -- a danger stressed by Federal Reserve Chairman Ben Bernanke at the U.S. central bank's Jackson Hole symposium last month.

Apart from sapping animal spirits and forcing governments to raise taxes or cut spending, diminished growth closes off one route for lowering the high sovereign debt to gross domestic product ratios that have locked Greece, Ireland and Portugal out of the bond markets and are unnerving investors in Italian and Spanish debt.

Against this background, and with the scope for fiscal and monetary stimulus all but exhausted, politicians might be expected to grasp the nettle and push through reforms to improve the supply side of the economy -- policies such as making it easier to hire and fire, promoting greater competition and investing more in training.

Far from it. Pier Carlo Padoan, the OECD's chief economist, says he is less optimistic about the prospects for deep-seated change than he was at the start of the year.



"I see that measures are being announced. I would like to see them being implemented," Padoan said.

With policy ammunition running desperately short, he said it was time for governments to overcome their squeamishness about confronting vested interests opposed to change. "This is a luxury that many countries cannot afford any more. The situation does not allow it."

SOUTHERN DISCOMFORT

The vicious circle of rising debt and falling growth is made worse by the fact that those countries drowning in debt on the periphery of the euro zone are also the ones that have dragged their feet on freeing up their product and labor markets or modernizing their education systems.

"They're going through some truly horrible times. I'm very worried about the whole southern European fringe, not just on an 18-month to 2-year view but looking out a decade or longer," said Whyte with the Center for European Reform.

Germany, by contrast, derided a decade ago as the sick man of Europe, is being held up as a model, at least when it comes to jobs.

"The remarkable resilience of the German labor market in the last few years, where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms," Jean-Claude Trichet, president of the European Central Bank, said approvingly in Jackson Hole.

How much are countries missing out by not pressing the reform button?

Padoan says Europe's trend growth has fallen in recent years to an average of just 1.5 percent a year, but he says some members of the 17-nation euro zone could almost double that rate with a supply-side jolt.
Italy needs to liberalize its service sector, open up professions to new entrants and improve energy efficiency, Padoan said. Greece needs to do all that and overhaul its labor market and competition policy at the same time.

POOR ADVERT FOR FREE MARKETS

Germany, too, could grow faster still if it liberalized services, which would trigger increased investment.

These policy prescriptions are well worn. Leaders of the European Union enshrined them and a host of other reform goals in the 2000 Lisbon Agenda, which they promptly ignored. The pledges have since been repackaged as the Europe 2020 Strategy, but Whyte says the havoc wrought by the near-collapse of the international financial system will make politicians more wary than ever of the social disruption that reforms entail.

"The Great Financial Crisis hasn't been a great advert for free-market capitalism," said Whyte. His research outfit publishes a booklet this week exploring how Europe could take off by embracing innovation. But in this area, too, Whyte fears the political climate means policy is likely to be increasingly hijacked by incumbent firms hostile to competition from start-ups.

Europe is not doomed to go down Japan's path of economic stagnation. Its potential growth rate is low but stronger than Japan's -- estimated by the Bank of Japan at just 0.5 percent a year because of a fast-shrinking working-age population.

But the specter of a renewed recession is a reminder for governments that, even if they can spirit away the euro zone's currency and debt woes, they have still to find the elixir for growth.

"I'm not saying politicians will implement reform, but they should," Padoan said. "Some politicians resist reform because they are captive to interest groups. Well, the price for those governments in terms of sustainable growth will be very high."

(Reporting by Alan Wheatley; Editing by Ruth Pitchford)
Newscribe : get free news in real time 

65 million more obese adults in the US and 11 million more in the UK expected by 2030!

Tweet

The rising prevalence of obesity around the globe places an increasing burden on the health of populations, on healthcare systems and on overall economies. A major challenge for researchers is to quantify the effect of these burdens to inform public policies. Using a simulation model to project the probable health and economic consequences from rising obesity rates in the United States and the United Kingdom, researchers at Columbia University's Mailman School of Public Health and Oxford University forecast 65 million more obese adults in the U. S. and 11 million more in the U.K. by 2030, leading to millions of additional cases of diabetes, heart disease, stroke, and cancer. The findings suggest that medical costs associated with treatment of these preventable diseases in the U.S. alone will increase by $48-66 billion per year.
Image via Wikipedia

The paper, "Health and Economic Burden of the Projected Obesity Trends in the USA and the UK," is part of a series of articles on obesity published in the August 27 issue of Lancet. The research was led by Y. Claire Wang, MD, ScD, Mailman School assistant professor of Health Policy and Management, with colleagues from Oxford University.



