Borrowing GDP

First of all, Selamat Hari Raya, Maaf Zahir dan Batin to all. I’m back from my annual Ramadhan break, and fully determined to blog more regularly from now on.

An interesting data release yesterday has the economics profession completely bemused – Ireland has just restated their 2015 GDP growth to 26.3% (!) from an initial estimate of 7.8% (excerpt):

Ireland’s Economists Left Speechless by 26% Growth Figure

In three days, Jim Power is due in London to brief the British-Irish Trade Association on the state of the Irish economy. Now, he has no idea what he is going to say.

The economy grew 26 percent in 2015, officials from the Central Statistics Office told a stunned room full of economists and reporters in Dublin on Tuesday. Previously, they had estimated growth of 7.8 percent.

Investment Abroad Isn’t A Negative

It turns out direct investment abroad isn’t exactly a zero sum game (excerpt):

Do multinationals that expand abroad invest less at home?
Theodore H. Moran, Lindsay Oldenski, 31 October 2013

There is a long history of politicians accusing US MNCs of “shipping jobs overseas” when they invest outside the US…This line of attack implicitly assumes that expansion abroad by US firms substitutes for domestic expansion, harming US workers. It is equally possible that foreign expansion increases the productivity and market share of firms in a way that benefits US workers….

2012 International Investment Position

I won’t touch too much on the 2Q2013 balance of payments which came out with GDP to weeks ago, but I thought it might be better to concentrate on something more pertinent, and quite a bit easier to understand. For all the potential for the current account to turn negative (with all the attendant consequences), it’s still only one part of a bigger picture that is the international investment position of the country.

The 2012 IIP report came out at the same time as the BOP, and shows a negative position for Malaysia, for the first time since 2007 (RM millions):

Transfer Pricing: A Global Problem

From the December issue of Third World Resurgence comes this accessible, and potentially explosive, article (excerpt; warning: pdf link):

Transfer Pricing and Tax Evasion: Beyond the trans-Atlantic furore
Smitha Francis

...The charge facing US TNCs [sic] like Google, Amazon and Starbucks is that despite generating billions of dollars in revenue in the EU, they get away with paying little or no corporate income taxes in Europe by distributing their income between different tax jurisdictions. They use complex tax accounting strategies to exploit tax loopholes and differences in national corporate tax rates across Europe, which range from less than 10% to more than 30%...

I’m Back!! A Korean Digression

If you’re wondering on my silence over the past couple of weeks, I’ve been on a trip to Korea as part of the business delegation following the PM.

We were on very short notice for the trip, which necessitated some pretty frantic preparations. Nor was there time at all for sight seeing of any kind – I don’t think I moved more than a block from the hotel the whole time except for a short trip to the Korean Chamber of Commerce and Industry and obviously the airport. I barely saw my hotel room except to sleep.

Having said that, it was a pretty interesting trip – I made a lot of useful contacts, and learned a great deal.

I can’t talk about more than what was publicly revealed, but the trip did involve the creation of a Malaysia-Korea Business Council (on our part) and a Korea Malaysia Business Council (on the Korean side):

The role of these two bodies is to facilitate discussions on business matters between the private sector, beyond the existing government to government framework. The end goal is to basically double trade between the two countries by 2015, which is pretty ambitious even with the ASEAN-Korea FTA, considering it took a full ten years for it to double previously.

Korea is already Malaysia’s sixth largest trade partner and obviously has much to offer in terms of technical and engineering expertise. So what’s in it for the Koreans? Basically, a cheaper production base (not much of an advantage, I’d grant, compared to the alternatives), raw material availability (big one, this), and as a hub for the ASEAN region. We don’t have much of a domestic market yet, and it’s pretty much a toss-up whether all the incentives, regulations and other factors really matter to them.

So even though the PM came back with RM5 billion in investment commitments, long term we’ll have to show we’re a better bet than say Indonesia, where the Koreans have been investing in a big way and don’t mind saying so.

I’ll be writing more about this off and on (about a couple of times a year), as I’m rather deeply involved with this. So stay tuned.

The Determinants of FDI

Hot of the press at the NBER (abstract; emphasis added):

Determinants of Foreign Direct Investment

Empirical studies of bilateral foreign direct investment (FDI) activity show substantial differences in specifications with little agreement on the set of covariates that are (or should be) included. We use Bayesian statistical techniques that allow one to select from a large set of candidates those variables most likely to be determinants of FDI activity. The variables with consistently high inclusion probabilities are traditional gravity variables, cultural distance factors, parent-country per capita GDP, relative labor endowments, and regional trade agreements. Variables with little support for inclusion are multilateral trade openness, host country business costs, host-country infrastructure (including credit markets), and host-country institutions. Of particular note, our results suggest that many covariates found significant by previous studies are not robust.

Revisiting Vision 2020 (Updated)

This morning I attended a speech by Tun Mahathir on the Vision 2020 that he introduced way back in 1991. The event was organised by the Institute of Marketing Malaysia (freebie plug here) on the subject of Vision 2020 and what progress we’ve made in achieving its goals.

The grand old man of Malaysian politics was in fine fettle, cracking jokes, most of which were at his own expense (like, having to reread the Vision 2020 document because he couldn’t remember what was in it, and making constant references to mega projects).

I want to touch on a few things he mentioned in his speech, some good, some not so much.

Tok Pah: Focus On Domestic Investment

When the news broke a couple of months back about the dramatic fall in FDI to Malaysia in 2009, I thought most of the commentary was missing the point. The issue to me was poor investment as a whole over the past decade – low FDI was just symptomatic of a bigger problem. The Minister of International Trade and Industry is now signalling that the government recognises the real issues:

Foreign Direct Investments vs Domestic Investments

THE domestic debate on whether a country should focus on foreign direct investments (FDIs) or direct domestic investments (DDIs) is gaining traction as Malaysia moves towards increasing private investment under the 10th Malaysia Plan. Questions are being raised on the impact and contribution of FDIs versus domestic investments on the economy.

