SIMPLE THINGS FIRST - BUDGET AND SPENDING CUTS HERE AND THERE. REDUCE BORROWING! - Nik Zafri

Just a thought. (It's been quite sometime since I've written anything about Knowledge Based Economy - Mind you, I am NEITHER a qualified economist or forecaster, I would rather say that I am the DIY type of economist, the street smart style - so don’t take my views oo seriously especially when making formal economic decision..it’s just my personal views.)

I think the new Government efforts to improve Malaysia's economy would eventually result in a boost!! (Reduce corruption, declaration of wealth by high officials, reduce dependence on foreign workers, eliminate GST etc)

To start with, there have been efforts to improve market self-regulation, efficiency and innovation rather than worrying about inflation and asset bubbles (like what typical bankers would do) Supply and demand equilibrium (Keynes) should already become HISTORY. Capital markets will not work properly if financial element are not being looked at. We are also forgetting how Corporate Governance principles being discarded and the disasters that came afterwards were unimaginable (Enron)

But the ones that is really suffering is the common PEOPLE like me...

Apart from depending too much on FDI and trade volumes, efforts to focus on Malaysia’s domestic economy as a priority is not being neglected.

I remember reading some case studies involving Denmark and Ireland where both countries succeeded in reducing country's deficits; ironically according to Keynes probably this will cause recession; but to everyone's surprise, the economies of both countries got out of the recession very quickly. Malaysia can too and we are doing it by cutting the spending and other kinds of "cuts here and there".

But please, let the interest rates stay for now, do not lower or increase them FOR ANY REASON (unless our currency rates and exchange are stable and under control) - yeap, we might lose something along the way, but think of the long term positive impact. (just like the Tun M's legendary pegging of Ringgit against USD in the past). And Feds : no more "scaring forecast" about "hike in interest rates" - it will cause panic in the global stock market!

One of the reasons of Denmark and Ireland's success; I think; is the rejection; to the idea of borrowing to improve purchasing power of the people - well guess what? Many people save rather than spending!! Surprisingly, the cancellation of GST might improve the purchasing power..hence improve customer confidence..hence improve stock/share market!

So, the lesson that I’ve learnt is that the most difficult model is trying to "assume the economics of human behaviour" (Well, you can't!)

I also share the idea of "making more debts" are NOT working anymore, since it has been proven that "borrowing" HAD directly affecting the economy especially in the past : when politics are mixed with economical decisions and policies.

So, I think the "monetary funds entity" should be making some changes on their economic and financial perspectives - no more "Free Trade" and how this will so-called affect employment opportunity, capital and labour.

So, between less borrowing VS budget cuts...I go for budget cuts.

Many people still like to think “in the box” despite claims that “they are thinking out of the box” hahaha. Example that if A is done, B will follow and the "soothsayer shamans" will start forecasting that a certain country's economy will fall. There was not even sufficient space provided for the economy to prove itself first in a certain period of time (self-regulation)

Funny, recession forecasts many times have been proven WRONG. Take Brexit for example - many believes that the UK economy will be "very bad"...but UK’s economy has improved! So will countries leaving EU, it may have a short term impact but in the long run, look at "exiting" countries now? (Did it work?...YES)

Trust me, I "predict" some smart alecs will start forecasting negatively on the TPP issue if Malaysia decided to pull out. (kudos to US to take such action) So, if Brexit works good on UK’s current economy, TPP also works for the US, so Malaysia will also benefit as well if a pull-out from TPP is to happen.

Forecasters sometimes (not all) tend to safeguard their professionalism and the forecast must be made in line with politics - so, the results are : economic chaos. (well, forecasters are not always right! They are just doing their job by painting rosy pictures) Models; they used; NEVER predicted economical crisis or recession or depression. That's where problem will start. Need I say more?

Experiencing and learning from the bad past to create an economic model of reference can be good but by frequently using the past as “a gospel” it will definitely put the economy in a causality loop - "repeating the same mistake" over and over again.

One Cambridge study says the loss peaks at 3% of GDP early in the 2020s. The loss of GDP per head is smaller – never much more than 1% – and soon recovers (The Guardian) I think this is a brave economic model. Remember, GDP is NOT the only indicator of economics. We need more Cambridge-Oriented type of innovations.

I am looking into Austria, they seemed to do things their own way and it is working.

HAIL TO THE POWER OF KNOWLEDGE-BASED ECONOMY

Malaysia Economic Monitor, December 2015 - Immigrant Labour

Key Findings 

The Malaysian economy continues to expand, albeit at a slower pace.

• Growth is projected to be 4.7% in 2015, easing to 4.5% in 2016 and 2017.
• Private consumption growth is expected to moderate from 7.0% in 2014 to 5.3% in 2015 and 2016, affected by the slowdown in disposable income and a softer labour market, though unemployment remains low.
• Fixed investment is projected to continue expanding, driven by strong public infrastructure development, despite a downturn in the oil and gas sector
• The current account surplus is projected to narrow from 4.3% of GDP in 2014 to 2.5% of GDP in 2015, driven by low commodity prices.
• Malaysia has managed the downturn in commodity prices and the financial market volatility with an appropriate policy mix, notably exchange rate flexibility. 
• The authorities have allowed the Ringgit to nominally depreciate by 20.5% from January 2015 until December 8, 2015.
• The introduction of the Goods and Services Tax (GST) and the removal of fuel subsidies were timely and critical reforms implemented by the government. Fuel subsidy removals have led to fiscal savings of 0.9% of GDP, while GST collection is expected to amount to 2.3% of GDP in 2015.
• These measures partly compensated for lower oil related revenues that are projected to decline from 6% of GDP in 2014 (30% of total revenue) to 3.8% of GDP (19.7% of overall revenues) in 2015.
• Fiscal consolidation and resolving political issues can help reassure foreign investors and cope with heightened external vulnerability.

Immigrant labour plays a crucial role in Malaysia’s development. Immigrants – both high- and low-skilled – will be needed for the country to achieve high income status by 2020.

• Malaysia has the fourth largest number of migrants and the seventh highest ratio of migrants to total population in East Asia Pacific.
• There are 2.1 million registered immigrants in Malaysia and likely over 1 million undocumented immigrants, making up 15% of Malaysia’s workforce in 2014.
• As Malaysians have become more educated and seek out higher-skilled jobs, and as the labour market remains tight, immigrant labour has filled gaps in low- and mid-skilled jobs, which make up three quarters of all jobs in Malaysia.
• Econometric modeling suggests that a 10% net increase in low-skilled foreign workers may increase Malaysia’s GDP by as much as 1.1%.
• For every 10 new immigrant workers in a given state and sector, up to five new jobs may be created for Malaysians in that state and sector, two of them female.  
• Economic modelling suggests that a 10 percent net increase in low-skilled foreign workers may increase real GDP by up to 1.1 percent. 
• A 10% increase in immigration flow slightly increases the wages of Malaysians by 0.14%. Yet it significantly reduces salaries of immigrant workers already in the country by 3.94%.  A 10% increase in immigration flow reduces wages of the least-educated Malaysians, which represent 14% of the total labour force, by 0.74%.
• The fiscal burden is mainly borne by undocumented immigrants. Documented immigrants in Malaysia raise employment and wages of Malaysians which in turn contributes to public revenues. Also, levies pay for work permits of documented immigrant workers raising 1.2% of total revenues in 2014, they have to have health insurance which reduces the burden on the government.

