A Madani Economic Narrative

23/06/2023

collective on geoeconomics

Prologue

From The Quest for Growth  (World Bank, 2016), and to Surge Ahead  (World Bank 2021), the country is still, catastrophically, mired and entrapped within  capitalism crisis to crisis in a struggle to Catching Up, (World Bank, 2022) among ASEAN peers:

1] THE MEN

The Madani Economic Narrative is a new economic developmental approach aligned with the Madani concept on sustainability, care and compassion, respect, innnovation, prosperity and trust (SCRIPT).

The Madani objective is to provide each ministry and agency with directives on the implementation of the unity government various – PMO’s Finance, the Ecomomics Ministry, MoHR, MITI – and varied economic plans on fiscal stability, economic growth, labour reforms and industrialisation under an e-commerce economy.

The prime goals of these economic plans are the creation of a high valued yet sustainable (within a defined digital) economy whilst concurrently, expanding social welfare protections to rakyat² by empowering them through reforming the labour market process.

That the new MEN shall only be awaken and take a presentation stroll in August 2023 indicates that this living specimen is, maybe, a precarity in an expiring economy.

2] THE PROBLEMS

i) As a trading nation, but with a declining factor in GDP, the country is in dire state of an existential eclipsing economy confronted by cost-of-living inflationary trends and slack in manufacturing capability in a competitive global domain, a youth unemployment rate nearing 12%, and female labour below most ASEAN countries, and a public sector effective productive yet to be improved, and enhanced upon, as its captured place, position and power are entrenched.

Exports of goods and services in Malaysia was reported at 68.84 % of GDP in 2021, according to the World Bank collection of development indicators.

The 0.7% fall in Malaysia’s exports in May 2023 compared with a year ago  portends downside risks  pointing to a weak export growth momentum for the remaining months of the year – even as Malaysia’s national debt now at RM1. 5 trillion, or over 80% of GDP – whence the ringgit is under exchange rate pressure, and may weaken further against the US dollar to as steep as 4.7500 by the third quarter of 2023, (nst 30/05/2023).

United Overseas Bank (M) Bhd senior economist Julia Goh said despite the narrower year-to-date contraction in exports, global demand has yet to show signs of rebounding. This is concurred by OCBC Banking Group Ltd senior Asean economist Lavanya Venkateswaran who said the contraction in exports was broadly in line with the bank’s expectation. In fact, the combined April/May data confirms that an external sector slowdown is already and duly underway, (theedgemalaysia 20/06/2023).

The strategic economic option is through an adequate, and appropriate, Industry 4.0 Initiative with existing deficiencies to be ratified and organizational processes restructured, including upskilling of workers, taking into account that feudal capitalism is meshed in the country’s present Digitalisation Capitalism environment where the capital and labour factors have yet to be reconciled on a careful trust and compassionate basis to ensue a common wealth sharing developmental effort – if the country insistence upon sustaining a prosperous and respectful society has to be maintained.

ii) With government revenue already projected to remain low and  structural expenditures still increasing high, this has led to further narrowing of Malaysia’s fiscal space (see right chart below):

Using the ratio of the Federal Government Debt to the revenue collection as a reference point, the World Bank has indicated that Malaysia’s fiscal space has indeed narrowed since 2012 and has in fact became even tighter post-pandemic. Indeed, the current fiscal consolidation strategy – via spending reduction – is, to many national economists and political analysts, (bfm.my, IDEAS, theedgemarkets, O2 Survey) rather challenging, given the current tight spending domain.

The way out is selectively, and strategically, in choosing some of the options available in financing the economic development of the country, (see STORM 2023, Debts Financing towards Progressive Economic Development).

iii) Since the Olin Liu’s IMF Report is there now a structural approach to national economic development that is more strategic and formative in dealing with politico-economic realities faced by the nation in totality. However, the tasks ahead are still daunting, (see STORM 2023, Towards structuring economic development with sustainability).

