SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION - Examining the Middle-Income Trap in Malaysia (Part 2) - The Vietnamese Dilemma - Uncovering Key ASEAN Needs Vital to US Economic Legitimacy in ASEAN (Part 2)
The Fortnight In Brief (24th June to 7th July) US: Manufacturing rebounds as services slide, 7.6% unemployment US PMI for June bounced back from 49.0 in May to 50.9, the fifth time in six months, where the manufacturing sector has seen an expansion. The New Orders, Production, Imports and Export indices also grew from previous months, with the exception of the Employment Index registering a surprising contraction at 48.7, the first since Sep 2009. The ISMs non-manufacturing figures were also soft as it fell to 52.2, the lowest since Feb 2010. Non-farm payrolls out Friday rose by 195,000, beating expectations of 165,000 as the unemployment rate hovered at 7.6%, a four year low. Mays NFP were also revised upwards to 195,000 from its previous 175,000, fuelling more talk of Fed tapering. Asia Pacific: Japans 100 mark On 25th June, The Peoples Bank of China (PBoC) broke its silence to reassure investors that it had been supporting bank liquidity. This announcement comes as the Chinese stock markets swung wildly when the central bank refrained from intervening to keep interbank rates in check. In Japan, the Yen crossed the psychologically significant 100 mark for the second time this year as the greenback strengthened amidst the Feds talk of tapering. The Y en has fallen significantly from 86.72 from the start of the year and 79.86 from a year ago due to Japans prime ministers, Shinzo Abes aggressive loosening policies. EU: Spains banks do not require further European aid at present Spanish banks do not at present require further European aid. Spanish lenders, hit hard by a five year on-off recession and burst property bubble, have received financial aid from Europe of 41.3 billion euros, to date. The aid was used for the recapitalization of state-aided banks and a capital injection into a bank that took on bad loans and devalued property assets from the financial system. However, the report mentioned that ensuring bank profitability represents a m ajor challenge given low interest rates and rising bad debts. The stability of the Spanish financial sector may still be impaired by uncertainty over the extent to which losses can be passed on to investors. In addition, there is uncertainty over arbitration processes by which some investors will seek to prove they were mis- sold complex hybrid investments.
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PROUDLY SUPPORTED BY MSCI AC Asia Ex. Japan

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STOXX Europe 600

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Examining the Middle-Income Trap in Malaysia (Part 2)

By Tong Kah Haw and Toh Wei Zheng, Singapore Management University
In the last issue, Kah Haw and Wei Zheng discussed Malaysias middle income trap. This week, they present more structural issues Malaysia faces. Figure 2: List of Malaysian States by GDP per capita (2010) States / federal territory Kuala Lumpur Penang Sarawak Melaka Pahang Johor Perak Kelantan Structural Problems in Education Institutions Ever since private higher education was liberalized in 1996 in order to transform Malaysia into an education hub, more than 50 private domestic and foreign providers have been established. Yet, no Malaysian higher education institution has secured a place among the top 400 of Times World University Rankings in 2013. The best university is the University of Malaysia, ranked 87th by The Times Asia University Rankings. Education standards differ drastically amongst universities and programmes are often not attuned to the needs of the economy, causing a mismatch between demand and supply of labour. Many multinational companies such as IBM have lamented about the lack of qualified graduates with technical skills, such as accounting and engineering. There is also a lack of coordination between various government agencies such as the Economics Planning Unit and the Ministry of Higher Education. Each seeks to push their own agendas, and the resulting conflict of interest causes difficulties in implementing viable education policies; a key reason why it will be difficult for Malaysia to escape the middle- income trap. Perhaps, Malaysia could learn from its Singaporean counterpart on the close coordination that the government agencies have with one another. In addition, qualifications from independent Chinese-medium high schools that many academically inclined students attend are not recognized by the Malaysian government for admission into public universities. Such a move has caused many Chinese to pursue tertiary education elsewhere in places such as Singapore and Greater China where these qualifications are highly regarded, further fueling the brain-drain1. 2 Copyright 2012 SMU Economics Intelligence Club GDP per capita (2010) in USD 18,218 10,893 10,845 8041 7408 6809 5,238 2,694