Recommendations: Six possible directions for reform for Malaysia to strengthen its immigration system.

• Aligning the institutional and legislative framework with the human resource development strategy;
• Establishing an evidence-based system for identifying labour market shortages that immigrant labour can fill;
• Adopting a live-levy system that responds to labour market needs identified in the evidence-based system;
• Using a broader set of criteria to categorize immigrants (i.e. skills, experience) and defining approaches for their recruitment, employment, and repatriation;
• Strengthening monitoring and enforcement of immigration and labour regulations; and
• Investing in upskilling the unskilled workforce, and promoting productivity-enhancing technology.

(Full report : Please e-mail nikzafri@yahoo.com) 

MALAYSIAN ECONOMIC MONITOR - WORLD BANK

BOOSTING TRADE COMPETITIVENESS

Following the review of near-term developments and outlook, the thematic chapter of this Economic Monitor analyzes structural trends in trade competitiveness.

Trade competitiveness is measured as Malaysia’s ability to grow its exports and the domestic value-added embodied within them, leveraging foreign demand and knowledge to support its transformation to a high income nation.

Nearly 60 percent of value-added produced in Malaysia was ultimately consumed by foreigners in 2009 – one of the highest shares in the world.

The share of Malaysia’s GDP consumed in foreign markets includes the value-added of exporting firms and also of suppliers to export-oriented industries. Thus the actual significance of external demand to the Malaysian economy is higher than it appears from net exports (22 percent of GDP) or the output from externally-oriented industries (38 percent of GDP).

The export engine appears to have been faltering since before the Global Financial Crisis.

The share of exports of goods and services in Malaysia’s GDP declined by nearly 30 percentage points between 2005 and 2013. Unlike Thailand, Vietnam and Korea, which saw market shares expand, Malaysia’s share shrunk from 1.35 to 1.22 percent in that period. However, Malaysian exports have included a higher portion of domestic value-added, mitigating the impact of the decline in gross shares.

The decline in exports has been concentrated in Malaysia’s core export product segment – E&E products.

E&E exports as a share of GDP declined from about 38 percent between 2002 and 2004 to 18 percent in 2013, and Malaysia’s market share in the period declined from 5.25 percent to 3.74 percent of global E&E exports. Meanwhile, exports of commodities, and commodity-related manufactures such as petrochemicals expanded, but not enough to compensate the decline in E&E exports.

The domestic value-added of Malaysian E&E exports is relatively low due to limited domestic linkages.

Malaysia remains an integral part of the E&E global value chain, but at 44 percent the share of valueadded  in exports is relatively low. This is partly due to limited domestic linkages. Compared to other countries, the contribution from domestic intermediaries to the value-added of exports is only 7 percent in Malaysia compared to 31 percent in Korea. This finding is supported by analysis of enterprise survey data, which finds that multinationals in Malaysia source less than 40 percent of their inputs from domestic firms compared to 46 percent in Vietnam and 82 percent in China.

Exports of services have also lagged and remain an area of significant potential.

Malaysia has few services-exporting firms and at 12 percent of GDP services exports are below what would  be expected for a country at its level of income.

‘Behind the borders’ restrictions hinders export growth and limits linkages between domestic providers and export-oriented industries.

Although the Government has recently embarked on a liberalization of services  sectors, many are still relatively restrictive as measured by the World Bank’s Services Trade. Restrictiveness index and assessment of the burden of non-tariff measures. Professional and transport services are more restrictive on average than most countries in East Asia for example. A restrictive domestic environment reduces incentives for exporting, and for exporting firms to buy more domestic value-added. Barriers are not limited to ownership restrictions, but extend to licensing and regulations that limit domestic competition.

DOWNLOAD FULL REPORT HERE

Global economic power shifting to Asia

Wolfensohn predicts shift in global economy

It's no secret that a massive shift in global economic power is under way from West to East but the question is whether the old developed economies are ready for the consequences of this change.

Former World Bank president, James Wolfensohn, thinks not. He also thinks the time is rapidly approaching where the World Bank's top job should cease to be the exclusive preserve of the United States.

Transcript

JIM MIDDLETON: Your old organisation the World Bank says that China's current economic model is unsustainable in the medium term. How serious a problem for the rest of the world would it be if China's leaders do not engage in the kind of top to bottom liberalisation of their economy envisaged by the World Bank?

JAMES WOLFENSOHN: Well I think what the World Bank is saying is that any period of 40 years growth, which they're projecting between now and 2050, will have some bumps. And I think they're saying that in terms of the remarkable growth that there's been in China in recent years there may be a slowing, there may be an adjustments in terms of housing, there may be an adjustment in terms of the amount of borrowings. 

But I don't think that the World Bank is predicting any great collapse in China. It is just that there will be perhaps a slowing for a few years but they certainly still believe that by 2050 China will be confident 25 per cent of the global economy.

JIM MIDDLETON: The World Bank is worried about certain factors, for instance the notion that China could grow old before it gets wealthy. The fact that in just five years time China's work force will have more retirees than entrants. These factors do point to the need for a pretty substantial structural renovation, even though China has been so successful over the past three decades.

JAMES WOLFENSOHN: I think that China has shown up to now that it can adjust. It's my belief that there are many people in China, particularly in the rural areas, who have come into more industrialised and city areas. The Chinese themselves are just bringing, I think, 350 million people into that particular group. And I think they're looking forward to the creation of a pretty substantial middle class, along with the middle class that will grow in India.

So what you're saying is absolutely correct. The population will age, but it's against a backdrop, of very substantial growth and there is also the possibility of an extension of the work life in China, which is, I think, something that I is likely to happen.

JIM MIDDLETON: The World Bank is arguing the need for liberalisation; that China needs to move to a market economy. Many Chinese, of course, argue that state capitalism has worked very well, especially given the record of free market capitalism in recent years. Why wouldn't state capitalism work for China into the future?

JAMES WOLFENSOHN: Well I think one of the reasons is that many Chinese, and if you go, as I am sure you do, to Shanghai, Beijing, even to many of the other cities in China, very large cities, you will find that the enterprise is occurring from the private sector. It is not occurring just from the government owned corporations.

It is always been true that the Chinese themselves as a people are quite entrepreneurial. They may still call it state capitalism for another 10 or 20 years but for anybody that show knows China they will, I think, comment on the fact that the individual is becoming a more important factor in the country.