Firstly, the national coffer is depleting: both from odious transactional practices through the decades, supported by the  public sector with dastard nature of kleptocractic and korupsi practices. As such, the performance criteria  to spur economic development have not been met. More than ever, the government should consider seriously to increase its revenue base by improving and innovating the tax system. With the uncalled expansion of government-linked companies and public authorities in the 1970s and 1980s, the nation is facing difficulties in maintaining and sustaining these parasite entities. One option is to raise the Goods and Services Tax (GST), but with the provisio where some of the GST is redirected to lower-income groups to improve their living conditions.

Secondly, ruling regimes should not perpetually rely on Petronas for funds. Instead, like other resource-rich countries,  the nation should setup an investment fund which, in the long run will provide revenue to assist in its budget planning and allocation. With Malaysia petroleum reserves for oil and gas resources projected – according to the Reserve Life Index – to last another 15 years only, Malaysia’s probable and proven reserves of petroleum totalled 6.9 billion barrels of oil equivalent. The way foward is to optimise present petroleum resource and to stretch to over 40 years with high capital investment, new technology as well as more stable and competitive investment landscape.

Indeed, Emir Research consultancy has indicated that the country should strengthen the oil and gas (O&G) sector by enhancing the attractiveness of existing energy and petrochemical hubs, increasing and intensifying exploration in the South China Sea and offshore deepwater elsewhere in the world. The primary objective is to maximise outputs and include a more robust national stockpiling policy and stabilising infrastructure ecosystem in place. Under this approach, through diversification and expansion, the O&G sector can then be transformed. Petronas and its subsidiaries from an O&G base or oil and energy corporation into a global industrial conglomerate. In fact, Petronas should not be limited in expansion and investments on the energy and renewable enery business and assets, but also leading to renewable  chemicals, petrochemicals, materials and other businesses.

Thirdly, the oil palm sector is likely to remain a major food oil for the world  and as a base oil for various other products. The ‘core’ business shall be widened with a flexibility to quickly adapt to market forces and competitive disruptions. For once, palm oil mills generate biomass (from palm residues) that can be utilised for power generation and other renewables, such as fuels, chemicals and materials.

Fourthly, other  economic sectors also need to move from lower value, high-volume commodities or simpler products to high-value end-user products to reap more from the value chains. An early de-industrialisation process in the 1990s had impaired the dynamics of the Electrical and Electronic sector in its contribution to higher commodity value chain.The E&E sector shall need to coordinate with present infrastructural platforms implementation processes to connect high-value commodity and value chains towards a digital economy.

Fifthly, institutional reforms are not only to pertinent major institutional structural reforms. There shall also be a demanding need in a good governance to ensure justice, equity, insuring talent availability is fully mobilised. Without these, policies and strategies will not be successfully or sustainably implemented.  Therefore, policies must become needs based instead of previous kleptocractic ethnocapital hangovers with discriminatory, arbitrary or very not infrequently on a knee-jerk non-visionary reaction to developmental effort.

2] THE ISSUES

Nested within a neocolonial economy and following Lenin’s concepts of imperialism and international class conflict into the theory of economic growth and stagnation, the Global South, predominantly low developing countries (LDCs) were in the clutch of Global North economic and political domination, especially during the colonial period.

Therefore, the most enduring socio-economic and clientel ethnocapital colonialism issues in Malaysia are those related to the  bumiputera and non-bumiputera term and the dichotomy, the compartmentalisation and polarity that has resulted since the term was introduced into the nation’s political lexicon and life. The contrived term and dichotomy was regarded as a deliberate and opportunistic strategy of the political and policy leadership to create a new political taxonomy to manage and control the political-administrative workings and socio-economic development of the country, and with the NEP to prioritise “UMNOputra”  interests and dominance, predominantly and specifically to entrench bumiputera  clientel ethnocapitalism.