...Looking at these numbers, questions may be asked as to whether FDIs are necessary. Or can we ignore FDIs completely and depend only on domestic investments?

Outward Investment: EPF And UK Property

I was struck by the juxtaposition of the articles on property in yesterday’s Star. On the one hand we have news of oversupply and softening rental yields in the KLCC Condo market (here, here and here), in stark contrast with the news that the Employees Provident Fund (EPF), the country’s largest fund manager public or private, is committing to invest GBP1 billion in the UK:

Should EPF house our money in real estate abroad?
Sideways by ANITA GABRIEL

IT’S as predictable as clockwork.

Any move by the Employees Provident Fund (EPF), unless it’s glaringly positive, tends to set off warning sirens. Much of it has to do with the fact that the employed, 12.4 million of them, have no choice but to channel part of their hard-earned savings to the fund, hence the perceived-right to voice dissent or concern.

There’s also the “legacy stigma” that now and then rears its suspicious head, that the EPF, with its bursting wallet, may be acting in ways that are not in sync with the pillar on which it was set up almost two decades ago – to safeguard the people’s retirement monies.

So, when it was recently revealed that EPF plans to tuck some £1bil (or 1.2% of its total investable sum) primarily into commercial properties in UK, the vibes were multi-pitch.

Now obviously, with the number of stakeholders that EPF has there’s going to be questions – as in this article. But I happen to think it’s a pretty positive move (and the consensus agrees).

GNI And Outward FDI

etheorist is calling for a shift from measuring economic growth in terms of GDP to measuring it in terms of Gross National Income (GNI):

Some Theoretical Issues in the Malaysian Economy

…With the focus on the livelihood of Malaysia, the correct approach to measuring the improvement in the economy is the GNI or GNP, and not GDP. When the focus is on GDP, the focus tends to concentrate on foreign investors. With GNP, the focus will the opportunities that are being offered or made available to Malaysians, whether those opportunities are at home or abroad. GNP should be an integral part of the 1Malaysia concept, for it counts Malaysians whether they may be.

Outward FDI: A Practical Illustration

In the Star today:

Why Indons replaced M'sia as top palm oil producer?
Hanim Adnan

Malaysian palm oil sector must not lose its focus

INDONESIA’S taking over Malaysia as the world’s largest crude palm oil (CPO) producer in 2006 had often been associated with the mammoth size of the oil palm planted areas.

In fact, many however failed to comprehend that it was the much increased CPO production in the ensuing years – mainly in terms of higher fresh fruit bunches yield and oil extraction rates – that significantly set Indonesia far ahead from Malaysia’s continued stagnanting [sic] CPO production.

A (Mostly Correct) Historical View Of The Electrical & Electronics Trade In Malaysia

Dr Fong Chan Onn describes Malaysia’s historical love affair with E&E exports:

Reviving the golden goose

Malaysia has to go the extra mile to offer investors better terms than our competitors. The country must keep its ears to the ground and be open to the needs of new-wave entrepreneurs…

…Our love affair with electronics began in the early 1970s when Craig Barrett of Intel, who was scouting for a suitable location for his factory outside of the US, landed in Penang. Tun Dr Lim Chong Eu, then Chief Minister of Penang, heard that he was coming and gave immediate instructions that the roads from George Town to Bayan Lepas be tarred by the following day, ahead of Barrett’s site visit.

Sure enough, the very next day the roads were all ready, as workers toiled all night for the site inspection. So impressed was the CEO of Intel to the responsiveness of the government that he agreed without hesitation that Penang would be his first factory outside of the US.

The rest, as they say, is history.

What Determines FDI?

I’m kinda busy today, so not much commentary on this one, but in a new working paper, IMF researchers examine the determinants of FDI across a selection of advanced and developing countries (Malaysia included):

Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach
Walsh, James P & Yu, Jiangyan

Using a dataset which breaks down FDI flows into primary, secondary and tertiary sector investments and a GMM dynamic approach to address concerns about endogeneity, the paper analyzes various macroeconomic, developmental, and institutional/qualitative determinants of FDI in a sample of emerging market and developed economies. While FDI flows into the primary sector show little dependence on any of these variables, secondary and tertiary sector investments are affected in different ways by countries’ income levels and exchange rate valuation, as well as development indicators such as financial depth and school enrollment, and institutional factors such as judicial independence and labor market flexibility. Finally, we find that the effect of these factors often differs between advanced and emerging economies.

FDI Is Not The Issue; Investment Is

The Star’s Managing Editor has compiled a 10-point list of how to improve Malaysia’s investment climate:

10 ways of doing without FDI

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)...

...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.

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.

The Miti Blog On The FDI Issue

It reads like a FAQ (you can read it here). You may or may not believe the answers, but for a précis about the whole situation, it’s a good place to start.

What’s Behind The Drop In FDI?

You may have heard that inward FDI to Malaysia crashed in 2009 – Tony Pua has a nice roundup on his blog. You can read the full report from UNCTAD here.

As far as knowing the cause, I haven’t a clue…yet. There is of course the general drop in FDI across the globe in 2009 due to the global recession, but that doesn’t explain why Malaysia’s inward FDI dropped more than most. There’s also some interesting anomalies with the data that I really would want to know about before commenting on the situation, such as the massive increase (like, 100%+ a year) in both inward and outward FDI stocks from 2007-2009. This isn’t something that is confined to Malaysia – it runs across the global database.

As far as suspecting why inward FDI has been so poor lately, however, I have a few ideas.