Sunday, August 15, 2010

Economics @ Home © Volume 2 Issue 17

Doing it without FDI?? Are you kidding?

When I saw such a huge heading in the online version of the Star, I was extremely shocked. After reading through the whole article, I was totally appalled because at the start, I was thinking, “Who is this Gunasegaram to say that Malaysia can do it without FDI?” Then at the end, I found out that he is actually the Managing Editor of the Star. Why is a journalist pretending to be an economist? What will happen when the ignorant public start listening to people like Mr Gunasegaram here? Let’s have a read about what he said. I have included his whole article here:

I have included comments where I deemed it necessary.

Saturday July 31, 2010
10 ways of doing without FDI
A Question of Business
A STIR of sorts has been caused by the story that foreign direct investment (FDI) into the country for 2009 fell 81% to US$1.4bil (about RM4.5bil) from US$7.3bil (RM24bil).
But really it should not. If we want higher value-added, then labour-intensive industries are not our target. This is the area which many foreign investors like because they can get tremendous cost savings by using cheap labour in places like China, Vietnam etc.
If greater value-added is what we are after, then increasingly more investments have to be made in the services area – think tourism or education for instance. That does not necessarily need foreign investment – we can use local money.
We have plenty of money in Malaysia – as much as RM250bil at last count. That’s roughly the excess of deposits over loans sitting with the banks throughout the country.
All that money and nowhere to go within the country, is our problem. The money is not chasing investments in the country. And that can mean only one thing – there is a lack of opportunity here. (This is just a nice way of saying, the investments around are too poor, especially the investment climate that is totally not conducive and transparent)
The question then is what is it that is reducing business opportunities in Malaysia? Is there too much red tape? Are approvals not forthcoming? Are there too many equity strictures? Do we have sufficient workers?
FDI flows in any particular year into Malaysia pales in comparison to the amount of idle money in the system. What we have to do is to find ways to use that and we will more than mitigate the effects of reduced FDI. Here are 10 ways we can do that.
1) Shift from manufacturing to services. This is inevitable if you want to move towards higher income. Our manufacturing is low value-added. Much of it is low-end assembly. Things like tourism and education offer so much more opportunities and are already large contributors to foreign exchange savings; (This is utter rubbish. The way up is not a change in sectors. Just liberalize the economy and let the private sector and the market determine what are the goods that have demand, then those are the goods that will be produced. Furthermore, we can never do without manufacturing. The value-addedness per worker in the manufacturing sector is simply too large. Even in the advanced countries such as Germany still have a huge manufacturing sector)
2) Reduce export dependence. Old habits die hard and we must realise that we cannot continue to export ourselves out of trouble all the time. What we must do is create a market for ourselves right here. Get our consumers, who seem to have a lot of money, to spend – think restaurants, entertainment, lifestyle etc; (AGAIN, total rubbish. It is precisely this inward looking attitude that was “introduced” by our 4th Prime Minister that has caused so much destruction in our economy. Once again, the market should decide what to produce, what to export, and what to import. To produce domestically is not as simple as Mr Guna suggests. Take Proton for example. Without the subsidies that the government pays them, they would have gone bankrupt a long time ago. This protectionist measure has cost the Malaysian public billions of RM. Once again, just let the invisible hand decide where our money should go)
3) Identify and target the high growth areas. Old-style low-cost manufacturing is out. We need to identify some areas for good growth in the future and focus on this. We could easily become a quality education hub for the region for instance and benefit ourselves in the process. We could set aside areas for international universities to be set up; (Need I say it again? Liberalize the economy. Let the private sector decide where their money should be most efficiently spent. Mr Guna is simply a product of the Mahathir mentality. You think the people are too stupid to decide how to spend their money?)