Thus, post May 13, 1969, the country’s growth policies have shifted from strategies with an emphasis purely on economic growth toward a strategem focusing at combining growth with income inequality reduction between ethnic groups. This policy shift was formalized in the New Economic Policies (NEP) for the period 1971–1990 (see Economic Planning Unit, various years). The relationship between economic growth and ethnic diversity (Agostini et al., 2010, Gören, 2014,  Iniguez-Montiel, 2014)  is supported by a body of economic literature that finds that ethnic heterogeneity induces social conflicts and violence, which in turn, affects economic growth (see Easterly and Levine, 1997, Mauro, 1995,  Montalvo and Reynal-Querol, 2005). The negative consequences of ethnic diversity imply that adequate policies are required to ensure that the benefits of any economic growth are equally shared among all ethnic groups, yet US$241 billion – equivalent to our national debt – had been poured into the Bumiputera  agenda, an affirmative action plan to assist the majority race: a dependency debt-determined development syndrome.

Through ensuing as an economic entrenchment of the NEP construct (Woo 2015, James Chin 2016, KBN 2018,  Khalid 2019, KRI 2020, Kua 2021) it is clearly divisive to the nation’s unity and a sense of belonging. The MEN as articulated is meant supposedly to eliminate these economic deformities.

Thirdly, the introduction of JAKIM to play a role in the economic advisory and planning performance only adds on the theological aspect in a secular society (Bakri; Tajuddin; Hunter) with a grim Islamic future upon non-muslims (Ignatius; Ramakrishnan), complicating the complexity on tasks in developmental execution (UNICEF; World Bank, 2022; and World Bank, 2019); STORM; Ramesh Chander, Murray Hunter, and Lim Teck Ghee) or is it that premier Anwar Ibrahim is closing a circle to an inadvertent post-ABIM script, (Mohktar). Nevertheless, the Madani precepts alone cannot merely serve as the pillars of a grand nation-building project when a rumah in a kampung built on stilted but capital-muddied foundation is prone to collapse.

Even if real prosperity, as Anwar Ibrahim believes, is enshrined in the Islamic concept of al falah (success, happiness and wellbeing), however, contrary to Marxism, Islam does not consider wealth as intrinsically evil. Also, unlike capitalism, Islam extends the concept to the entire community rather than restricts it to single individuals, stressing that abundance is a blessing to be shared. Whether the abundance sharing of a common wealth admidst diversity in geographical, creed and racial segments towards an ethos in socialism with a Malaysian characteristics has yet to be distinctively defined, and to be ably executed.

Finally, the continuance of a neoliberalism economic approaches post-independence only restrains the forward thrust in engendering a truly national developmental effort – whether and when they are a parcel of a suite in rural development, export-led industrialisation, a digitalisation e-economy but capitalism-wrapped, and now the Industry 4.0 Initiatives.

The neoliberal policy of the preceding regimes, with its emphasis on free market and privatisation, have only benefited a few elites, especially wealthy compradore capitals. The MEN sura conversation has, however, neglected to mention the roles and responsibilities of non-muslims who had contributed to the economic development of this country from the indenture labour in the rubber plantations, the pools of tin miners, the fruiting of the oil palm industry to the small manufacturing enterprises’ al amal and knowledge (spiritual, wisdom and scientific)  in modern Malaysia. MEN has all the character of a muslim-Malay centric governance legacy. The existing economic praxis must be overhauled so that a just economic system that is equitable to all irrespective of race and creed while upholding the true spirit of democracy, individual rights, tolerance, gender equality and pluralism permeates right to the egalitarian soul of every rakyat-rakyat.

EPILOGUE

The MADANI ECONOMIC NARRATIVE needs to

big in vision, bold in objectives and a bravery to surmount the arduous developmental tasks in hand.

MEN not only requires to be sired – striving courageously in structuring institutional reform in an economic development ethos but to stir, and wrap-up, TAPAO in a nation-wide robust responsibility to achieve the desire goal of targeted area poverty alleviation ojectives otherwise it’s obviously an amen.

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Madani Malaysia praxis

Madani the script

TAPAO

SIRED

Economic neoliberalism in export-oriented industrialisation and the Industry 4.0 Initiative

18 June 2023

PROLOGUE

In Malaysia with encouragement of an equity ownership, foreign direct invesrments (FDIs) enjoy the liberalised condition of 100 percent ownership subjected to 80 percent or more of their production that are assembled for exports. Though the net flow of long-term capital account has increased, the country’s export-led industry from the manufacturing sector had been lack-lustre due to a pre-matured de-industrialisation during the 1990s.

