Creative Reinvention: The Way To Survive The Chindian Challenge

Small to medium sized Asian economies such as Malaysia, Thailand and other emerging economies which do not have the benefit of China's vast population as a source of domestic demand nor India's head start in information technology have to innovate their ways out of their caught-in-the-middle economic dilemmas.

If these smaller countries do not manage to build a new competitive edge, they face the danger of being peripheral nations whose business cycles depend on China and India's economic engines. Where will the next generation of jobs and domestic economic growth come from? If they can't compete in the manufacturing sector, then they have to compete in services, which is high quality human capital intensive rather than low skilled labour intensive.

The next growth areas in Asia will come from innovation and high-end services such as education, financial services, health care and consumer branding. To generate the next generation of thinkers, innovators and leaders, the education system of Asia needs to be refocused towards creative thinking. Joseph Schumpeter's idea of creative destruction is the answer to Asia's tendency to build a symbiotic relationship with the US. If this traditional relationship continues, the economic decline of the US will bring these Asian economies down with it. Conversely, desperate attempts to ride on the Chinese dragon or the Indian elephant can also backfire.

In fact, China's fledgling attempts to diversify out of the U.S. export market and build up its own domestic demand market have yet to bear fruit. The robust growth of 2009-2010 will continue to be driven by infrastructure spending, which has strong spill-over effects on consumer incomes but which is not sustainable over the long-term. So China, too, has to innovate its way out of its unbalanced relationship with a deleveraging and over-indebted US consumer.

The Chindian challenge is this: if Asia follows China's economic structure, they will be competed away because they can't catch up with China's leap into producing engineering talent. If they follow the Indian model, they also need to start from scratch not to speak of the lack of an English proficiency advantage.

So what can Asia do to stand out of the shadow of the two emerging economic giants? The dependence of the global economy on the vibrant health of emerging countries is both a blessing and a source of future economic trouble. Blessing because if Asia stands up to the challenge of innovation and creative reinvention, it will be able to rebalance the current global imbalances which depend on the developed nations's ability to rescue themselves from rising debt levels. If it fails in the latter, then continued dependence on developed nations' weakening appetite for consumer goods coupled with the potential of sovereign default of developed nation's debt suggests a more polarised and protectionist economic world.

Getting On The Innovation Highway With A Nation-wide Contest System

I think there are broader benefits of promoting open science forums in Msia across all sectors of the economy. The call for open science comes from Dr Lim Teck Ghee's article, "Positioning Malaysia for open science: Any takers?" (http://english.cpiasia.net/)

The government and private sector can embark on a nation-wide knowledge innovation competition for each sector of the economy ranging from tourism, education to financial services.

The award will be on a quarterly basis and participants can submit their research work anonymously (you know how humble most Msians are when it comes to having a high profile) which focuses on raising productivity and innovation in their industries.

The government should have a grant to promote ideas that will benefit the entire industry and raise global competitiveness. The aim is to raise the productivity of the nation from the bottom-up rather than the top-down.

What are the incentives? The quarterly award could be RM5,000 each for three top prizes for each industry sector. Assuming six sectors, the annual prize money may cost RM360k, which will be subsidized by both the private and public sector. This is not costly in view of the unquantifiable external benefits for the country (excluding advertising and campaign costs.)

Who will be the judges? Like American Idol, the expert judges will be drawn from a panel of industry leaders as well as registered voters from the public through an online poll.

What are the benefits? It will promote out-of-the-box thinking and problem solving skills to short-term and long-term challenges in every industry.

How will it be executed? The biggest challenge will be to standardize the platform/format for the different issues facing 6-7 key industries. For instance, the finance industry will address issues of how consumers/investors can be encouraged to mobilise their savings without taking unwarranted risks, the tourism industry can tackle issues of how tourists can return to Msia in droves without spending too much on new tourist attractions. Simple value-enhancing ideas such as clearer signboards in English or touch screen information counters in hotels showing all the tourist hot spots, etc.

We know that often what benefits the consumer may not benefit the producer. However, competition, local and global, will ensure that both their interests are more aligned.

If done smartly, this innovation competition will put Msia on the map of high income, high productivity nations. Let the politicians handle their corruption problems with debates about the open tender system, we the rakyat need to move fast on the innovation highway and come up with an open innovation system that benefits both consumers and producers alike.

In fact, if the government lacks the initiative, internet bloggers can jumpstart this idea on an Asia-wide basis starting with the more English-literate countries such as Singapore, Hong Kong, Taiwan and Australia. Malaysia is well positioned to be a thought leader due to the potential of its English-speaking population notwithstanding the recent decline in English standards.

A Different Twist To The US$ Debate

What most mainstream economists have missed out in their analysis of global currency outlook with regard to the US dollar’s outlook is the political perspective.

