The Lean and Mean Machine Pte Ltd Monthly Income Statement September 2009

The second monthly income statement comes as a shock even to myself. As I monitor it almost daily, even I wondered if the Lean and Mean Machine could manage to scrape through with a profit for this month and fortunately it has.

I have made additional investments as you can see from the investment fees. Next month, when I disclose the quarterly balance sheet, you will have a better idea of what the company's portfolio size is as well as its rough performance.

Compared to the previous month, the food expenditure increased from RM582 to RM697. This is totally unacceptable as it exceeds the monthly budgeted amount of RM160 per week, which translates to RM686 for the 30 days of this month. More discipline is definitely needed to curb this excessive dining spree.

Fuel expenditure has maintained within the region of RM160, but this is still on the high side. Hopefully fuel expenditure can be reduced in coming months to push the cost down further.

You will see several new items in this month's income statement. First, the water bill is at RM27, the handphone bill is at a whopping RM170. This is because it includes the previous month's handphone bill.

Because of all these excessive unrecorded expenditure from the previous month, the net profit margin has tumbled to a meagre 2.83%. Thus, the NAV per share still managed inch up slightly.

The Lean and Mean Machine Pte Ltd Copyright © 2009

Income Statement	September 2009
	Total
Interest Income	-
Dividend Income	-
Net gain on quoted disposal of investments	-
Revenue	2,215.70
Less: Operating Expenses
Food	697.18
House rent	330.00
Fuel	158.73
Parking	148.00
Books	174.70
Electricity Bill	61.50
Handphone Bill	170.00
Internet Bill	55.00
Water Bill	27.00
Futsal	10.00
Investment Fees	14.54
Others	306.35
Profit before tax	62.70
Income tax expense	-
Profit after tax	62.70
Net Income	62.70
Basic Earnings Per Share	0.0078
Net Profit Margin	2.83%
Return on Equity	0.73%
NAV	1.0169

Economics @ Home © Volume 1 Issue 10

Output and Growth - Part 3

Dividing the topic of output and growth into several parts was not the initial intention. Ordinarily, I would have preferred to leave a topic to one part alone. However, as I began typing, I realized that there was actually more content than I thought. I also understand that it is difficult to finish a long article in one reading. In this third part, I will exhibit how leakages are detrimental to growth prospects of our resources at the macro and micro level.

Conventional economics suggest that growth comes from investment, and investment is a result of savings. Investment is a very broad term and the things that come to mind when we think about investment are things like stocks and capital expenditure. To be very specific, investment is the postponement of current consumption for future gains. A typical individual would save a portion of his income, usually in the bank and earn the interest offered on deposits until he needs the money. What began as perhaps RM1000 in savings could grow to RM1030 after a year with a 3% growth rate and RM1060.90 after two years. If he had not postpone his consumption, then he can only purchase up to RM1000 worth of products. The idea of growing resources seems easy enough.

People who have studied Keynesian theory would surely recognize that the multiplier of national income is a function of marginal propensity to save. The key here is to achieve maximum growth rate. Is 3% a high growth rate? Before we explore how to achieve high growth rates, we should first take a look at some examples of how growth can be achieved (or lost).

Malaysia was once known as one of the Asian Tiger economies. This is a very misleading statement. Upon a closer look at the underlying factors leading to growth in national income, we will realize that while it is true that our national income did grow at a rapid rate, we have failed terribly at growing our resources. As luck would have it, our country was bestowed riches in the form of natural resources. We are net exporters of crude oil, palm oil and rubber. As technology inevitably advances, we were able to harvest these resources more efficiently and in larger amounts. This has thus increased our national income or as we call it, output.

As mentioned before, growth is a function of investment. While Malaysia happily constructed mega projects all over the country and allowed its proceeds to "leak" through the system in terms of corruption and handouts, we forgot to save. Our country's meek attempts at investment included projects like the Multimedia Super Corridor and the poor excuse of an international airport that is in the middle of the jungle. Other excuses of investments include the billions of dollars spent on the Port Klang Free Zone (PKFZ) and attempts to increase the value-added-ness of our country's output.