1] INDUSTRY 4.0

Steam engines propelled the first Industrial Revolution; electricity powered the second; the advent of automation and engineered machinery propelled the third; and cyberphysical systems — or intelligent computers — are shaping the Fourth Industrial Revolution.

The national deficiency of understanding the prerequisite Industry 4.0 requirements in principles, processes and people skills contributed to the weak implementation of an Industry 4.0 export-led industrialisation initiative. Collectively, these are some highlighted deficiencies that encompass potential external challenges toward Industry4WRD Initiative.

The Industry 4.0 brings these inventions beyond the previous realm of possibility with four foundational types of disruptive technologies  that can be applied across the value chain of an industrial process:

1. connectivity, data, and computational power:  cloud technology, the Internet,  blockchain, sensors
2. analytics and intelligence: advanced analytics, machine learning, artificial intelligence 
3. human–machine interaction: virtual reality (VR) and augmented reality (AR), robotics and  automation, including autonomous guided vehicles
4. advanced engineering:  additive manufacturing  (such as, 3-D printing),  renewable energy, nanoparticles

One of the major challenges facing the nation is a deficiency of a national platform with a defined visionary objective (and a governance mechanism and or organisational structure) in the Industry 4.0 related programs, structures and approaches.  Consequentially, the standards of Industry 4.0 related equipment, technologies and systems are ill-defined in conception and fuzzy in design and development.

Secondly, there are no specific financial incentives allocated specifically for Industry 4.0 development. There is no financial aid to manufacturing  companies to develop technologies, conduct research and development, prototyping, testing and upgrading to forefront  facilities.

Then the Step-up toward the development of high-speed broadband infrastructure – a major component in a digital economy involving big data – in key industrial and training locations are still in discussion stage with a new unity governance. Even whether the defined infrastructural platforms would be capable to support the application of Industry 4.0 technologies are still another gap in the implementation of Industry 4.0. with multiple local industrial players and Global North IT monopoly-capital competing a share of the digital pie while suppressing labour to digit units, (STORM 2023, Digitalisation Capitalism).

Another potential issue to be concerned is lack of training providers who capable of provides training programs with sufficiency to support Industry 4.0 talent development due to trainers at present unable to keep abreast of the  advanced technologies.

To thrive in the Fourth Industrial Revolution, companies must ensure that their workers are properly equipped through upskilling and reskilling and then hire new people when necessary. Upskilling means that employees learn new skills to help them in their current positions as the skills they need evolve. Reskilling is the real challenge: workers are retrained with new skills that will enable them to fill different positions within their companies.

Manufacturing companies might face an issue where a lack of support from the ecosystem to provide Industry 4.0 solutions and lack of local capabilities to provide cybersecurity solutions to protect even the assets and facilities of Industry 4.0. companies.

The root of the above problems is that only very few numbers of experts from the field of manufacturing industry, academia and research institutions – amidst and across private industries and public universities – are even knowledgeable on the Industry 4.0 technologies availability, accessibility and applications.

2] EXPORT-LED GROWTH

Realistically, the country is sandwiched in a state of the industrial revolution between Industry 2.0 and 3.0. Presently, 98.5% out of the total 49101 establishments in Malaysia manufacturing sector are small and medium enterprises (SMEs) whilst the rest of 1403 companies are large firms, majority are the TNCs. At present, SMEs constituted 59% to the total employment in the nation and contributed 38.3% to the national gross domestic product in 2018 m. It is a crisis to the nation if SMEs remains unaware of the importance to embrace Industry 4.0 to improve their manufacturing competitiveness in the future.