JIM MIDDLETON: Broadening the discussion a little bit, you've noted that by mid -century fully 60 per cent of world GDP will come from Asia. What makes you say, though, that the old developed economies are not ready for this shift? 

JAMES WOLFENSOHN: Well, first all, the proposition is that we will do as was done in the early 1800s and before that in 1500, which is that the weight of the economies of the world will shift to Asia.

And I think there's very little doubt that we will have 50 to 60 per cent of the world's GDP in Asia. If that is true, then the rest of us in the more developed or the Western world will have 30 to 40 per cent, because that's the other part of it; along with whatever Africa has and some parts of Latin America. 

So what I think is happening is you're seeing a shift in terms of both population and a shift in terms of initiative and knowledge. The interesting thing to me is that the Chinese and the Indians are studying with huge numbers in the Western universities, in the United States and also, I've been interested to see, very much in Australian universities, so you're quite used to it.

The truth of the matter is that we in the West are doing very little about learning about the East, learning about what happens in China, learning about what is happening in India. And our young people are just not encouraged or maybe not themselves go to study in these part of the world. Certainly people of my age never thought of doing it. And I'm afraid in we're in a transitional period where parents of my age are a bit less - have not encouraged their children to go and do Asian studies. 

I have very little doubt that it will be a necessity over the next 10, 15 years. And it is my hope that Australia could be a leading country in terms of that transition because of its proximity to Asia and frankly the importance of Asia to Australia in term of the economics.

JIM MIDDLETON: Is one of the logical implications of that shift the global economic institutions, the IMF (International Monetary Fund), the World Bank, G20, also need to change to reflect that changing balance of economic power

JAMES WOLFENSOHN: I don't have the slightest doubt that they need to change. They were invented really after World War II. And there's no question that the balance of the shareholding and the traditions of that 50 plus years have certainly served us well. But the world was pretty much the same until the end of the last century, but starting in 2002 we've seen a significant move in terms of share of global income towards Asia.

The international institutions have not yet adjusted for that. And in another 10 years or 15 years or 20 years we will see a totally different ranking in terms of the economic power of both the world and the representation that you need in those international institutions. It certainly cannot, in the long term, be right that a French person should head the International Monetary Fund and an American should head the World Bank. I don't have the slightest doubt that in 10 years time that will be different.

JIM MIDDLETON: Is 10 years too late, though? Is this now a timely moment for leadership of the World Bank to go to a representative of one of the fast growing and increasingly large developing economies?

JAMES WOLFENSOHN: It only stands to reason that an institution which is concerned with development, and where development has taken place and where some of the developing countries have now reached sizeable positions. After all, China is now the second largest economy in the world to the United States ahead of everybody else.

So it wouldn't be surprising if at some moment a Chinese colleague would head the World Bank. It wouldn't be surprising if someone from Latin America or someone from India with global skills would head it. In my judgment, I think that that would be a healthy development. It's already happened in the management level.

And I think it would be - personally I think that at some point if not the next one it would be an important development to see happen.

JIM MIDDLETON: James Wofensohn it's been a pleasure talking to you.

Economic power shifting to Asia from the West?

Today, as much as China is the centre of global manufacturing, India has become the international hub for global service industries. India’s IT and outsourcing exports amount to over US$ 50 billion.

The economic resurgence of China and India has also made way for the emergence of Thailand, Indonesia, Pakistan and Vietnam as manufacturing bases. This shift of world economic power back to Asia is highlighted in the ADB Key Indicators (for Asia and the Pacific) for 2010.

Today, the Asia Pacific accounts for 38% of the world economy. Europe comes second and North America third. Within Asia over 67% of the GDP comes from three countries – China, India and Japan. It is predicted that Asia will be the main driver of global growth over the next two decades with a newly-emerging Asian middle class of nearly 1.5 billion.

Since 1980, 400 million Chinese people have transcended poverty lines. By 2030 the Chinese middle class is expected to exceed 600 million. In numbers – this will be the largest middle class in the world; and the world’s third largest consumer market. India will be the fifth largest in the world with 520 million consumers. It is this demographic transformation of 1.5 billion Asian consumers, which will fuel global economic growth.

Inclusive growth

However, China and India to fuel global economic growth need to encourage inclusive growth and oppose all forms of trade protectionism. They need to improve the global monetary system and promote new modes of development.

One of the most significant changes today is the collective rise of emerging countries. The emerging countries have become an important force in global affairs. They are no longer in the backseat of global economic governance.

The emerging economies are now institutional players, rule makers and protectors of interests. Many global issues cannot be solved without the participation and support of emerging economies. Currently, China is the world’s second largest economy. Many predict that China’s GDP will soon surpass the US. An IMF report concluded, that calculated on PPP basis, China’s GDP will overtake that of the United States in 2016.

Some scholars predict that global power is ‘shifting’ from the West to the East. 

However, many analysts believe that there is no need for developed countries to lose sleep over this. Developed countries have for centuries accumulated incredible wealth and social and economic infrastructure, which still give them an advantage in capacity and influence over the East.

On the other hand, while the developing countries’ rapid economic growth has resulted in a more balanced distribution of global economic power, they don’t have much of a say still in global political and economic affairs.

Many emerging/developing countries are still far behind the developed countries in overall capacity, international outreach, institutional building and economic and social growth. Global issues are fundamentally about development. World peace and security cannot be built in the absence of stronger developing countries, smaller South-North gap, fewer living in abject poor and a better world order.

China’s challenges

China is today the largest developing/emerging country; it has had an extraordinary economic rise built foremost on the backs of low priced workers. China is seeing fast urbanisation and going through a rapid modernisation process. However, China’s growth is totally unbalanced. On per capita income they are 90+ in the world.

Based on United Nations standards, there are over 150 million Chinese people living in poverty. To become a true global player, China faces many challenges: In 2010, China’s economy grew by 10.3 percent to almost six trillion US dollars.

Yet, the foundation for development is weak. China has a huge population and frequent natural disasters. There is an increasing gap between the Eastern China and Western China, urban, rural regions and the rich and poor.

China also has an ageing population they need to take care of. China therefore would need to invest big to improve health care, education and housing. In addition the real wages in China have increases over 12% per year from 2000-2009 and this could result in some of the manufacturing jobs shifting to India, Cambodia and Vietnam.

China’s emergence

One of the most popular debates is the possibility that the United States will be joined or even surpassed as a superpower by China. What makes a superpower, and what would it take for China to match the United States? A genuine superpower does not merely have military and political influence, but also must be at the top of the economic, scientific, and cultural pyramids.

The most recent genuine superpower before the United States was the British Empire. Many Europeans like to point out that the EU has a larger economy than the US, but the EU is a collection of 27 countries that does not share a common leader, a common military, or a uniform foreign policy.

No doubt the only realistic candidate for joining the US in superpower status by 2030 is China. Unlike the US, China has a population of over four times the size of the United States, has the fastest growing economy of any large country, has the buying power and is also mastering sophisticated technologies. But to match the US economy by 2030, China would need an economy that matches the US economy in size.