I will just throw it out there that a country like India, which has one of the highest poverty rates in the world (at 50%), has a much larger network of fibre optics per square area than our country. While Malaysia has never stopped talking about high speed internet, our broadband champion, Streamyx, has yet to be able to provide consistent service even with its copper cables. When are we going to migrate to fibre optics and if we do, will it be just as inefficient? I wonder if such inefficiencies would have been minimized if there wasn't protectionism in the telecommunications industry.

While infrastructure is one way of investing, human capital is another great area to invest in. Singapore is a success story for human capital investment. Other than handouts to unqualified students, our government has also "invested" in the best technology for a select group of schools that were conveniently renamed as "smart schools". Brand new high-end computer equipment were bestowed upon these schools, funds were granted to construct labs to house these equipment and endless scholarships were awarded to the inadequate to study in these schools. When can we learn that there is no way that we can become world champions in golf, tennis or soccer by using Tiger Woods's clubs, Roger Federer's rackets, or Lionel Messi's boots in their respective sports? Giving a caveman a computer is not going to create an IT expert.

What's worse is that not only are the high-end equipment under-utilized, but they were also procured from "government contractors" who had to "bid" to supply these equipment to the schools. Of course the definition of bidding is debatable, especially in a country which refuses to keep up with the times in teaching English effectively. Goodness knows that these equipment were obtained at exorbitant prices that are way above the market price. A simple inquiry to any school will let you know that the schools are not allowed by the Ministry of Education to purchase computers from other contractors except the ones appointed by the government in the name of standardization. And I thought that the concept of buying wholesale would entail discounts that are derived from bargaining power. The obvious flaw in this system is the lack of competition.

These leakages are too common in the government bureaucracy. Not only have our resources been misallocated in terms of investment, but most of our savings are foregone via these leakages. Not only has our country failed to invest efficiently but also simply failed to save. Thus, that is why I say it is misleading to call Malaysia an Asian Tiger. We are perhaps a complacent sloth that failed to forage and store food for the winter. We have grown fat and content by exhibiting income growth without growing our resource base. We merely consumed more by producing more efficiently. How high can you build your tower if you do not build a wide base?

To apply these concepts at the micro-level, I will focus only on income for the time being. While saving our money in terms of fixed deposits (FD) is a sure way to grow income, it is probably obvious to you by now that 3% is meagre. Taking into account average expected inflation of 5%, your real returns from FD would be negative. FD is a sure way of getting poor slowly but surely. This is an example of fund misallocation.

In worse cases, we ourselves spend unnecessarily in unproductive goods and services and forego growth completely. Not all these expenditures are deliberate. Just this month, I spent RM200 on my examination fees and other smaller amounts for car-servicing etc. While these expenditures are "necessary", they function as leakages because I will not be able to invest them for future gains. The money is lost forever. Compounded at about 5% per annum, RM200 would become RM325 in just ten years, a growth of almost 63%.

While these leakages are unavoidable, we can choose to minimize those that are. For example, unnecessary shopping and fine dining. I am not forbidding myself from the occasional indulgence, but what I am saying is that skipping one or two of these expenditures per month can grow your resources quickly if invested in the right places.

As a final word, this issue of Economics @ Home dwelt upon the "do-nots" of saving and investing. What may seem like an unproductive activity is intended to create an awareness of the detriments of leakages. We often condemn the leakages that result from the government's misallocations, but also tend to overlook our own leakages. It is important to build a strong self-awareness when it comes to allocating our resources. Next week, as a conclusion, I will try to be more productive in exploring the possible ways in which we can grow our output/income more efficiently.

Economics @ Home © Volume 1 Issue 9

Output and Growth - Part 2

Last week, we discussed what output means for an economy and for an individual and also the importance of maximizing output. To recap, the output for an economy is a measure of income for all the participants in the economy, and I do not have to elaborate on the importance of income to you.

Things are a bit more complicated when it comes to estimating output for an individual. While the literal meaning of output implies that a product or a service that is provided, the value of the goods produced would seem intangible and difficult to estimate. However, it is sufficient to say that the salary paid to that person for his services is the value of his output, so says conventional economic theory.

Carrying this assumption with us, it is then obvious that not only do we want to maximize output, but also to grow the amount of output. There are two ways to grow output and I briefly touched one of the methods in last week's issue.