That the SMEs are completely overwhelmed by TNCs is not surprising given that the latter, with the pervasion of financialization capitalism permeating into the country, the role of clientelship capitalism  dominates. This is where corporate capital in the SMEs collaborates with Global North to tighten the commodity supply chain with monopoly-capital M&E vendors like AIDA, SKF, Cohu, VAT, Oerlikon Balzers, Favelle Favco, Bromma, Vitrox, etc.; as recent by the new millennium, TNCs like Digi, Nestles and British American Tobacco were, by market capitalisation, leading the list of foreign companies that dominate our local businesses.

These are the sins of a industrial policy that neoclassical economists had warned against: favourable tax treatments for TNCs, strategic industrial licences allocated to government-linked companies which are crony capital-indulged and the systematic manipulatation of market incentives to create “a local industry”; (see STORM June 2023, Fractionalisation in Global Trade). In the industrialisation process, the enclave of TNCs within  a stronghold in the Free Trade Zone (FTZ) or the Export Free Trade Zone (EFTZ) results in that of monopoly-capitalism  [place] that has aligned with the political elites and compradore capital of a developing country [positions], and by ownership and control of assembly workers [power] is able to extract the surplus value through their labouring tasks.

In fact, the 0.7% fall in Malaysia’s exports in May 2023 compared with a year ago  portends downside risks  pointing to weak export growth momentum for the remaining months of the year.

United Overseas Bank (M) Bhd senior economist Julia Goh said despite the narrower year-to-date contraction in exports, global demand has yet to show signs of rebounding. This is concurred by OCBC Banking Group Ltd senior Asean economist Lavanya Venkateswaran who said the contraction in exports was broadly in line with the bank’s expectation. In fact, the combined April/May data confirms that an external sector slowdown is duly underway.

As an instance, the downcycle in the semiconductor sector, and lower global commodity prices, have led to lower price earnings for commodity exports. Semiconductors — one of Malaysia’s main exports — make up nearly 38.5% of the country’s total exports in 2022.

The same sorry state is emerging in Bangladesh which has once depended on 83 percent of export earnings from its major local industry: garment. The country is now facing a growing trade deficit, shrinking foreign exchange reserves, a rapidly depreciating currency, a record inflation and an energy crisis that has necessitated massive power cuts.

It has to be said that the country’s problem lies much deeper, in the application of an economic strategy of export-led growth directive that Bangladesh, together with most other countries, has been adhering in the era of neo-liberalism.

The fact is that 14 Asia-Pacific companies with a total of US$113 billion (RM523.7 billion) in reported debt are in danger of being classified as ‘fallen angels’, meaning their credit ratings could be downgraded from investment grade, according to a report by S&P Global Ratings. The agency said reducing revenue and profit prospects, legacy Covid- or expansion-induced leverage and uncertain forward-looking financial and governance risks were identified as top triggers for potential downgrades to speculative grade. The report found that credit polarisation has been growing within Asia-Pacific ‘BBB’ rated non-financial entities.

Following Sri Lanka and Pakistan, Bangladesh has become the third country in the Indian subcontinent to be afflicted by a serious economic crisis. The country has had requested a $4.5 billion loan from the IMF, apart from $1 billion from the World Bank and $2.5-3 billion from multilateral agencies and donor nations.

In a neo-liberal economy where being open to cross-border financial flows imposes limits on the fiscal deficit, exports become the main stimulus for growth. A neo-liberal economy in short is characterised by primary reliance upon export-led growth. Under present challenging economic environment with a pandemic onset and a war in Europe, the Bangladeshi economic outlook is not that encouraging.

3] NEOLIBERALISM ECONOMIC POLICY

The neo-liberal philosophy and its application in economic policy since 1947 – after the Swiss Resort conference of the Mount Pelerin Society (MPS) that morphed into as the  Washington Consensus, was first articulated by World Bank economist John Williamson.

We shall apply the case-country scenario of The Philippines as an exemplary case-country in the application of neoliberalism economic policy that devastated a country.