If the US, with an economy of $14.7 trillion in nominal terms, grows only by 3% a year for the next 20 years, it will be $ 27 trillion in 2030. This is a modest assumption for the US.

China, with an economy of $5.88 trillion nominal terms (not in Purchasing Power Parity terms) grows at 8% a year for the next 20 years straight will be around $ 27 trillion in 2030.

China will have to sustain these growth levels for a long period of time (no country, let alone a large one, has grown at more than 8% over such a long period).

In other words, the progress that the US economy would make from 1945 to 2030 (85 years) would have to be achieved by China in just the 20 years from 2010 to 2030. Even then, this is just the total GDP, not per capita GDP, which would still be far to catch up because of China’s huge population, US currently $47,000 and China $4200.

Also, the weak dollar also leads some currency experts to believe/ that the US will lose economic dominance in the next few years. The US dollar comprises a dominant 60%-65% of global currency reserves, even greater share than it had 10 years ago, while the second highest share is that of the Euro (itself the combined currency of 21 separate countries) at just 25%.

So is there no currency that has any chance of overtaking the US, particularly a currency that is associated with a single sovereign nation? The Chinese Yuan represents fewer than 3% of world reserves, and China itself stockpiles US dollars and Euros. Clearly, US dominance in the global currency market is enormous, and very unlikely to lose that edge in the foreseeable future.

Furthermore, unlike the US brands Chinese brands have always been labelled as cheap and obscure quality, and suffer from weaker popularity compared with brands. But the Chinese market is consolidating quickly and has already nurtured some well-known brands in recent years. However, they need combine their image with US factors, to prove their brand competitiveness to domestic consumers and set up high-end brand images.

The US to retain its dominance will however have to manage the debt ceiling (foreign debt $ 13.5 trillion and domestic) and get their private sector that collectively owns over $ 2 trillion to stand up and lead the recovery without depending on fiscal stimulus from Obama.

(The writer is CEO, HR Cornucopia.)

MALAYSIA'S NEAR TERM OUTLOOK

From : The World Bank

PRESS RELEASE

Malaysia’s Near-Term Outlook still Favorable; Smart Natural Resource Management Ensures Smooth Path to High Income Economy

June 24, 2013

KUALA LUMPUR, JUNE 24, 2013--- Resilient domestic demand will allow the Malaysian economy to recover from a slow first quarter in 2013, says a new World Bank report. GDP is expected to grow by 5.1% for both 2013 and 2014, driven by higher consumer and business spending. As the global recovery gathers speed in 2014, the Bank report states, Malaysia's external sector will increase its contribution to growth, offsetting the impact of tighter fiscal policies on the domestic economy.

Released today, the World Bank’s Malaysia Economic Monitor: Harnessing Natural Resources, notes that Malaysia’s trade has become more dominated by commodities such as crude oil, natural gas, rubber and palm oil. With prospects for demand in commodities dampened by weak growth in key export markets such as China and Europe, and an abundance of supply globally, Malaysia needs to accelerate structural reforms to ensure that its economy remains diversified and dynamic.

"Malaysia has done remarkably well over the last two decades," says Kaushik Basu, Chief Economist at the World Bank. "However, the coming onstream of new sources of global energy is likely to put downward pressure on several commodity prices. This will no doubt put restraints on growth on a commodity-exporting country like Malaysia. I hope Malaysia will show the nimbleness it has shown in the past."

Malaysia is one of a few developing countries that has successfully converted an abundance of natural resources into long-term sustainable growth. As noted in the report, sound policy choices ensured revenues from resource extraction were reinvested in the economy in the form of machines, buildings and education. This supported high rates of growth that was shared among the population, raising the average incomes of the bottom 40 percent of rural households by 7.1 percent a year over three decades, while poverty rates

plummeted.

"Malaysia is a good example of a country that has successfully used natural resources to invest in other areas of the economy,” says Annette Dixon, World Bank Country Director for Malaysia. “This has allowed the country to promote diversification, create jobs and improve living standards for its people."

While Malaysia can be seen in many ways as a blueprint for other resource-rich, developing economies to follow, important challenges have emerged as a consequence of the global boom in commodity prices in the 2000s. In recent years, the economy has become less diversified, with high-tech manufacturing declining and commodities increasing as a share of exports. As highlighted in this report, reversing this trend, as well as saving a higher share of revenues from oil and gas, will enhance the resilience of

Malaysia’s economy.

"To reach its goal of becoming a high-income nation, Malaysia will need to continue managing natural resources sustainably," says Frederico Gil Sander, World Bank Senior Economist for Malaysia. He added, "Some adjustments are needed to spend less of the resource revenues on consumption and more on building skills and institutions that will support further diversification."

The report suggests that policy makers in Malaysia consider measures to enhance structural reform and management of natural resource revenues going forward, including:

* Improving sustainable consumption of natural resources by increasing the role of Malaysia's formal oil wealth fund, reforming fuel subsidies and reviewing gas pricing.

* Diversifying the economy towards higher productive investments in non-commodity sectors through improvements in human capital and better public investment management systems.

* Adapting agricultural commodity production to the effects of climate change.

The Malaysia Economic Monitor series provides an analytical perspective on the policy challenges facing Malaysia as it grows into a high-income economy. The series also represents an effort to reach out to a broad audience, including policymakers, private sector leaders, market participants, civil society and academia.

GDP OF 6% IS FINE - By Nik Zafri

I'm not working with Bank Negara but when "smart" people (who is also not employed with Bank Negara as well) started to question Malaysia's targeted GDP of 6%, they are overlooking inflation, money flooding in without control, rising consumer demand and escalating commodity costs.

Before questioning the credibility of Bank Negara Governor, Tan Sri Zeti, I would like to point some things out for the sake of discussion.

We should consider inflation based on CPI (*energy, food etc) - which is the inflation's benchmark to determine our financial market.

(*I'm looking into the volatility of these prices translated from what I see on the field myself - people at ALL levels especially the medium income and the poor ones rather than sitting comfortably in an air-con office suite and thinking how to get publicity by criticizing Bank Negara)


GDP represents total aggregate output of our economy. As a market watcher, I told the investors that "WE MUST PLAY SAFE" - do not be too ambitious - so 6% is FINE by the standard of investors as the figures have been adjusted for inflation.

Let's say Gross GDP calculated 6% higher than last year, inflation measured 2% over the same period, thus : net growth over the period is reported as 4%.

Investors will look into GDP's annual growth - the primary stock performance driver - in order to determine whether 'to invest or not to invest'. Yes, it's true that if there in no change or a decline in the overall economic output, investors will translate these datum into companies inablity to make profit

So how about TOO MUCH GDP Growth? (or not 'trying to play safe' - take some risk) Definitely inflation will increase - killing the gains in the stock market hence our RM is also devaluated. So here we can see what will happen - more and more crime might happen, prices of food my go 'sky high' and unaffordable, more unemployment, more controlled of financing/loan/grants etc.