 Lack of Workforce Participation of Women The World Bank reported in 2012 that the proportion of working-age women who are already in or joining the workforce is lower in Malaysia, as compared to other countries with similar income levels. The study also showed that Malaysia could experience a 23% increase in output per capita if more women hold jobs and become entrepreneurs. Hence, it is crucial to involve more women in the workforce if Malaysia aims to transform itself into a high-income economy. As a start, pro-family policies such as flexi-work arrangements and better childcare options can be introduced to encourage more women to enter or remain in the workforce. However, implementation will certainly be difficult as social norms discourage women from holding jobs. Lack of Innovation Culture In order for Malaysia to break out of the middle-income trap and transit to a knowledge based, innovative economy, a culture of innovation needs to be fostered. As outlined in the New Economic Model, initiatives have been crafted to attract foreign direct investments (FDIs)2, increase the ease of doing businesses in Malaysia, encourage entrepreneurship and improve productivity. Such measures are laudable but their effectiveness remains to be seen. However, certain areas have not been adequately addressed in the framework and warrant rooms for further improvements. Enhanced measures in legal institutions should be bolstered to protect intellectual property rights, which is vital in a knowledge-based economy. Also, while protectionist measures3 can shelter domestic industries, it also allows them to be less innovative and creative in the comfort of government protection. Malaysias national car manufacturer Proton is a good example. Heavy duties, which are expected to remain till 2016, are levied on imported cars to ensure the survival of Proton and other Malaysian auto manufactures. In conclusion, although a vision has been set for Malaysia to undergo reforms to transit to a higher income economy by 2030, inherent structural problems as seen in its institutions and racial polarisation can pose severe challenges to such a transition. Another learning point is that it can be easy to meet the benchmark targets set by the World Bank (i.e. above GDP per capita of US$12,000) to qualify as a high-income nation, but whether Malaysia eventually becomes a developed, knowledge-based economy supported by strong fundamentals such as research and development and an innovative work force is another question. This is evident in the great disparity in GDP per capita across the different Malaysian states. Nevertheless, Malaysias target to become a high income nation is an overtly visionary plan that is commendable, with the potential to improve living standards and transform Malaysia into a more equitable nation should it be implemented successfully.

3 Copyright 2012 SMU Economics Intelligence Club

1 Brain Drain

Brain drain (or human capital flight), is the large-scale emigration of a large group of individuals with technical skills or knowledge. 2 Foreign direct investment Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. 3 Protectionist measures Protectionist measures are policies aimed at restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and service produced domestically.

Sources: 1. Daniel Fleming, Hendrik 2012. Malaysian skills development and the middle income trap 2. 10th Malaysia Plan 2010. Prime Minister Office. 3. Times Higher Education 2013. Times University Rankings Website. 4. Aaron Flaaen, Ejaz Ghani, Saurabh Mishra 2009. The World Bank. How to avoid middle income traps? Evidence from Malaysia 5. Malaysia Economic Monitor 2011. Brain Drain 6. The World Bank. Unlocking Womens Potential Key Findings 7. Vikram Nehru 2013. Can Malaysia beat the Middle Income Trap? 8. New Economic Model. Economic Planning Unit

4 Copyright 2012 SMU Economics Intelligence Club

The Vietnamese Dilemma

By Hang Dieu Quang, Singapore Management University
This article seeks to explore the current real estate crisis and some constrains that the Vietnamese government has to deal with to untangle the situation. Figure 1: Vietnam inflation rate 2008 - present

In 2008, when the financial crisis hit, one of Vietnams chronic problems also came into full force - inflation. Its inflation rate skyrocketed to 23%, more than any of its neighbours in the region. The government moved swiftly in an unprecedented campaign to reduce prices, using unusually high interest rates, restricted borrowing policies, measures to control prices for essential items among others. The inflation rate was tamed to a more manageable level of 11% and 9% in 2009 and 2010 respectively. Figure 2: Vietnam Housing & Construction Materials CPI 2011 - present

Just when the government thought that the inflation was under control, the real estate market came into a crisis. Suddenly, many companies found that they could not sell their properties to customers; many investors found that they could not repay their bank loans on time. As a result, property prices have been sliding down since then. Available solutions to the Government There are a few physical and fiscal measures1 aimed at solving the demand bottleneck. Although the real estate market has generally been stabilized since the end of 2012 when 5 Copyright 2012 SMU Economics Intelligence Club

these measures went into full effect, many believe that these are just short-term solutions to avoid a complete melt down of the market. The evidence for that is that the increase in demand seems to be weak and will not be able to clear the inventory excess built up thus far. Figure 3: Hanoi residential property price index and inventory ratio 2009 - present