It was in The Philippines that  neoliberalism first came in the form of the structural adjustment program imposed by the World Bank in the early economy’s capacity to service its massive external debt during the 1980s. The World Bank often states it strengthens rather thab stranggle a country economy’s through the application of the Structural Adjustment Programs (SAP). However, such SAPs do not lead to stable, long-term economic development in many developing countries but rather had negative impacts on economic and social stability. This is because SAPs dictate often that a set of economic policies, including reducing government welfare spending leading to further socio-economic impoverishment and an acceptance of free trade policy that encourages more inroads by Global North monopoly-capital onto targeted countries.

It was the structural adjustment processes which triggered the economic crisis of the early 1980s, later to be magnified by the onset of the global recession.  The crisis was The Philippines’ worst since the Second World War.

It was during the Aquino period that neoliberal economics started its rise to ideological ascendancy. 

Often expressed was that neoliberal economics were associated with several  activist intellectuals and technocrats close to the Aquino administration who had been greatly influenced by the Reagan and Thatcher free-market experiments in the United States and Britain.  Those involved included economist Bernie Villegas and Cory Aquino’s secretary of finance Jesus Estanislao.  Another key center of emergent neoliberalism was the University of the Philippines School of Economics, which had drafted the extremely influential anti-Marcos White Paper on the Philippine economy in 1985.

Secondly, the intellectuals proposals were witnessed as much inclined to what was termed as “crony capitalism”, that is, the use of state agencies to advance the private interests of a few close associates of the ruling regime; not dissimilar are the government-linked companies (GLCs) with political-appointed board of directors in Malaysia clientele capitalism.

Thirdly, there were simply no credible alternatives to neoliberalism.  It was alluded by many that Keynesian developmentalism, which promoted the role of the state as the strategic factor in the first phase of the ascent to development, was compromised by its personification in the then preceeding Marcos dictatorship. 

However, Marcos’ successors — Corazon Aquino (1986-1992), Fidel Ramos (1992-1998), and Joseph Estrada (1998-2004)— have continued to follow an export-oriented industrialisation (EOI) strategy. Aquino committed her government to repaying all foreign debts, including the ones that only benefited Marcos and/or his “cronies,” and Ramos and Estrada have followed suit.

As for the left’s vision of “nationalist industrialization” or the “national democratic” economy, it is now agreed that these expressions hardly went beyond rhetorical flourishes and had not much of traction nor popularIty prior to the EDSA Uprising.

The EDSA or People Power Revolution or the February Revolution was a series of popular  demonstrations in The  Philippines, centering mostly in Metro Manila, from February 22 to 25, 1986. There was a sustained campaign of civil resistance against regime violence and electoral fraud. The nonviolent revolution led to the departure of Ferdinand Marcos ending a personalised dictatorship of 20 years.

Then, the Communist Party of The Philippines  –  (CPP) and its armed wing, the New People’s Army (NPA) was founded belatedly (unlike other southeast Asian counterparts) only in 1968, and the NPA was formed in 1969 – with the objective to overthrow the Philippine Government, establish a communist state, and expel US from The Philippines. The CPP was packing the anti-fascist struggle leading to socialism on an united front against the dictatorial elites.  However, after the EDSA Uprising, that alternative articulation was somewhat derailed by the left’s preoccupation with the consequences of its failure to participate properly in the final act of the ouster of Marcos.

This absence of credible alternatives domestically was compounded by four geopolitical developments internationally: the collapse of centralized socialism in Eastern Europe, which seemed to deliver the coup d’grace to the socialist alternative; the crisis of the Swedish social democratic model; the seeming success of the Reagan and Thatcher Revolutions in revitalizing the American and British economies; and the rise of the East Asian newly industrialising countries of south Korea, Singapore and Malaysia.

Indirectly, these had an impact on the bourgeois thinking of the middle class and the elites who are more inclined in their preferred role in talking about social and political issues, and related problems- while the capitalism infrastructure remains still intact – than overhauling the neoliberalism status.

EPILOGUE

A neoliberal approach to development, as advocated by the World Bank and the IMF, has only benefited the Global North monopoly-capital and the networks of local compradore capital. All these benefits to the ruling class come often at the direct cost of the large majority of population in the dominated countries.