Furthermore it sounds good to increase GDP by linking to lowering unemployment rate but it will be out of control when supply decrease faster while services and goods' aggregate demand increase, constraint in the labour market that will result in company raising salary - where will this all end? Consumers definitely - in the form of price going higher. (Yes, in some way, some people are making profits out of these - maybe that's the reason they are restless seeing 6% GDP)

We should learn from what is happening around the world especially from the US. Almost all the US economists will agree with me that GDP growth causes inflation and inflation begets hyperinflation. The process can become a self-reinforcing feedback loop. Everyone in the world will start spending money which they know will be less valuable in due course. So...more increase in GDP = more price increase! Inflation are non-linear - 10% inflation is much more that twice as harmful as 5% inflation.

With that I rest my case.
------------------------------

FOR READING PLEASURE

Pengeluaran Bon sebagai Alternatif Penstabilan Ekonomi - Nik Zafri

Nota ringkas ini lebih kepada haipotesis ekonomi dan pengarang tidak memberikan apa-apa jaminan kejayaan sekiranya haipotesis berikut digunapakai.

Pengeluaran bon untuk menstabilkan ekonomi juga dikenali sebagai Bon GDP- Gross Domestic Product. Reaksi balas yang berlaku apabila cadangan ini dikeluarkan ialah kenaikan faedah.

Apakah kelebihan dan kelemahan Pengeluaran Bon berkaitan GDP :

1. Servis Bon adalah tinggi dalam suasana pasaran sihat tetapi akan rendah apabila pasaran tidak sihat.

2. Bagi peminjam - pengeluaran ini akan menstabilkan perbelanjaan awam dan Kerajaan akan dapat servis apa-apa hutang semasa suasana pasaran yang sihat dan kurang memberikan servis hutang jika berlaku sebaliknya. Krisis hutang dan kegagalan membayar hutang akan dapat dikurangkan. Apabila ini berlaku, ianya akan membantu proses pemulihan.

3. Bagi pelabur - kerugian mungkin berlaku serentak dengan masalah gagal membayar hutang. Jadi, jika dibandingkan dengan bon konvensional, bon yang berkait dengan GDP dapat memastikan bayaran total yang leibh tinggi dan ini pastinya akan mengurangkan kebarangkalian kegagalan pembayaran hutang.

4. Kerajaan dapat membantu membiayai sektor yang berpotensi apabila bon berkait GDP dikeluarkan. Tidak mustahil, sektor yang baru atau sedang berkembang umpamanya industri pembuatan akan menyasarkan untuk disenaraikan dalam Bursa Malaysia kerana pengeluaran bon akan dapat memperbetulkan pasaran saham.

5. Pengeluaran bon ini juga akan dapat menambahbaik pasaran modal (terutamanya bon korporat - dalam kes di Malaysia - Bon ini dikeluarkan oleh GLC) Sektor korporat juga dapat mengurangkan kos dan menambahbaik kecukupan modal sekiranya bon ini diintegrasikan dalam struktur kewangan.

-----------------------------------

ISSUANCE OF 'GDP-LINKED' BONDS

There has been some interesting stories I heard in the market about the intention of the Government to issue bonds to stabilize the economy. When plan of economic stabilization involves, these bonds are known as "GDP-linked"Just a short comment (I hope)

There are a number of things to talk about whenever anybody touched about GDP and linking it to bonds.But one of the most popular reactions would be the increasing interest in creating bonds.

1. Bond servicing is higher during rapid growth but lower if the growth is slow.

2. For borrowers - issuance may stabilize public spending as Government can service more debt during affordable times and less during difficulties. It is also said to lower down crisis of debts and defaults. When you reduce the service of country's debt during recession, it may help in the recovery process.

3. For investors - losses may happen due to defaults. Thus, comapred to the conventional bond, this kind of bond (GDP-linked) can ensure higher total payment hence reducing default probability (what am I saying? )

4. The Government can help in financing some potential sectors if GDP-linked bonds are issued. In theory, some emerging or new sectors (any industry esp. manufacturing) can target to be listed in the Bursa Malaysia if they wish as bond issuance can help correction in the stock market.

5. It also helps in improving capital market as well (esp. corporate bonds - in Malaysia's case - the bonds issued by GLC). The corporate sector can reduce cost and improve capital efficience once bonds are integrated into the financial stucture.

ISSUANCE OF 'GDP-LINKED' BONDS

There has been some interesting stories I heard in the market about the intention of the Government to issue bonds to stabilize the economy. When plan of economic stabilization involves, these bonds are known as "GDP-linked"

Just a short comment (I hope)

There are a number of things to talk about whenever anybody touched about GDP and linking it to bonds.

But one of the most popular reactions would be the increasing interest in creating bonds.

1. Bond servicing is higher during rapid growth but lower if the growth is slow.

2. For borrowers - issuance may stabilize public spending as Government can service more debt during affordable times and less during difficulties. It is also said to lower down crisis of debts and defaults. When you reduce the service of country's debt during recession, it may help in the recovery process.

3. For investors - losses may happen due to defaults. Thus, comapred to the conventional bond, this kind of bond (GDP-linked) can ensure higher total payment hence reducing default probability (what am I saying? )

4. The Government can help in financing some potential sectors if GDP-linked bonds are issued. In theory, some emerging or new sectors (any industry esp. manufacturing) can target to be listed in the Bursa Malaysia if they wish as bond issuance can help correction in the stock market.

5. It also helps in improving capital market as well (esp. corporate bonds - in Malaysia's case - the bonds issued by GLC). The corporate sector can reduce cost and improve capital efficience once bonds are integrated into the financial stucture.

Having said the above, there are disadvantages as well...I'll save the 'bad news' for another day.

Hi everyone!!

It's been a while...dropping by to share a very good article which has caused me some delay in submitting a very important document to the client.

Luckily my client called me up to remind me...

---------------------------------------
Speeches, Testimony, Papers
Global Economic Prospects 2008/2009: Hoping for a Global Slowdown and a US Recession
by Michael Mussa, Peterson Institute

Paper presented at the thirteenth semiannual meeting on Global Economic Prospects
April 3, 2008

© Peterson institute for International Economics. All rights reserved.

Overview

After four years of average annual global real GDP growth of better than 4 1/2 percent, recent data indicate that the pace of advance is slowing in the major industrial countries, with the US economy on the verge of, and perhaps already in, outright recession. So far, the evidence points to less of a slowdown in other industrial countries, while most emerging-market economies appear likely to maintain quite strong, albeit somewhat slower, growth.

Meanwhile, world consumer price inflation (on a 12-month basis) is up from barely 2 percent seven years ago to nearly 5 percent as of February 2008. Among both industrial (except for Japan) and major emerging-market countries, inflation is now running at, or in most cases somewhat above, rates consistent with policy objectives. Driven by persistently rising global demand, commodity prices continue to surge upward across the board, especially measured in US dollars but also in terms of the rapidly appreciating euro.