Figure 4: Ho Chi Minh City residential property price index and absorption rate 2009 - present

The government had at that time two possible routes to deal with the situation: i) do nothing and let the market correct itself with a possible total collapse; ii) bail out2 the property developers. Status Quo By not rescuing the market and allowing it to correct itself, the government would not have to commit precious capital that is much needed elsewhere. Furthermore, as the crisis progressed, it was not the case of a fast and furious melt down of the entire industry. The weak developers were being weeded out while the stronger ones consolidated. This market consolidation3 process is believed by many to be what is needed for the market after decades of speculation and bubbles. 6 Copyright 2012 SMU Economics Intelligence Club

In addition, the market would transform itself into a more customer-oriented industry rather than one that was only interested in pushing the prices of the properties upwards, in order to earn quick returns. While the market demand clearly indicated a shortage of low-end and affordable public housing, for many years, private developers were only interested in the higher ends, the higher the better. This is evident in the transition many are witnessing whereby the supply for low-end and affordable housing is finally increasing. Perhaps, struggling to generate enough sales to pay off their obligations, developers are starting to realize that they can no longer solely rely on the high end segment. Nevertheless, there are few consequences to this approach. First of all, there is a risk that the market would go down further and transform into a total collapse of the real estate market. This would have an adverse impact on numerous sectors, especially the construction and banking industries. Government revenue would also be adversly affected. With much bad debt contributed by this industry, a collapse would spell trouble for the banks that hold on to these debts. A construction sector recession would further drag the economy into a slower growth recovery. Thus, the government would find its revenue, which mostly comes from land tax, reduced significantly with the sharp reduction in the number of transactions. Save the developers By bailing out the developers, the government needs to commit not only the capital but also the policies to help them solve the excess inventory as well as finding the customers. The former can be done via the central bank. However, there are many questions remaining. First of all, who should the government help and why? There are many developers that currently need the government to bail them out. How the government decides which developers are worth bailing out is a tricky question. Using efficiency and debt level as a guide should be the right thing to do. However, most big developers would not pass this test. On the other hand, just simply rescuing the big companies would give a wrong signal to the economy whereby it would set a precedent that the government would step in to bail out failing companies. The second question would be how much. If the government bails the developers out excessively, it may risk building up another bubble. On the other hand, if the help is inadequate, the crisis may prolong and require greater efforts. There are many ways that the government can help ease the level of unsold inventory and encourage spending on housing. In fact it has already implemented some. While there are many policies: handouts, price subsidies, lower interest rates, allowing more foreigners to buy properties, each of them carries consequences that are far reaching and may not be seen immediately. The most controversial one of all is lowering the interest rate. By doing this, the government risks triggering a rise in inflation again. In fact, in late 2011, when the interest rate was relaxed, inflation rose to near 2009 level. As long as the fundamental problems causing the inflation are left unresolved, interest rate remains a very sensitive instrument that the government can use. The fact that the inflation rate is currently stable and low may be due to the fact that the economy has slowed down significantly, coupled with the ongoing property market crisis. So there may be a risk of increasing the inflation rate once the real estate market has stabilized and the developers receive government help. Figure 5: Vietnam interest rate 2011 present

7 Copyright 2012 SMU Economics Intelligence Club

 The right way forward Given the fact that the current crisis is deep-rooted in the speculative behaviours of investors, loopholes in regulations, as well as, loose lending policies by banks, the government should aim to provide a long term restructuring of the entire system. Three things need to be done to avoid repeat episodes of the current crisis: restructuring of the banking industry, new property market regulations that provide better mechanisms to reduce speculation and risky investments and policies to correct market behaviours. The government has already promised banking reform by 2015 with a new regulation system was demanded for many years now. Many hope that this crisis will finally push the government to seriously consider making it a reality. While the policies that were implemented recently maybe rudimental and small in scope, it is a step in the right direction. Hopefully, they are to be signals for more to come. The problems that are faced by the Vietnamese economy are intertwined and delicate. The government can risk one problem by trying to solve another. It is much harder for the government to devise a simple, conventional one stop measure to solve them. Rather, it requires efforts in many different areas and the coordination of many fields. It requires time to solve all of the issues effectively and time is something that is running out very fast.
1 Fiscal Measure