Fractionalisation in Global Trade -Deglobalisation and Decoupling – geoeconomic impact upon countries

collective on geoeconomics

10th June 2023

PREAMBLE

Malaysia economy exposure to global trading shares in GNP were from 77.3 percent in 1970 to 169.2 percent in 1997 indicating that the country is very integrated to the world economy.

Post-1957, the country  pursued a development strategy that
focused on the diversification of agricultural exports – to stabilize its export
earnings and income – through industrialisation. These structural adjustments were through the import substitution and export-oriented industrialisation and globalisation strategies.

Even before the Federation of Malaya gained independence, the International Bank for Reconstruction and Development (IBRD) Mission of 1954, had already schemed definitive country’s industrialization program towards a neo-imperialism orbit. Its platform’s The Report of the Industrial Development Working Party, Kuala Lumpur, 1957 bound succeeding ruling regimes to monopoly-capitalism till today.

1] INTRODUCTION

The industrialisation strategy  introduced tax incentives to pioneer industries in 1958, followed by the imposition of tariffs and quotas in the early 1960s to encourage the development of import substituting industries concentrated in consumer goods production for the domestic market.

Mostly owned by the transnational corporations, and to protect the monopoly-capitalised industries, Malaysia had to erect high tariff wall, import control, offer fiscal incentives such as tax holidays, and tax exemption on capital goods and raw materials imported from abroad. Further, a wider range of other incentives were introduced in the Investment
Incentive Act 1968 for companies investing in new enterprises or expanding existing industries to attract domestic and foreign investments. These incentives include total or partial relief from payment of income tax and development tax, locational incentives to disperse industries, and labour utilization relief to encourage arbitrage of labour exploitation to generate immense capital accumulation and through transfer pricing, too.

Capital inflows into the country were actually driven by several external “push” and internal “pull” factors (Reinicke, 1998). The decline in international interest rate in 1990 together with recessions in The Triad (United States, Japan and European) countries made investment in the emerging market like Malaysia, attractive. Concurrently, there was the withdrawal of generalised System of
Preference (GSP) Privileges from the Newly Industrialised Economies (NIEs) which encouraged the outflow of Global North capital to the emerging and developing economies.

Another external factor was the fast development of the institutional investors, such as mutual funds, seeking for long-term profits and to diversify investment risks performing as partners of vulture capitalism.

The internal pull factors of FDI inflows attraction were the then country’s strong economic fundamentals and political stability, low inflation rate, stable exchange rate and interest rate differentials. Besides, the Promotion of Investment Act (PIA) of 1986 was enacted primarily and particularly towards  foreign direct investment
(FDI) through competitive packages of fiscal incentives.
Indeed, under premise of an equity ownership, FDIs enjoy the liberalised condition of 100 percent ownership subjected to 80 percent or more of their production that are assembled for exports. As a result, net flow of long-term capital account increased between 1987 and 1992. However, between 1993 and 1995 the corporate investment fell slightly due to the global economic slowdown that checked the inflow of capital to the developing economies.

Summarised, the main characteristics of Malaysia’s foreign direct investment (Samuel, Abdul and Ong, 1999) are the extraordinary benefits for the foreign investments that encompass generation
and repatriation of profits, access to local inputs, increasing their market shares by reducing competition and establishing political networks with subsequent ruling regimes  and the existing ruling class.

Secondly, the experience of FDI processes has helped transnational corporations in understanding local business environment , and eventually, investing in other southeast Asian economies as widening part of neo-imperialism penetration process.

Thirdly, with FDI, the country’s comparative advantage has evolved from agricultural-based to manufacturing-based, from labour-intensive to capital intensive, from import-substitution to export-promotion and from the traditional industries to the information and communication technologies where the extensive monopoly-capital domination in the infrastructural platform ecosystem is maintained and retained.

There was a big increase in FDI investment between the periods 1980 to 1995 with a volume of RM$120 billion. During the same period, the average growth of FDI was 45.8 per cent while for domestic investment it was 55.2 per cent.