The dollar bears have got their analysis right over the long term but over the short term of 6 months to a year, the US dollar index may rebound due to a stronger-than-expected recovery in the US economy, a hike in Fed interest rates, or the end of quantitative easing or some global financial crisis where flight to safe dollar havens resumes. So the dollar bulls may be right for the short term.(this has turned out to be true with the Greek soveriegn crisis and better-than-expected US economic data lifting the US$ in the first quarter of 2010)

The decisive factor that will lead to the demise of the US$ (be it through an outright collapse of 40-50% or a gradual annual depreciation of 10% over the next five years) is predicated on four factors:

1. The excessive and irresponsible printing of money (through the US Treasury’s creation of excess reserves) and the monetization of America’s rising debt burden.

2. The large holdings of US dollars by global central banks notably China, Japan and the BRIC countries. Nobody wants to be holding large amounts of a currency that will fall sharply in value. Their ongoing policies to buy US Treasuries to support the US dollar will eventually end if investors continue to abandon the US dollar due to its government's debasement/devaluation policy.

3. China’s policy response to the prospect of a weakening US dollar is to move its assets away from the dollar and into hard assets and other currencies.

4. The political drive by a group of globalists to engineer the emergence of a new global reserve currency. The latter will not happen unless the US dollar collapses. (In fact, many sound economists and central bankers have voiced their approval of a global currency to stabilise the global economy.)

The fourth political factor is the most important factor that is overlooked by economists presumably because (a) it appears to come from conspiracy theorists (b) a monetary union of the world seems more justifiable and noble than a political union under a one world government. But if you follow closely the actions of the US government and the statements and actions of many world leaders, the stage is already set for a new global reserve currency, whether by default, accident or through negotiation. The question is whether this move will be successful or will the US economy suddenly find its way out of structural decline through a technological breakthrough or resource discovery?

We live in interesting times not just because all well-known economic theories and policies (namely Keynesian and Monetarist) have failed to convincingly rescue the world from the current global recession, but a wrong policy move by governments can lead the world into a Greater Depression. The current global solution of piling up more government debt to compensate for the deleveraging of private debt is a short-term pain-killer that will not cure the patient of the root cause of his illness, which is too much debt in the first place.

This leads one to ask whether government leaders can be that stupid. They may act stupid and go against the interests of their electorate in favour of a vested interest group who put them in power. However, it is my view that there are certain prominent "global" leaders who may pretend to act selfishly for their lobby groups but who are actually setting up the stage for a one world government.

This could soon happen in the next 2-3 years when the current dosage of orthodox economic policies (flooding the economy with newly created money) leads into new asset bubbles and financial collapse. By then, global markets systems could be shut down and food shortages and civilian unrest will force governments to impose marshall law.

Hamlet, Atheists & The Msian Christian's Dilemma

I am a Christian. Though I may not be an exemplary one at times, I do not boast about myself but Christ in me.

In a simple analogy, Jesus may not appear to be the answer to how we decorate our houses but He is the answer to what foundations we build upon. There are many people who live successful and moral lives without believing in God and Jesus Christ. At the end of their lives, they will face an accounting for which their lives will be judged and weighed.

The confusion of this world and the tragic comedy of the human soul is caused by our lack of understanding of who we are, our position in this world, our purpose and final destiny. A world in which every man and woman act for themselves within the constraints of the law and human decency is destined for failure. If we build our house on the rock of Christ, we shall withstand every storm, every blow of circumstance and overcome the sting of death (i.e. we shall all die a physical death but will be spiritually redeemed and saved from eternal death).

In simple words, Jesus is the practical answer to every aspect of our lives. He is present in every suffering person, be the pain physical or emotional or spiritual. I personally know because I marvel at the way He rescued me many times from trouble even when I was not a believer in my youth.

My faith is in Jesus who died for our sins and took our place of bearing God’s punishment against man's sins, the faith that man can only be saved and have eternal life through giving our lives to Him.

In this sense, a Christian engaged in social or political works without the power of the gospel and the aid of the Holy Spirit is like an empty drum, making noise and having little impact in the harvesting of souls.

So I think the dilemma facing Msian Christians, post March 2008 shake-up in the political landscape, is not Hamlet’s dilemma of whether to be or not to be a man of action. It is precisely this limited choice that caused Hamlet to end tragically. Without the power of the Holy Spirit and the word of God, we won’t be able to contend with the enemy of this world, which is not flesh and blood but principalities.

A Wide Disconnect Between Growth Targets & Reality

There seems to be a wide disconnect between what Malaysia's Ministry of Finance projected GDP growth (+2% to +3%) to be for 2010 and what the Prime Minister has in mind in terms of his long-term forecast of economic growth from today till 2020.

Notwithstanding the fact that he made an about-turn within a day from 9% GDP growth to 6% GDP growth, the PM's target of 6% real GDP growth does not seem to sit well with his objective to raise per capita GDP from US$7,000 to US$17,000 by 2020. Per capita GDP is always stated in nominal terms, so this implies an annualised nominal growth rate of 8.4%.

Assuming long-term inflation in the next ten years is in line with the historical average of 3% ( a fair assumption given that cost-push factors from energy and food inflation), then an 8.4% nominal GDP growth translates into a real GDP growth rate of 5.4%.