In this situation, the world economy really needs what is now forecast for 2008/2009: a significant slowing of economic growth, down to 3.8 percent (year over year) in 2008 from 4.7 percent in 2007.1 This slowdown will be led by a decline of demand growth in the US economy, which is both pronounced and extends over a considerable period. Indeed, in view of the exceptionally aggressive easing of macroeconomic policies already in place in the United States and the likelihood of monetary policy remaining highly accommodative so long as US financial markets remain under stress, it is now desirable that real GDP growth for 2008 fall to a forecasted rate of barely more than 1 percent (year over year)—an outcome consistent with a very mild and brief recession. Reflecting some risk of a somewhat deeper and more prolonged recession in the United States, the growth forecast for 2009 (year over year) is set at 2 percent.

For the rest of the world, a mild US recession in 2008 will have a modest negative effect on real GDP growth, with more significant impacts in Mexico and Canada. In countries where the slowdown threatens to become excessive and inflation is under control, some easing of monetary and perhaps fiscal policy is both likely and appropriate. More generally, however, it is too soon to call for a general and significant easing of macroeconomic policies. A general slowdown in global economic growth is needed to cool the clearly apparent upsurge in worldwide inflation.

Some countries, including Australia, China, and Sweden, have recently tightened monetary policies in efforts to forestall inflation. Other countries, including Canada and the United Kingdom, have eased monetary policies modestly in response to weakening economic growth. Quite appropriately, however, no country has so far followed the lead of the Federal Reserve in aggressive monetary easing.

As the custodian of the world's second most important currency, the policy of the European Central Bank (ECB) is particularly noteworthy. Inflation in the euro area is running more than a percentage point above the ECB's announced objective. The euro area economy has recently been growing significantly more rapidly than its potential rate of about 1 1/2 percent. The unemployment rate has fallen half a percentage point below the minimum reached in the last expansion. Key monetary aggregates are surging at rates well above their desired target ranges. In this situation, one would normally have expected the ECB to have raised its key policy interest rate a further 100 basis points since last summer.

Instead, with financial turbulence spreading to some extent from the United States to euro area financial markets and institutions, with evidence that euro area economies are beginning to slow, and with a sharp appreciation of the euro against the dollar, which is likely to slow growth and impede inflation, the ECB has wisely held back from further interest rate increases. With the euro area economy now expected to expand by about 1 1/2 percent this year (in line with potential), the timing and direction of future adjustments in ECB interest rates remain—appropriately—dependent upon the evolving balance of risks for inflation and economic growth.

For Japan, the strengthening of the yen against the dollar in recent months and weakening of exports to the United States, together with likely weakness in domestic demand growth, suggest a further write-down in the forecast for real GDP growth for 2008 to 1.2 percent (from 1¾ percent forecast last October). This reflects the assumption that the surprising upsurge of GDP growth in the final quarter of 2007 will be partly offset in the first half of this year.

For the industrial countries as a group, real GDP growth this year is now forecast to be 1.5 percent, and growth for 2009 is projected to be moderately stronger at about 1.9 percent.

In emerging-market economies, circumstances vary and so do appropriate policies, but the general prospect is for continued quite strong economic growth, despite the slowdown in the industrial countries.

Is this "decoupling?" Not really. Mexico, Caribbean and Central American countries, and Asian economies that are particularly dependent on exports to the United States are already feeling and will continue to feel the effects of the US economic slowdown. More broadly, however, strong growth of domestic demand in many emerging-market economies will sustain reasonably strong GDP growth, and rising demand for raw materials by key emerging-market economies, most importantly China, will help keep commodity prices strong and aid growth in other emerging-market economies.

Overall, I forecast that growth for developing and emerging-market economies as a group this year will be about 6 1/2 percent, down from almost a 7 1/2 percent advance in 2007. For 2009, I now project slightly slower growth. The slowdown will be more severe, however, if growth in the industrial countries, especially the United States, turns out to be meaningfully below the present forecast. Exports from emerging-market countries would then be hit in volume terms, and prices of commodity exports could take a serious tumble. Some developing countries, especially among the primary commodity exporters, could face serious economic challenges and potential crises.

On this occasion, Arvind Subramanian is available to share his expertise on emerging-market economies, particularly in Asia and especially India. Accordingly, I will limit my remarks on these economies to selected observations on some key emerging-market countries. Then, in view of the departure from the Institute of my colleague Martin Baily and the (at least) temporary absence of Douglas Holtz-Eakin, I will turn to discuss growth prospects in the industrial countries, especially the United States. This should provide background for Morris Goldstein's more in-depth observations on the present financial crisis and proposals for reform.

Sustained Growth in Emerging Markets

China's economy continues to surge forward, so much so that the authorities are tightening policies to cool down inflation. Growth will likely slow from 11 1/2 percent last year to about 10 percent this year and next. On the policy front, the key action that should be taken—but that the Chinese authorities have so far refused—is a significant step appreciation of the renminbi against the dollar and in real effective terms, combined with policies to stimulate domestic demand.

In the rest of emerging Asia, growth will likely moderate somewhat in 2008 and 2009 but stay above 6 percent, with India continuing to grow at nearly 8 percent.

In Latin America, Mexico will suffer spillover effects from the slowing US economy, and growth this year is likely to fall to about 2 1/2 percent before recovering modestly in 2009. In contrast, Brazil should be able to sustain growth of nearly 5 percent, despite the strong appreciation of the real against the dollar. Growth in Argentina and Venezuela is expected to slow from the high rates of recent years, bringing down the growth rate for all of Latin America to about 4 1/2 percent this year and slightly less in 2009.

For Central and Eastern Europe, weak growth in Hungary and Turkey hurt regional performance in 2007 and partly offset strong results in Bulgaria, the Czech Republic, Poland, and Slovakia. For 2008 and 2009, regional growth will likely run about 4 percent, reflecting partly the impact of slower growth in Western Europe.

In the Commonwealth of Independent States, the dominant Russian economy should continue to grow at about 7 percent, and growth rates will likely remain somewhat higher (on average) in the smaller economies.

For the Middle East, high oil prices will help keep growth strong in the energy-exporting countries. The larger and more diversified economies of Egypt and Israel should also maintain growth rates in the 5 percent range.

High commodity prices will continue to benefit many African countries, and growth in the region appears likely to continue at least at a 5 percent rate.

Slowing in Other Industrial Countries

Among the industrial countries other than the United States, growth will slow significantly from the 2 3/4 percent advance of 2007 to barely more than 1 1/2 percent this year. However, aside from the United States, I see significant risk of recession this year only in Japan and possibly Italy. The impact of the yen's recent appreciation and weakening of exports to the United States, together with deteriorating sentiment among Japanese businesses and consumers, could push GDP into a couple of quarters of negative growth, even if year-over-year growth remains slightly positive. And the Japanese policy authorities have little room to provide offsetting stimulus.

