WE all grew up listening to nursery rhymes.
We know of course that these tales often hold moralistic lessons, even if satirically
so. Remember that good egg, Humpty Dumpty. He sat on the fence, not being able
to decide between one side or another. Then he fell… and all the king's horses
and all the king's men couldn't put Humpty Dumpty together again. We are hopefully
not that fragile, but we do need to choose the right side.
Having
said that, the rhyme that anchors the editorial piece is the tale of Old Mother
Hubbard, who went to the cupboard and found it bare. For a number of European
governments — notably Greece, but also Portugal and Ireland, potentially Spain,
Italy and even France — must be feeling like Old Mother Hubbard. Their
populations demand they keep doling out benefits, and do so without undertaking
deep structural reforms. They fear the same reforms that we in Asia (from South
Korea to Indonesia) had to endure from our own 1997-98 crises: the very reforms
that helped us emerge stronger.
This
unresolved European crisis is potentially infectious because the world economy
is nowhere near as decoupled as we wish.
Yes,
the share of the global economy has shifted dramatically: in 2007, the European
Union (EU), North America, and Japan accounted for more than 70% of the world
economy. By 2011, they accounted for less than 60%. The new economic order may be
happening faster than we expected but at this scale, around three-quarters of
all trade still touches these troubled mature economies somewhere along the
journey.
Worse
still, the European (and to an extent, the American) crisis is also a
persistent one. My colleagues David Rhodes and Daniel Stelter have distilled
three underlying factors that act as a drag on economic growth in the developed
world. Let's remind ourselves of these:
·
Debt.
The sustained boom over the last 30 years was substantially driven by debt.
Growth in real consumption outstripped growth in real wages: The party could
never have gone on forever. In the US, between 1980 and 2011, real hourly wages
grew by 5%; over the same period, per capita spending increased by 80%. The
boom was fuelled by debt. Over- indebtedness necessitates private households
turning to austerity after years of negative saving. The resulting lower
private demand in these economies will slow economic growth.
·
Uncompetitiveness.
Much of the EU runs a trade deficit with both Germany and China — €55 billion
and €156 billion, respectively, in 2011. Also last year, the US hit a record high
deficit of €212 billion (US$295 billion) with China. And despite a plunge in
China's trade balance caused by its biggest trade deficit in more than a decade
in February, there is no prospect of any of this changing in the long term
without very painful restructuring. The fundamental issue is the
uncompetitiveness of those economies, which have allowed their unit-labour
costs to balloon without the accompanying productivity gains. Take Southern
Europe. Blessed with a strong euro and low interest rates, these countries took
advantage of high inflation to trigger property booms and unsustainable
improvements to their standard of living. This will take time (and pain) to
unwind.
·
Demographics.
This is the issue that seems to get the least attention. All across the West,
there are aging populations whose retirement and health needs remain largely
unfunded. When Australia introduced universal pensions for men in 1909, the retirement
age was set several years beyond the typical life expectancy. Today, in most
Western economies, many retirees can expect to collect pensions for 20 years or
more. The proportion of people over age 64 may only be 7.6% on a global level, but
in the EU, it reached 17.4% in 2010, and is projected to reach 23.6% in 2030.
In Japan, it is already 22.7%, having nearly doubled from 11.9% since 1990. In
1950, the G7 dependency ratio of those over 65 to those of working age was 1:8.
By 2030, it will be 1:2 to 1:3. Adding a couple of years to the retirement age
simply will not resolve this problem.
Indeed,
there is much to fear for the state of the global economy. For much of the
West, growth will be slow, while for the East and the South, growth will be
much stronger — although given China's demographics, we do wonder whether that
nation will get old before it gets rich.
The
economic outlook for Malaysia is by no means a rosy one, even if we are in a good
neighbourhood of high-growth countries. Our economy is still largely
resource-based: oil, gas, crude palm oil. A significant part of our government
revenues is from royalties, taxes and dividends paid by the companies in these
sector. Should the prices of these commodities moderate further (and they have
already started to dip), we need leaders who can manage the economy through
such turbulence. We need leaders who can tighten spending in the right places
and yet continue to invest in the fundamentals that will make this
country
strong.
We
should accept that we will face tough economic headwinds globally and yet look
beyond the economic news. Many companies and countries have found ways to
prosper in spite of external challenges.
·
We
must make use of the crisis to make the tough changes, be it to force closure
of weak companies or business units or eradicate policies that have stymied
competitiveness. We successfully managed this back in 1998/99 when Bank Negara Malaysia
consolidated the local banking sector. It was painful but this has resulted in
local banks that are now regional champions
·
We
need to continue to invest for the long term, especially in making our social
and economic environment competitive, thus attracting investments and human
capital. A crisis often puts many talents into the available pool and
companies, even countries, should not waste the opportunity to acquire
previously unavailable workers. Singapore need not be the only hub for the
world's talents in Asean.
·
And
in the short to medium term, a downturn will throw up oversold but
fundamentally sound assets. We all know the maxim of "buying low, selling
high". The time to buy could well be upon us soon. Let's make sure we have
the capital to do so.
Doing
the above requires strength. It is much easier to keep going to the cupboard.
Our cupboard cannot sustain profligate spending or unending subsidies. It will
become bare soon. And then, when the best people and best assets become
available, we would be too poor to pick any of these up.
More
than ever, Malaysia needs responsible leadership. We are in a stronger position
now to do the right things than in 1997/98. And even then, we did the right
things. Nearly two decades on, let's make sure we emerge winners from this.
The
future, after all, belongs to those who take their destiny into their own
hands.
Vincent
Chin
Business & Investment Opportunities
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