To see whether this is realistic, we need to ask three simple questions:

1. What was Msia's average GDP growth in the last ten years (excluding the recession year of 2009)?

Answer: 5.5%.

2. What were the global economic conditions for this type of growth?

Answer: The US economy was growing 2.6% while the Singapore economy was growing at an average of 5.6% amidst a credit boom in the US starting from 2003 to 2007.

3. What was the standard deviation of the growth rates of these three economies? In other words, how volatile are these economies?

Answer: The US economy had a standard deviation (SD) of 1.3% with the lower range of growth at 1.3% (average growth of 2.6% less 1.3%) while the Singapore economy has an SD of 3.9% with the lower range of growth at 1.7%. For Msia, the SD is 2% and the lower range of growth is 3.5% (higher range at 7.5%).

Given that Malaysia has a a fairly high correlation (R sq=79%) with the Singapore economy and the Sing economy in turn is correlated with the US economy (R sq=60%), then a period of sub-par growth in the US for the next ten years suggests that Singapore and Msia's economy will also be below their past 10-year track records. Unless either economy rebalances and realigns their economic structures towards new growth engines such as China and India.

My conclusion is that a long-term GDP growth rate of 3.5% for Msia is more realistic than the 5.4% implied by the 2020 goals of the PM.

Malaysia & Spore's GDP Move In Step?

In the last three years, Malaysia's quarterly real GDP growth has become more correlated (move in tandem) with Spore's real GDP growth. This is because both are highly export-oriented and the global financial meltdown of 2008 basically pulled down their economies simultaneously.

What is also interesting is that in terms of standard deviations, Spore's economy is 3.7 times more volatile than Msia's economy. On an annual basis, Spore's economy is twice as volatile as Msia's.

Look at the chart above (apologies for the quality of the image, will try to overcome the technical glitches) to see the strong linkages between the two economies. The R Square for the 2007-2009 period is higher at 89% compared to 83% for the more extended 2000-2009 period.

Implications: The lower volatility of Msia's economy is due to its broader base economy with commodities and consumption as a buffer. However, in absolute terms, the close correlations of GDP movements indicate that Msia is vulnerable to the global economic cycle.

Incidentally, the KLCI has only an R square of 38% with the STI. Given that KLCI has a 70% R Sq vis-a-vis the Dow Jones, this means that the rest of the driving factor for the KLCI's movements is regional sentiment.

Six Key Words In Stiglitz's Latest Economic Prophecy

Renowned economist (the prophet with not much honour in his homeland) Joseph Stiglitz wrote another enlightening article in Vanity Fair: "Wall Street's Toxic Message".

If there is one economist we would all be wise to listen to and who is neither influenced by Wall Street or Washington, it is Stiglitz, a man of unusual modesty and intelligence (I personally met and interviewed him when he was in Kuala Lumpur in 2000 before he won the Nobel Prize in Economic Science in 2001).

His last paragraph contains key words that hints at more than what he did not elaborate:

"The American economy will eventually recover, and so, too, up to a point, will our standing abroad. America was for a long time the most admired country in the world, and we are STILL THE RICHEST. Like it or not, our actions are subject to minute examination. Our successes are emulated. But our failures are looked upon with scorn. Which brings me back to Francis Fukuyama. He was wrong to think that the forces of LIBERAL DEMOCRACY and the market economy would inevitably triumph, and that there could be no turning back. But he was not wrong to believe that democracy and market forces are essential to a just and prosperous world. The economic crisis, created largely by AMERICA'S BEHAVIOUR, has done more damage to these fundamental values than any TOTALITARIAN REGIME ever could have. Perhaps it is true that THE WORLD is heading toward THE END OF HISTORY, but it is now sailing against the wind, on a course we set ourselves."

Stiglitz hit 6 key words in the above paragraph (my comments in blue):

1. Still the richest (thanks to loads of debt).

2. America's behaviour (a blind electorate satiated with steroids induced asset inflation and money illusion + a government that is more of a wolf helping the Wall Street fellow wolves to the chickens).

3. A liberal democracy that has become a two-headed party oligopoly.

4. Any totalitarian regime (has one already entered the White House by stealth?)

5. The world (which world? The politician's world, the media's world or the real world?)

6. The end of history (Quite rightly, we are at the end of a long and dramatic history which is the culmination of our mistakes and the false delusion that we can solve the problems of under-regulated capitalism with socialist fascism i.e. state and privates assets merged under one authority.)

Ironically, the most economically "successful" posterboy for the world today is also one of the most totalitarian states in the world (perhaps fourth ranking after North Korea, Burma and Iran).

What Professor Stiglitz forgot to say or implied by not saying is that world politicians today (from the developing and developed countries) are quite likely to take that emerging country's model as a blue print for development.

We are now in an end game when the leading players, frustrated by the severity of the global financial crisis and by the lack of viable long-term economic solutions, decide to change the rules and declare themselves winners.