4) Make incentives the same for both domestic and foreign investors. The days of giving more incentives, latitude and preference to foreign investors must end once and for all and the playing field levelled. In fact, greater encouragement and incentives must be given for the development of local enterprises based on the simple premise that we must help ourselves more; (Totally contradictory. In the first sentence, he says that we should make incentivest eh same for both domestic and foreign investors. Then in the third sentence, he asks for greater incentive for local enterprises. I think he has no idea what he is talking about anymore. Equal opportunity is best. There is no need to give “crutches” to Malaysians. We must inculcate this culture of competitiveness as soon as possible. Or else we will be sending our children to Indonesia to become their maids very soon)
5) Cut tariffs and taxes. Tariffs are non-competitive and cutting them increases competitiveness of all industries as they are able to source supplies and services which are the cheapest and of the best quality. Cutting taxes provides incentives for making money. Our taxes are still relatively high; (Then where is the government going to get money from? Hasn’t anyone told you that our budget deficit looks just a bit too much like Greece? Does blood really have to spill on the streets before someone realizes that Malaysia needs to wake up and wake up now?)
6) Do away with equity targets altogether. With bumiputra equity targets probably already met if we measure using the right techniques, there is no need to force non-bumiputra industries to continue to enter Ali Baba-style partnerships to do this, a highly inefficient process that benefits very few bumiputras in any case; (First smart thing he said so far. But who doesn’t know this already?)
7) Cut red tape. For all the lip service made to cutting red tape over the years, this is still very much with us. As long as officialdom puts all kinds of barriers in the way of genuine enterprise, expect enterprise to be hobbled; (This is number 7?? I already said this right at the start. Liberalize, liberalize, liberalize!!)
8) Do away with yearly renewal of licences. If you already have a licence, why renew it yearly? Why can’t it be given to you indefinitely unless you flout licence requirements? Doing away with licence approvals on a yearly basis helps cut bureaucracy; (Please see comments from number 7)
9) Improve educational standards. We can’t emphasise this enough and the steady decline in educational standards both at schools and universities has not, so far, elicited a strong enough response from the Government which will stop the slide; (All talk but no substance. Mr Guna, if you are so smart, perhaps you might give a concrete suggestion as to how to do this? If you can pretend to be an economist, maybe you can pretend to be a politician too? Simply promote a culture of meritocracy. Let people appreciate the value of competitiveness. Almost everything else will follow) and
10) Cut corruption. This insidious, widespread problem is eventually the cause for much bottleneck, inefficiency, higher costs and a downright hindrance to improving productivity at all levels. It’s incredible how little we have done to stop this scourge. (It’s incredible that Mr Guna has not said anything that we don’t know in such a long article. Maybe we need to give more voice to people who actually know what they are talking about)
Yes, FDI has dropped and it may continue to drop. But really, that’s not the end of the world. Anyway, it’s high time we reduced dependence on FDI and did something to pump up domestic investment instead. And there are many more imaginative ways to do that. (No FDI will be the end of Malaysia! Does Mr Guna realize that the benefits of FDI is not just limited to  investment? Does Mr Guna even relize what investment is?)
Managing editor P. Gunasegaram is amazed that some foreign companies are taxed by their home countries for the taxes they don’t pay here; in other words, the tax incentives given to them here goes to a foreign country instead. (I am amazed that people who have a "voice" do not take their privilege seriously)

Just some additional comments. Let me just list down A FEW of the benefits from FDI that CANNOT be obtained from just domestic investment. FDI allows transfer of technology. It allows foreign companies to bring in new technology that can provide value add to our local industries and workers. FDI allows foreign companies to bring in new training methods and foreign experts which can help train and improve productivity of our workers. FDI also creates a competitive business environment that forces local businesses to stay on their toes and not rest on their “laurels”, if any at all.

This article from Mr Guna is a simple example to show that we cannot simple believe every person who has a voice. What he wrote only appears intelligent on the surface. Any real economist will know that a developing country CANNOT survive without FDI. Only Mahathir will agree to something like what Mr Guna said.

If you think I have contributed nothing but a harsh criticism of Mr Guna, then the least that you can do is to note that Malaysia needs FDI and I have given you enough reasons why.

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