Efficiency is key to maximize output with a set of given resources. For an economy, its resources include money, natural resources, human capital and some other things that may or may not exist. It is easy to see that our country is far from being efficient. A quick look in any newspaper would make us sick to the bone with respect to how our hard-earned money is being wasted everyday. I am referring to taxpayers money that is spent on great big white elephants. I will spare you the torture of reliving the horrors of how our blood, sweat and tears are being wasted. Corruption is still rampant. Rent-seeking is the chief wealth-building activity of the rich bumiputeras in this country. To add to our pains, we are told that this is the evidence that the NEP is working.

Pointing out inefficiencies is easy. Explaining why these inefficiencies exist could even be entertaining, but most definitely unproductive. I will only get all emotional about how poorly the government is allocating resources. Keynes was right that in the short run, market failure is inevitable, thus justifying government intervention. In Malaysia, government intervention leads to poorer efficiencies than if we had let market forces steer our course with its possible failures. This part, Keynes was wrong. He assumed that all governments could allocate resources rationally and efficiently for the greater good. If only...

So to maintain my efficiency and not dwell on fruitless efforts, perhaps I can share some light on how we can improve efficiency and hope that someone who knows someone who knows someone will read this and shares it with someone who knows someone who might actually have the guts and intelligence to implement it. I say guts because some of the problems that need to be tackled are so deeply rooted within our society that any change would be severely unpopular and cost the government even more votes in future elections.

Anyone who has had a brief encounter with economics, even at the secondary school level can tell you that efficiency is derived from competition. Only one word, "competition". When we learn about perfectly competitive markets, we learn that every supplier in the market is a price taker. That is to say, the suppliers have no pricing power and can only sell their goods at the current market price. To put it in context, let us begin by examining students. If all students understood that there was no such thing as a free lunch, don't you think they would work hard? What is this free lunch that I am talking about? Well, for starters, easily available university entrance via matriculation courses and the quota system for scholarships for students who are immensely less deserving than others. If bumiputera students keep getting handouts, what is their incentive to become effective?

The buck doesn't stop there. When the students graduate from universities, because of the poor foundation that was caused by the handouts given by the government, they cannot find jobs in the private sector. So what does the government do with all the unqualified and unemployed graduates? Create jobs for them in the public sector. MORE handouts! This inevitably leads to the promotion of these graduates to decision-making positions and what happens when someone unqualified is placed in a position of power? Well, if you can't decide what is good or bad, what do you do? Pick one that you think works out the best for yourself. So what is best for the decision-maker is how much money he can pocket through whatever he has to decide on.

So now, some of the good and beneficial projects do not get approved because some unqualified jackass was given a place in university and subsequently a decision-making job only knows how to evaluate project based on how much rent he is going to receive for approving the project.

In short, not all the best students are given the necessary support, not all the best graduates are trained to do the important jobs that require making tough decisions and not all the best ideas are utilized. This is clear evidence of sheer inefficiency. Competitive markets will leave no room for pretenders. If you do not have the best abilities, services, ideas, products, or grades, you are redundant and will be subsequently substituted. Competition is an automated system to encourage effectiveness.

Extrapolating the idea of perfectly competitive markets to the individual at a micro-level entails the same conclusions. However, advocating this dog-eat-dog culture surely isn't perfect. This is where Keynes comes in. Markets do fail in the short run. Competing for oneself sometimes ignores the bigger picture of positive and negative externalities. This is why Keynes calls for government intervention. Or else, who would build the roads and the street lamps? Education would be extremely costly. Smoking and drinking would be rampant without regulation. Is that what we want? So of course, competition has to include common sense, bearing in mind the greater good. This is how effectiveness is achieved, building on each others' achievements to climb greater heights.

Next week, I will deal with the other factor of output growth, which is via growing our resources. Briefly, output is a product of resources and efficiency. While we have dealt with how to improve efficiency, so we will move on to the less intuitive idea of growing resources in order to multiply output growth. In short, we hope to build a bigger base so that we can build higher. We will explore how we can widen our base next week.

Economics @ Home © Volume 1 Issue 8

Output and Growth - Part 1

Output and economic growth is one of the longest standing issues in economics. The two innocent concepts seem simple enough. The words mean exactly what you think they mean, or is it? While we can grasp their English meanings intuitively, I would like to formalize our thinking about output and growth and explain why these concepts are important to us in a macro and more importantly, in a micro scale.