In Canada, growth this year will likely fall a little below 2 percent, under the impact of slowing US growth and a strong Canadian dollar. However, solid income growth from strong export revenues should keep domestic demand relatively robust, and the Canadian authorities have considerable room to ease policy should that appear needed to forestall very weak growth or recession.

In the United Kingdom, growth this year is also likely to slow to slightly less than 2 percent. But this is not entirely unwelcome in view of the need to curb inflationary pressures, and the Bank of England has plenty of room to ease further should that appear warranted. The Reserve Bank of Australia has continued to tighten in recent months and would surely welcome the forecasted slowing of growth to 3 percent this year.

In the euro area, as previously noted, the projected slowing of growth this year to 1.6 percent from 2.6 percent last year involves nothing more than slowing to the potential growth rate. The slowdown will affect all countries in the area. The Italian economy looks likely to be extremely sluggish and is at some risk of falling into recession. Growth should remain stronger in Germany, sustained by good export performance in the face of weaker consumer demand. France will lag slightly behind Germany, while Spain will slow considerably due to a sharp downturn in home building. The slowdown will probably be reflected in a small uptick in unemployment and will be unpopular with most politicians. However, with inflation running well above the ECB's tolerance rate of 2 percent, the central bank is likely to see the slowing of growth more as a solution than as a problem.

A Mild US Recession

Despite signs of increasing financial strains, the US economy achieved almost 5 percent annualized growth in the third quarter of last year. Economic data that became available through Christmas indicated that the economy was still expanding through November. The data since late December, however, suggest that economic activity has been no better than flat and probably modestly declining since very late last year. The economic data do not indicate an economy that is crashing into steep recession.

The three most recent monthly employment reports have shown small declines in private-sector jobs. Weekly initial unemployment claims have risen from around 300,000 to slightly over 350,000. Residential investment continues to decline. The boom in nonresidential construction appears to have peaked. Data on durable goods orders and shipments suggest weak or even declining business equipment investment. As should be expected in the face of falling home prices and household wealth, sharp increases in energy and food prices, and stagnating employment, real consumer spending has not increased since November—but it has not declined.

Net exports are probably continuing to improve, but this will not be enough to offset weakness in the other components of final demand. Annualized real GDP growth in the first quarter will likely be modestly negative—probably between minus one-half and minus one percent in the first quarter. (And, if there is a modestly positive result, it will probably reflect an upsurge in inventory investment, which is not a positive sign for future growth.)

The second quarter may see moderation in the pace of decline of residential investment, but the other elements of domestic demand are likely to remain weak. Another quarter of modestly negative real GDP growth now seems to be the most likely outcome. Whether this will be enough to persuade the National Bureau of Economic Research (NBER) to proclaim an official recession is not clear, but I would now put the likelihood of such a recession at over 50 percent.

By June, the tax cuts from the recently passed fiscal package will be flowing into consumers pockets, bumping up consumer spending mainly in the third quarter. Some, not unreasonable, forecasts suggest that the stimulus could induce as much as a 5 percent annualized gain of real consumer spending in the third quarter, implying a considerable temporary boost to GDP growth. My view is more restrained, partly because I expect that businesses will absorb some of any surge in consumption spending (particularly for durables) into reductions in inventories.

On the other hand, businesses have kept inventories quite lean for the past three years, and there is no indication of a general inventory overhang (aside from the stockpile of unsold homes, which is not counted in business inventories). Sharp declines of inventory investment into negative territory have been a feature of all ten postwar recessions. It is a positive sign that the magnitude of any inventory correction in the present episode appears likely to be limited.

In sum, the prospect is that with the benefit of the fiscal stimulus, the US economy will bounce back to moderately positive growth this summer. By then the massive contraction of residential investment, which began two years ago, should be complete—with new home building running just below one million units, less than half of its recent peak level. Growth of consumer spending is likely to be weak after the effects of the stimulus are spent, but inventory investment should bounce back, and net exports may be expected to continue to make positive contributions to GDP growth. During the second half of 2008, it is reasonable to expect growth to rebound to 2 to 3 percent.

The suggested pattern of modestly falling GDP in the first half and moderate rebound in the second half implies that real GDP will show a very meager advance of about one-half percent on a fourth-quarter-to-fourth-quarter basis. Year-over-year real GDP growth would be barely more than 1 percent. In comparison, in the 2001 recession—the mildest of the postwar era—fourth-quarter-to-fourth-quarter growth was 0.4 percent and year-over-year growth was 0.8 percent.

The 2001 recession was followed by an initially weak recovery, with real GDP growing at only a 1.7 percent rate during the six quarters after the official end of recession, and with the unemployment rate continuing to rise to a peak of 6.3 percent in May 2003. On this occasion, I expect that the economy will remain quite sluggish through 2009, with growth proceeding at about a 2 percent annual rate. Weak growth of consumer spending in the face of significant losses of household net worth associated with lower real home values will be the key reason for this sluggishness.

Partly offsetting weak consumer spending growth will be continued improvement in US net exports, reflecting both slow import growth and continued rapid export growth. With the usual lag, the substantial depreciation of the dollar over the past year will contribute to the improvement in US net exports in 2009 and beyond.

We see here what I earlier called "reverse coupling." From 1995 through 2004, relatively strong growth of domestic demand in the United States and the effects of a strong dollar (with lags extending this effect) led to persistent deterioration in US real net exports. Thus, the United States was exporting demand to the rest of the world at a time when domestic demand growth in the rest of the world was relatively sluggish.

This process has been operating in reverse since the summer of 2006. Slower domestic demand growth in the United States, combined with stronger demand growth abroad and the effects of a significantly weaker dollar, have begun to significantly improve US real net exports. Thus, during the past year and a half, the rest of the world economy has been helping to pull the US economy along. This process may continue for several years as consumer spending growth in the United States remains restrained by the effects of lower household wealth, making room for expanding the supply of US net exports without contributing to inflationary pressures in the United States. For this process to continue relatively smoothly, however, the rest of the world needs to sustain reasonably robust demand growth and the United States needs to avoid too sharp a decline in domestic demand. The adjustment of the foreign exchange value of the dollar, which is essential for this process, is now largely complete, except for the needed appreciations of some Asian currencies, most notably the Chinese renminbi.

Turmoil in Global Financial Markets

A key feature and source of uncertainty in the present economic situation is the continuing turmoil in financial markets, especially in the United States but with spillovers to Europe and to a limited extent (so far) to Japan and emerging markets. Global equity markets have sold off amidst the turmoil, but markets for credit instruments and financial institutions dealing in such instruments have been most affected.

Three issues concerning this financial-market turmoil deserve special attention:

(1) What has caused this financial turmoil, notwithstanding strenuous efforts by the Federal Reserve and other central banks to contain it?

