Sunday, September 21, 2008

MOHAMED JAWHAR HASSAN: Our Achilles heel: the politics, not the economics

Soaring oil and food prices have caused untold suffering to the world’s poor.
Soaring oil and food prices have caused untold suffering to the world’s poor.

AMERICA is sneezing, and the rest of the world is catching cold. Unlike the financial crisis of the late 1990s, this time around it is not the developing economies of East Asia but the world's largest developed economy that is spreading the bug. And the United States is prescribing for itself the very medicine that it flayed Asian economies for. It is resorting to the grandmother of all bailouts.

The current financial crisis is unlikely to be as traumatic as the last one a decade ago for East Asia. Its impact however is far more widespread. Markets are reeling not only in Asia but in Europe and other continents as well. Recent gains in world global bourses caused by a proposed gigantic rescue plan in the US do not detract from the fundamental vulnerability of the global financial system.

The problem of course is much more than tumbling share prices across the globe triggered by the bankruptcy of Lehman Brothers and the cascading effects on other financial institutions and markets.

A heavy economic pall has descended over the globe. Inflation is one of the more prominent features of this landscape. A Morgan Stanley report in June pointed out that no less than 50 countries containing half the world's population suffer from double-digit inflation. Prices of oil and food account for a substantial portion of the inflation. As usual, the poor suffer the most.

The greatest fear is low growth combined with high inflation. The International Monetary Fund predicts that world economic growth this year will fall significantly from five per cent last year to 4.1 per cent this year. Growth is expected to decline even further to 3.9 per cent in 2009. Developing economies, including the most dynamic such China and India, will be affected.
Growth trajectories are also generally flat across Western Europe. In Japan, the economy has contracted and is believed to be at or near recession. In Britain, there is talk of another recession after 15 years.

All this adds up to an extremely negative external environment for the Malaysian economy this year and the next. Malaysia is exposed to imported inflation in the form of high energy and commodity prices, the prospect of declining exports to major trading destinations such as the United States, Japan and Europe, currency depreciation against a rebounding US dollar, and a significant fall in the shares market reflecting global sentiment.

For the next 18 months or so at least, until the global economy recovers, the government will find its goal of stimulating economic growth more challenging. It will have to work harder than ever to attract foreign and domestic investment in the face of adverse sentiment, create new jobs and sustain as well as improve living standards.

As economic growth will be moderate for a developing economy, it will also find it more challenging to carry out affirmative action programmes for the poor and to close income divides within and across ethnic groups and regions.

Fortunately for the Malaysian economy however, it has some strengths.

Despite the negative external environment, the country's exports surged strongly in July by 25.4 per cent year-on-year, the highest in four years. Exports were at a new high of RM63.36 billion. Total trade expanded by 20.6 per cent from July last year to RM112.2 billion.

Contrary to claims by some detractors about a decline, Malaysia has in fact become more competitive globally as ranked by the IMD's World Competitiveness Yearbook. Malaysia climbed four places, from 23rd in 2007 to 19th this year.

Malaysia also leapt five places in the World Bank's annual country ranking for ease of doing business, from 25th in the 2008 report to 20th in the 2009 report. This is a credit to the government's Pemudah initiative.

While Malaysia is still heavily export and trade dependent, domestic demand accounts for 58.5 per cent of its GDP.

The government has also succeeded in diversifying export markets. The US accounted for only 15.6 per cent of the country's exports last year. The country can also leverage on its attraction for Gulf Cooperation Council funds and its strengths as a hub for Islamic finance.

Though it faces some serious challenges, Malaysia's Achilles heel in responding to the current global situation is not its economics. Rather it is its politics. The damage done to the credibility of some of its key institutions, constant talk of crossovers and toppling the Barisan Nasional government, and Umno and the BN's own internal problems are creating an air of uncertainty and loss of confidence.

In the MIER's CEO Confidence Index report recently, no less than 87 per cent of the 235 CEOs polled said that current political uncertainties had a negative impact on domestic investment, 97 per cent stated it dampened foreign investments and 90 per cent said it undermined consumer confidence.

Political parties could therefore do the country and its citizens great service if they ceased destabilising the situation and moderated their intense politicking.

Pakatan Rakyat has five state governments to run and perform as a responsible opposition in Parliament until the next general election, when it can make another bid for power.

Umno and the BN can cut down on internal dissension and curb public displays of disagreement. They must address not just leadership issues but focus even more importantly on fundamental reform to restore their relevance and regain their credibility. Drawing inspiration from their founding ideals, aspirations and spirit of selfless service would not be a bad place to begin.

Parties across the political divide have a common responsibility to help the country and government overcome the current grave economic challenges, rather than erode its capacity to respond.

They can do more to be a part of the solution and less a part of the problem.

* Tan Sri Mohamed Jawhar Hassan is chairman and CEO of ISIS Malaysia. The views here are his own.

source: Our Achilles heel: the politics, not the economics
New Straits Times, Malaysia