The use of government revenue collection (taxation) and expenditure (spending) to influence the economy. 2 Bailout A bailout is a colloquial pejorative term for giving a loan to a company or country which faces serious financial difficulty or bankruptcy. 2 Market Consolidation The mergers and acquisitions of many smaller market players into much larger ones. Sources: 1. Jones Lang Lasalle 8 Copyright 2012 SMU Economics Intelligence Club

2. Savills 3. Trading Economics

9 Copyright 2012 SMU Economics Intelligence Club

Uncovering Key ASEAN Needs Vital to US Economic Legitimacy in ASEAN (Part 2)

By Tan Kwan Hong, Singapore Management University
In last weeks issue, Kwan Hong discussed the US economic legitimacy in ASEAN. This week he unveils an initiative that would help in formulating a vibrant US-ASEAN economic engagement. The Second Pivot: The Pivot from the TPP1 to the E3 Initiative2 Despite the noble goals of the TPP in being a high-level agreement deliberately targeted at emerging trade issues of the 21st century, weaknesses that have yet to be overcome continue to plague the TPP. First, the TPP is a rigid form of arrangement that requires members to eradicate almost all tariff and non-tariff barriers to trade. Few exemptions are granted, if any. Japan will have to liberalize its rice market. Countries with relatively closed economies will struggle to adapt. Countries with a protectionist posture on a few selected industries (e.g. due to union or domestic pressures or other reasons) might also be discouraged, even if they are willing to liberalize most other industries. As such, this rigidity leads to the second problem progress on concluding the TPP has been slow, arduous and fraught with difficulties. Despite being a concept mooted in 2005, eight years on, the TPP has been nowhere close to finalizing its membership base, let alone benefit from a liberalized trade between members. Although Japan, the worlds third largest economy, has expressed interest to enter the negotiations, the TPP has become an issue of contention in the countrys 2012 elections, whether it will ultimately enter the fray, remains at best a speculation. Not guaranteeing a major actors entry will undermine the relevance of the TPP. Third, the TPP might be seen as another US initiative to contain China, especially when the US currently remains as the leading entity directing the outcome of the TPP. Chinese hardliners might choose to perceive the TPP as an American-promoted, intrusively gold-standard TPP that requires varying levels of domestic reform, so as to discourage Chinas participation in the program due to the differing nature of its economic architecture with that of Chinas state- controlled regime. This might undermine US-China relations as the TPP is being pushed through. Fourth, given the rapid growth of the ASEAN economic force as mentioned above, no other equally-massive sub-region in the Asia-Pacific community can rival the collective growth of the ASEAN entity. The ability to ride on the ASEAN wave will be beneficial to the US. Unfortunately, by engaging in the TPP alone whereby only four ASEAN countries are involved (note that Indonesia, the largest ASEAN economy, isnt involved too), the US might be missing out on long-term growth. Therefore, the pivot from the TPP to the E3 might prove beneficial as a hedging tool to the weaknesses of the TPP, and to better align the US to tap of the growth of ASEAN for long term gains. The author recommends that the US heighten the development of the E3 under the Obama Administration, while maintaining continued engagements with the TPP. 10 Copyright 2012 SMU Economics Intelligence Club

Maintaining continued engagements with the TPP is necessary for two reasons: (1) To send a signal of continued American interest in the region and (2) To prevent the TPP from plausibly falling apart or be reduced in membership to the four original signatories due to a leadership vacuum, for a diminished TPP might encourage alternative forms of multilateral trade agreements (such as the EAFTA and CEPEA3) to take center stage among US major trade partners in the region, of which the interworking, norms and principles underlying such agreements might not be favorable towards the US. However, the US might sensibly view the E3 as a more constructive vehicle in achieving American trade and economic objectives, at least in terms of implementation speed. Also, as a backup plan in the event the TPP does not materialize full-scale in the short to mid- term, the author recommends the pursuit of a comprehensive E3 with ASEAN, supplemented with enhancing bilateral trade agreements with major partners such as Australia and New Zealand, as a viable and quicker alternative to extending the breadth and depth of US trade engagements with the region. Further Recommendations to a Constructive US-ASEAN Economic Alliance Despite ASEANs growth, potential and robustness as an economic region, ASEAN is still far from reaching its full economic potential. US legitimacy and relevance hinges on its ability and willingness to understand the fundamental economic needs and priorities of ASEAN. The author proposes the I-4 initiative: Infrastructure, Institutionalization, Incentivization and Integration. Each recommendation is mutually supportive in formulating a vibrant US-ASEAN economic engagement. Infrastructure Developing basic ASEAN infrastructure remains paramount to ASEANs economic growth, and one of which is energy. Despite the crucial importance energy in economic development, stunning insights emerge from current supply and demand balance in the ASEAN energy architecture. Electrification rates in ASEAN remained stunningly low. ASEAN, with a population of 567 million people, comprises of a startling proportion of 160.3 million people who do not have access to electricity, using twigs and leaves to cook their food. Figure 4: ASEAN, world and advanced economies projected GDP growth rates until 2016