(2) What risks does it pose to the global economy?

(3) Have the policy responses been adequate and appropriate?

Regarding the causes of the turmoil, it is noteworthy that it has been most severe in US financial markets and institutions. Europe and, to a lesser extent, Canada and Japan have also been affected. In these other countries, a few institutions (such as the mortgage lender Northern Rock in the United Kingdom) have gotten into trouble on their own, related to their domestic activities. But most of the problems faced by non-US institutions have arisen because of their involvement with financial instruments originating in the United States.

In the United States, the initial underlying difficulties arose from subprime mortgages and financial instruments involving such mortgages. However, the crisis is much broader and deeper and has gone on longer than can plausibly be explained by this underlying cause. Across quite a broad spectrum, credit markets have become illiquid and dysfunctional. Interest rate spreads relative to US Treasury obligations have shot up and remained high and volatile even for higher-quality credits. Markets for important classes of bundled instruments have frozen up, and values for some of these instruments—to the extent that they can be determined—have plummeted. All this turmoil, well beyond what can plausibly be explained by developments in the real economy, indicates that financial markets and institutions themselves are mainly responsible for the crisis.

The extent of this crisis in credit markets is even more remarkable in view of the exceedingly aggressive actions taken by the Federal Reserve and the important but less aggressive actions of other leading central banks. Contrary to the nonsense spoken by many financial-market commentators, the Federal Reserve has not been "behind the curve" in its policy response. In fact, the easing of US monetary policy in the present possible recession has far outstripped the pace of easing in past actual recessions. On top of this, the Federal Reserve has recently taken truly extraordinary actions to extend specific liquidity support to a wide range of US financial institutions.

The official explanation for these extraordinary actions is not that they are motivated primarily by the desire to protect financial institutions from losses but rather to head off the risk of major damage to the general economy spreading from difficulties in the financial sector. So far, however, there is little indication that the general economy is suffering much damage from the credit market turmoil—beyond some deepening of the downturn in US residential investment. In particular, the present slowdown in the US economy and around the world is not much more than what we would normally have expected in view of falling home values, higher food and energy prices, and other developments aside from the turmoil in credit markets.

Does this imply that the Federal Reserve, in its efforts to protect the financial sector, has overreacted to the credit market turmoil? Has it eased too aggressively, unduly raising the risk of inflation down the road? Has its rescue of the financial sector by cutting massively the cost of funds and the provision of specific liquidity support generated far too much moral hazard relative to the value of the protective effect of these actions against real hazards faced by the general economy?

At this point, the answers to these questions are not entirely clear, but two conclusions can be reached with high confidence. First, given the massive easing already undertaken by the Federal Reserve and the likelihood of some modest further easing, the US economy now needs to undergo at least a near recession if the Federal Reserve's easing is not to be excessive. Second, if the Federal Reserve's highly aggressive actions have really been warranted to protect the economy from substantial harm, then deep reforms of the financial system, including the Federal Reserve's policies and practices, are clearly needed to reduce the likelihood of such problems in the future. The Federal Reserve cannot pose only as the hero riding to the rescue of the economy and the financial system. Its role as one of the villains whose earlier actions and inactions contributed to the present crisis needs to be fully and carefully assessed.


Table 1 Real GDP growth projections as of April 3, 2008 (percent change, year over year)




Note

1. The figures for global GDP growth are aggregated from the growth rates for individual countries using purchasing power parity (PPP)–based measures of exchange rates employed by the International Monetary Fund (IMF) in its World Economic Outlook (WEO). Based on a major study supported by the World Bank, estimates of PPP exchange rates have recently been substantially revised, with the general result that the weights in world GDP of the industrial countries have been somewhat increased while those of emerging-market economies have been correspondingly reduced. Because emerging-market economies, most notably China and India, have been growing far more rapidly than most industrial countries in recent years, the effect of the revision in PPP exchange rates is to lower the figure for global growth (without changing growth rates for individual countries) by about 1/2 percentage point. Thus the present estimate for global growth of 4 3/4 percent in 2007 under the new PPP-based exchange rates corresponds to an estimate of 5 1/4 percent growth under the old weights. The weights used in table 1 are estimates of the weights that the IMF will use for the forecast to be reported in the current WEO.
---------------------------------------
RESPONSE FROM MELBOURNIAN AND COUNTER-RESPONSE FROM NIK ZAFRI - IN GLOBAL MALAYSIAN FORUM

Melbournian : A very lengthy analysis that echos familiar cliche from "soft-landers". My only comment is that there are two important factors that seems to be absent from his presentation: ie the component of human emotion and the lack of accountability in the derivative instruments that are prevalent in recent years. The health of credit market depends un-surprisingly on market "credibility". Quite akin to the railroad stock bubble and the (in)famous tulip futures fiascos in the past , the total sum of global derivatives todays seems to have exceeded the true intrinsic values of the actual goods and services that these instruments are supposed to underpin. Laws of conservation and Newton's principle of inertia are no longer relevant. No longer can one confidently say for sure that one man's gains equal in exactitude to another's losses. Containment ? Lets hope and pray.

Nik Zafri :

Hi Melbournian, I must say that I'm impressed!

This research seem to miss out "CCI" (Consumer Confidence Index) which I think suitably describes what you meant by 'human emotion' in the context of economics. (it's obvious isn't it....the article is touching on 'purchasing power', 'manpower', business surroundings - which are all linked to the CCI)

Surprisingly I have also discovered that the Global CCI have always been missing (in fact seldom being measured) But; in US; it will suddenly 'appear' during proposal to hike interest rates by the Feds - hence one of the main indicators to the performance of the stock market worldwide.

I can understand why the CCI is sometimes there and sometimes not there...it's because of the big variance between one country to another. CCI is suppose to be the consumption indicator for GDP.

Lack of accountability on derivative instruments

What you have said - coincidentally reminding me of the core of Management - it is said that :

"Responsibility is a derivative of authority and accountability is a derivative of responsibility"

It's a paradox - I do not know if there is any connection.

Anyway, in this case, the derivative instrument (to the accounting standards esp. balance sheet) becomes a concern when it involve hedging and embedded derivatives (contract) - to determine of whether they (derivatives) are liabilities or asset. Otherwise positioning of finance and determining the derivatives value cannot be accurately achieved.

I'm not a qualified accountant but I do know the affects of hedging either the normal fair value, cashflow or currency. Now? As you said and I would to agree to it that most accounting (and auditing) bodies (even in Malaysia) are 'shouting' demanding accountability but again, it is easier said than done unless further education to include hedging activities and the volatility behind them in the context of derivatives are developed further.

Yes, breaking every rule in the book is now trendy!! It is also the reason why I am really interested in the concept of Knowledge-Based Economy and Knowledge Management but of course these two terms are moulded according to my style of intepretation - in short my experience. At times, I never trust figures, data and statistics but I use my instincts to make decisions.

Finally quoting you : "Let's Pray and Hope"