In conventional economics, output is usually related to Gross Domestic Product (GDP), or some other derived variant like real GDP, real GDP per capita, GNI, PPP-adjusted GDP and the list goes on. I am not going to go too much into detail on how these figures are calculated but it suffices to say that they are an estimate of how much goods (and services) are produced by an economy. It can also measure the income of an economy as people get paid for what they produce. This seems to make more sense and easier to grasp as a concept because it is somewhat difficult to quantify the value of certain goods and especially services produced.

Just with this definition alone, you can probably see why output is important to us. It is a measure of our income and last I checked, our income was our source of sustenance. Of course, we must remember that we are currently thinking about output in terms of a macro-economic scale. Knowing what output is seems innocent enough, but knowing how this output comes about is another monster altogether.

As I said, I will spare you the gore, but it is vital that I go through what is important when it comes to output. First of all, we have to agree that it is in our best interest to maximize output. It is all well and good to talk about how we should be environmental friendly and talk about conservation of resources but that only alludes to the point that I am getting to. Because of the goal of output maximizing, it is then vital to optimally allocate our resources. That is to say, minimize waste and maximize productive output with a predetermined allocated amount of resources. We must allocate our resources efficiently.

A simple comparison between Malaysia and Singapore will make the difference between the effectiveness of resources allocation glaring. In a previous issue of Economics @ Home, I explained that Singapore's national income per capita (a measure of output) has grown to more than triple that of Malaysia's within the span of 30 years. That was already assuming that both countries started with the same base. Why and how did this happen? Singapore's small size did help, but not because they had nowhere else to spend its money, but because it spent it in the right places. Singapore did not try to build the tallest buildings in the world. It wasn't enough for Malaysia to build one, but TWO tallest buildings, which are already forgotten. If only "Entrapment" was a super big hit. Maybe more people would have said, "Hey!!! Those are the twin towers!!". That was never to be, at least not in this parallel universe.

Going back to the point of resource allocation. If you looked at the export data of Malaysia and Singapore, you would be amazed that Singapore as a country exported more in terms of value compared to Malaysia. You must ask yourself, how does a small country that has nothing, export more than a country that has oil, palm oil, rubber and whatever else? Remember that we were once number ONE in the world for some of these products.

Of course the answer is a combination of 1001 reasons and things that the Singapore government did and the Malaysian government didn't do. Malaysians laugh at jokes made about the Singapore government. Very few Singaporeans laugh at jokes made about the Malaysian government simply because those jokes are not made up. They are true stories that are exceptionally hilarious! Just the other day, OC Phang of PKFZ fame said that she did not understand the term cash flow projection. So I went around asking 12-15 year-olds what they thought cash flow projection meant. All of them got the idea albeit not the exact definition correct.

While I am not going to go through the 1001 reasons that I mentioned, I will elaborate on a few important points. Singapore stressed on the importance of providing value-added services. Exporting raw materials and commodities have no value-added-ness. The price of these goods are determined by the world market. If crude oil is USD80 today, we can only sell it at USD80. By providing exclusive value-added services, we would have differentiated our products from the homogeneous commodities and thus give ourselves pricing power. Consequently, pricing power raises our export value and income. Now that I have said it, the idea seems trivial. Why do we not provide value-added service? To add value to any good and service, there has to be invention and innovation, which is a by-product of education. As long as our education system is filled with potholes and bumps, there is no way that Malaysia can be a champion of value-added-ness.

On a macro scale, output is a determinant of our income. While it is fun and games to talk about output on a macro scale, thinking about it seems boring because when we really examine the issue, it is hard to see how this affects us as individuals. So what if my country does well or not? All I have to do is to make sure I work hard or smart or however you want to work, and earn enough money for myself and my family and my noble goals. Why do I need to bother about output?

Perhaps the link from the individual to an economy is hard to see, as the performance of the economy is a mere aggregation of individual performances. Actually, the same concepts apply to the individual as well. In fact, this concept of maximizing output is so inherent in our everyday lives that we take it for granted. Even a 12 year-old can tell you that he wants the most bang for his buck, however unethical it is for a 12 year-old to be talking about obtaining banging for his buck.