To construct historic trends in BMI the researchers analyzed data from two nationally representative surveys: the U.S. National Health and Nutrition Examination Survey (NHANES) from 1988 to 2008, and the Healthy Survey for England (HSE) from 1993 to 2008. The U.S. and U.K. have the highest obesity rates among the countries belonging to the Organization for Economic Cooperation and Development.
Projecting from these data sets: the researchers predicted the following impacts for the U.S. by 2030:

• Obesity prevalence among men would rise from 32% in 2008 to approximately 50% and from 35% to between 45% and 52% among women.
• 7.8 million extra cases of diabetes
• 6.8 million more cases of coronary heart disease and stroke
• 539,000 additional cases of cancer
• Annual spending on obesity-related diseases would rise by 13-16%, leading to 2.6% increase in national health spending.
• Total medical costs associated with treatment of these preventable diseases are estimated to increase by $48-66 billion/year.

For the U.K., researchers predicted the following developments by 2030:

• Prevalence of obesity among men would increase from 26% to between 41—48%, and among women from 26% to 35-43%.
• 668 000 more cases of diabetes
• 461,000 more cases of heart disease and stroke
• 139,000 additional cases of cancer.
• In the U.K., annual spending on obesity-related health would increase even more rapidly than in the U.S. due to its older population, rising 25%.

"Many chronic and acute health disorders associated with excess bodyweight burden society—not only by negatively affecting the health-related quality of life but also by incurring significant costs," says Dr. Wang. These stem not only from increased healthcare expenditures but also from worker absenteeism, disability pensions, less productivity at work due to poor health, and earlier retirement."

The new study shows that even a small drop in average body mass index (BMI) would have a major health and economic impacts. They therefore recommend action to promote healthier body weights.

"Taking no action would have the catastrophic consequences described in our study, but a population level decrease in BMI by 1% would avoid as many as 2.4 million cases of diabetes, 1.7 million cases of heart disease and stroke, and up to 127 000 cases of cancer in the U.S.alone."

There are currently 99 million obese individuals in the U.S and 15 million in the U.K. The distribution of obesity is somewhat different in the two nations. In the U.S. about one-quarter of all men are obese regardless of ethnicity. Almost half of black American women (46%) are obese, compared with a third of Hispanic women and 30% of white women. In the U.K., the proportion of obese white men (19%) is slightly higher than black men (17%) and much higher than Asian men (11%). One-third of black women in the U.K. are obese, compared with 1 in 5 white women and 1 in 6 Asian women.

While there is some evidence that the rise in obesity is levelling off in some nations and possibly in the U.S., the jury is still out, says Dr. Wang. "Population weight changes are slow to manifest. Whether or not the U.S. and UK have turned a corner or plateaued will not be clear until survey results over the next few years provide additional data points."

The suggestion that obese people die earlier, thus saving the likely expected social and healthcare costs if that person survives to old age, is also discussed in the paper. However the authors conclude, "Without a doubt, healthcare expenditure is high for elderly people, but these costs should not be used to justify the cost-savings of dying younger, or to suggest that obesity prevention has no benefit."

Provided by Columbia University

 Newscribe : get free news in real time 

How can Malaysia stem the tide of talent migration?

Tweet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click on image for actual size.
 

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

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

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

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

Why do people leave?

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

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

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

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

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

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

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

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

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

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

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

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

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



Courting talent back

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Malaysia Economic Monitor, April 2011

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

Related Stories:

Reversing the brain drain, innovate to compete!

 The big picture on skilled labour market
Can Malaysia reform fast enough to meet challenges?
Talent Corp CEO: Need to change business model
The vicious cycle' of brain drain

World Bank says: NEP, brain drain holding back Malaysia

Tweet

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

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

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

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

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

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

“Expect the trend to continue,” he said.

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

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

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

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

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

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

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

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

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

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



NEP, brain drain holding back Malaysia, says World Bank

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

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

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

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

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

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

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

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

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

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

“They need to boost productivity and strengthen inclusiveness.”

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

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

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

World Bank: Reforms under New Economic Model should accelerated

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

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

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

 

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

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

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

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

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

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

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

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