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 Source: IMF, World Economic Outlook Database Electrification rates vary widely throughout the ASEAN region, ranging from 0.1 in Myanmar to 1 in Singapore. With a projected GDP growth rate that is expected to supersede that of the world and of advanced economies till 2016 (Figure 4), the low electrification rates will further exacerbate the income disparity between rural and urban regions within a country. Income and development disparity might in turn have political and social implications within the country. The region also faces a steep surge of demand for energy in the next two decades, so much so that despite having a considerable amount of coal and gas in the region, more will still need to be imported. The usage of oil and coal will remain as the dominant source of energy till 2030, and will continue to contribute to environmental damages. Finally, enhancing energy efficiency is an often-overlooked factor in ASEAN energy policy developments. Several ASEAN countries face high transmission and distribution losses of electricity. This adds on to wasted resources, and to the cost of energy production. Therefore, among all the infrastructural issues, energy is an often-forgotten issue that the US can get involved economically. The US can facilitate an energy-related business forum or economic society, whose members include energy and environmental companies from both ASEAN and the US. This will foster collaborations between ASEAN and US companies in energy projects that fulfill the large demand of energy in ASEAN. Projects on energy mass production, energy efficiency, energy trading and environmental conservation will generate jobs. A research institute dedicated to research on US-ASEAN private and public sector energy cooperation, R&D development, and project implementation can be instituted. Government oversight and funding can be implemented concurrently on projects initiated through the forum, leading to public-private partnership arrangements that will generate merit and public goods for the masses. For a continuation of Kwan Hongs suggested I-4 initiative, please refer to next weeks publication.

12 Copyright 2012 SMU Economics Intelligence Club

1 TPP

The Trans-Pacific Partnership (TPP) is a proposed free trade agreement under negotiation by Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. 2 E3 Initiative A year-long initiative of energy-related companies that promoted the relationship between energy policy and national security. 3 CEPEA The Comprehensive Economic Partnership for East ASIA (CEPEA) is a Japanese led proposal for trade co-operation, free trade agreement, among the 16 present member countries of the East Asia Summit. Sources: 1. UBS 2. United Nations 3. World Bank 4. Haver 5. IMF 6. World Economic Outlook Database

13 Copyright 2012 SMU Economics Intelligence Club

The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Correspondents : Vera Soh (Vice President, Publication) vera.soh.2011@economics.smu.edu.sg Singapore Management University Singapore Samuel Ong (Publications Director/ Editor) samuel.ong.2010@business.smu.edu.sg Singapore Management University Singapore Ng Yongxiang (Marketing Director) yx.ng.2011@accountancy.smu.edu.sg Singapore Management University Singapore Tan Kwan Hong (Writer) Undergraduate School of Economics Singapore Management University kwanhongtan.2009@economics.smu.edu.sg Toh Wei Zheng (Writer) Undergraduate School of Economics Singapore Management University weizhengtoh.2009@economics.smu.edu.s

Ng Jia Wei (Vice President, Operations) jiawei.ng.2012@economics.smu.edu.sg Singapore Management University Singapore Yingyu Zeng (Liaison Officer) yingyu.zeng.2010@economics.smu.edu.sg Singapore Management University Singapore Darren Goh Xian Yong (Editor) darren.goh.2010@business.smu.edu.sg Singapore Management University Singapore Tong Kah Haw (Writer) Undergraduate Lee Kong Chian School of Business Singapore Management University kahhaw.tong.2009@business.smu.edu.sg Hang Dieu Quang Undergraduate School of Economics Singapore Management University dqhang.2010@economics.smu.edu.sg

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