We commonly think of material goods as resources. Day in and day out, we try to get the most value with our money. Although it may be common sense, I will still say it (because common sense is ever so uncommon these days): time is also another important resource. Everyone has 24 hours each day and it is only too cliched to say that we should make the best of the time that we have. We hear our parents tell us that all the time. While studying does give us good grades and perhaps a well-paying job, it probably isn't fun. So then, how do we really make the best of our time? Maybe I will attempt an article on this topic in a future issue.

Another important intangible resource is our mind. I have seen brilliant ideas go to waste simply because they were not put into action. My meek attempt at improving the output of my mind is to contribute a weekly newsletter that has a miniscule readership.

Going back to the main points, the idea of maximizing productive output is almost intuitive. I say this because we can always construct another bridge to nowhere or a building that is taller than the currently tallest building in the world and this would still contribute to national income. That is why the keyword here is "productive". If left completely to demand and supply, most of the goods that are produced would only be those that provide maximum utility. It is the role of the government to provide incentives for allocating resources to productive output.

What then, is productive output? To put it simply, they are products that can help generate growth. Growth not only allows us to produce more output in absolute terms, but ideally, it should allow us to produce more output with the same amount of resources that is to say, improve efficiency. I will talk more about growth, its importance, and perhaps attempt to figure out how to obtain it in the second part of this article next week. Until then, I wish that you can find the most bang for your buck.

Economics @ Home © Volume 1 Issue 7

Policonomic Ideals

Economists are not very creative people. I mean, they came up with terms like utility to mean satisfaction. I am about to continue that trend. While Political Economics relates to studies regarding the politics of economics; policonomics, I regard, as being related to the the economics of politics. The intertwining of terms may seem confusing and probably allude to the fact that I have created a new word just for the fun of it. But then again, if it isn't fun, why do it?

First of all, political economics is related to the decision making by authorities regarding the allocation of resources. Basically, it studies the the government's actions regarding the country's economic decisions. Without going too much into detail, political economics dwells on the role of the government in allocating resources in an economy.

What I will discuss today is probably not so different from that, rather, I will focus on the economics of the decisions of policymakers, more specifically,what are the policonomical ideals and how we may achieve them. Once again, I won't pretend to know how to run a country, but I think it suffices to have the ability to analyze the costs and benefits of an action or the outcomes of an action.

Anyone who has kept himself (without loss of generality in terms of gender) abreast with regards to the issues surrounding Malaysia will find it too easy to criticize the government and call for action or change or whatever it is. While many realize that the delapidated state of our country today is not a result of today's government but the leaders of the past and their mismanagement (to put it mildly) of the country, I find it disturbing because what these people are doing can be compared to blaming a son for his father's crimes. I will leave this topic at that and go back to what I intend to cover, that is what are our policonomic ideals and how we can achieve them.

I am not about to analyze every single policy in detail. I would like to focus on three key areas: education, healthcare and security. I chose these three specific areas simply because they tend to have positive externalities that extend the furthest. The benefits of developing these areas will naturally spillover to other areas and because of this, we can afford to assume that it is quite possibly the most efficient way to spend the people's money.

I touched a little bit on education in Volume 1 Issue 1. To recap, I asserted that the way to promote quality education was to significantly hike the salary of teachers and the trainers of teachers. This may seem absurd at first, but the idea behind it is rather simple. In fact, I recommend the policy of increasing wages significantly in these three key areas. Let us examine the effects on them one by one.

Of course, many people can argue that a sudden surge in pay of teachers is unwarranted and most definitely undeserving. Many teachers today are not only unable to teach science and mathematics in English, they sometimes impart the wrong facts to the students. I consider that a minor flaw. What is worse is that the students are taught the wrong attitude. Factual errors happen all the time and can be corrected by reading exposure. Teaching a student the wrong attitude is like baking a cookie with the wrong mould. Once its baked, it's almost impossible to reshape it. Because of this, it is clear that education is a vital sector to focus a country's efforts on.

We don't like to admit it but we all know that money is one of the greatest motivators. I am actually crazy enough to advocate a simple increase in the wages of teachers. As far as I understand, the government wages are paid based on the number of years people spend studying in university. So, doctors get paid more because they spend at least five years in university. Similarly, keeping teachers in university longer can only be beneficial. The standard of teachers today simply call for more training. Of course the teachers of teachers have to be competent as well. The best way to attract competent people into an industry is simply to offer attractive wages. The most obvious examples today are Real Madrid and Manchester City. The message is loud and clear: money is king!

Because of the increase in wages, more qualified (truly qualified, not just on paper) people will strive to become teachers. After all, being a teacher is a noble profession. No one is going to look down on someone because he is a teacher. The only reason bright students steer away from teaching and go into medicine, law and accounting is simply because of wages. I mean, seriously, why would anyone become a lawyer? The cause and effect is clear as the blue skies.

I don't need to elaborate the importance of healthcare. It is sufficient to note that better quality of living can only improve productivity and all the other nice things about any country.

As I said, the case is similar in healthcare. We all know how well-paid doctors are. However, doctors are not the only people who work in the healthcare industry. The often forgotten and unsung heroes, the biomedical scientists need to be given much better incentives. While the government has provided (or tried to provide) state of the art infrastructure everywhere, it fails to see that these facilities are clearly underutilized. Our country is great at boasting of having the most high tech corridor in the world and what not, but we forget to ask, what is the point of a corridor that no one uses?

Similarly, to attract great medical talents to Malaysia, our country must not be stingy on research grants to pull in the talents from all over Asia. Singapore is benefiting greatly from its generosity to sponsor research personnel. I am very certain that a stone's throw would be sufficient to pick out eager and talented researchers from China or India or some other "poor" country who can only cry about the lack of opportunities. Our selfish pea brains often ask, "Why invest in world class infrastructure and let foreigners use them?". First, it is obvious that giving an ordinary driver an F1 car is not only dangerous, but irresponsible. We simply do not have the expertise to fully utilize the infrastructure our government has strived to offer. Second, what our government always overlooks (or pretends to) are positive externalities. A simple question such as, "Why do we try to send our children overseas?" would lead us to the conclusion that we NEED foreign expertise. All this talk about how we MUST develop local talent and we choose to ignore the simple truth. Why not bring the foreign talents here? If Malaysia can establish itself as a healthcare hub of the world, the spill-over benefits for locals will be forgone conclusion.

Security is a very controversial issue in Malaysia. But I guess this is the case in every part of the world these days. I will not delve into the intricacies of the balance between regulation and freedom. Just like the indifference curve, there are many points on the balance that can provide the same amount of utility that can be derived from the security for a particular country. The issue is to maximize this utility. In this case, the cure happens to be the problem. Underpaying security personnel is like prescribing an incomplete schedule of antibiotics. Not only does the illness not go away, but in many cases, the bacteria become stronger.

Imagine yourself being a police officer who is underpaid. While it is all good and right to argue from the moral perspective but if your family or survival depended on money, would you not accept bribes if you could get away with it. Some people can even justify that it is only right.

There are three very strong benefits why increasing the wages of security personnel. First and similar to the previous two cases, we will get more competent personnel in the industry. It is only beneficial to have efficient workers in the police force. Imagine having bright detectives who solve crimes at unequalled success rates and police officers that are actually strong and brave enough to overpower the hoodlums that control our dark alleys. Will crime still be rampant in Malaysia? Second, paying security personnel high wages will force bribe offerers to up the ante as well. Imagine offering a bribe of RM50 to a police officer who earns RM10 000 per month. While money is still money, sometimes RM50 is not worth the risk. This brings us to our third point. By having high wages, the police will have too much to lose if they are caught receiving bribes. Now, their survival instinct will work in the people's favor. With a family to fend for, is wasting a perfectly noble and high paying job worth the risk? It is clear that the wage increase should not be limited only to the police force. I will leave how a wage increase can benefit the security industry as whole to your imagination.

Finally, I would like to reiterate why I chose to focus on these three areas. The positive externalities of having world class education, healthcare and security are practically unlimited. World class students bring world class brains and productivity across all industries. World class health care provides an enviable quality of life that will inevitably attract foreign investment. World class security and corruption standards entail the ease of conducting business in Malaysia. We often hear the Prime Minister preach about thinking "first world". Well, here is first world thinking for you. Please stop throwing money at useless submarines and other ridiculous mega projects and focus on what's most important for our country. There is no need for cute catchy names like 1Malaysia to label our people. Let's not be sidetracked about the issues that cloud the real matter at hand. Focus, and we can all prosper.