Though FDI has been attributed as the main engine of growth for the Malaysian economy often attributing in job creation,  technology transfer, linkages, increased exports, output and balance of payments, however, foreign corporations domination downstream and upstream in their manufacturing and sub-assembling activities, the domestic small and medium scale (sms) industries were often neglected, (World Bank 29/02/2020).

2] FRACTIONALISATION

Deglobalisation as measured by decelerating trade and investment, and reduced global value chains, started to appear already in 2008.

After decades of continuance globalisation, seemingly it is slowing, or a turning to deglobalisation, meaning a decelerating process on trade and investment, at least in some segments of business enterprises.

It has to be stated that Government policy and public sentiment began to shift toward deglobalization  around 2015  animating with perceived concern about the labour market impact of U.S. imports from low-wage countries. At that moment , the gathering of a trade war between the United States and China, and a resurgence of nationalistic views in Europe, and the Brexit insurgent view – all contributed to the decoupling narrative urge.

On the other hand, China and the US might not be decoupling but their technologies are bifurcating (Alicia García-Herrero, 16th. May 2023). The strategic competition between the US and China started in early 2018 when the Trump administration implemented untargeted import tariffs and reoriented most of its trade efforts towards widening the technology gap between China and the US with a special focus on deep tech, such as semiconductors. The Biden administration subsequently pushed even further in that direction with the CHIPS Act.

However, one should not be neglecting the argument that even before  the Trump presidency, China had began blocking Western technologies trying to enter its market especially relating to open internet-digital skies and infrastructural platforms. China’s geostrategic positioning lies in choosing where to engage and where to disengage on this technological decoupling.

Therefore, in reality,  the idea of suddenly moving away from hyper-globalisation through a policy action with decoupling, does not reflect an actual geostrategic situation. We are presently only experiencing a slow but steady process of bifurcation of technologies as well as technological standards, (Alicia García-Herrero, op.cit).

And, after all, a big country like China is already implementing a dual economy approach; where the markets are within her border – where domestic market space dominates.

The US National Security Advisor, Jack Sullivan had stated that the US goal is to build a “high fence on a small yard” when it comes to China. This effectively means tightly controlling the transfer of technology though only in key technologies,  but with dual commercial and military applications.

On the other hand, European policy makers have a different narrative, mostly focusing on reducing strategic geoeconomic dependency rather than blocking China’s access to core technologies.  After all, any push for a Sullivan’s decoupling needs to focus on diversifying the sourcing of European imports, especially for the EU’s energy transition, from what is now a huge concentration in China. This could be read as if the EU were not going to follow the US in its push to contain China technologically.  

The interesting story line on this fractionalisation process is that it has a great impact upon one specific EU Member State, namely, The Netherlands. She is the only country in the EU that makes part of the highest-end part of the semiconductor value chain, through the export of its extreme ultraviolet lithography machines necessary to produce advance semiconductor chips; now, she has to tail-coat to the US policy direction.

Sullivan’s ‘fence’ might not be as high as it looks because of the many loopholes in the CHIPS Act (Brookings, 3/05/2023) that exist for China to continue to import high-end semiconductors from third parties.  Also, the chip ban is not as small a ‘small yard’ would imply. It started with a prohibition to sell most gear that can fabricate semiconductor equipment of 10 nanometres and below (i.e. even more advanced) but that barrier moved to 14 nanometres, basically expanding the ‘yard’.

Finally, China’s capacity to move up the ladder cannot be underestimated because of a massive number of subsidies dedicated to China moving up the ladder in key technologies, including semiconductors. In fact, the US regularised prohibition policy only inspire China to speed up plans to develop a relatively autonomous semiconductor industry.

3] IMPACT

At the end of the 2010s, many workers in advanced economies were feeling, and being, left behind.
There were specific spatial-economic communities more exposed to import competition from low-wage countries owing to preexisting industrialization locations  that were sheltered domestic manufacturers from imports. This, in turn, singularly has had important socio-economic consequences in the US and the UK political dimensions.

Globalisation, thus, has created inequality where huge TNCs gain from closed, and tight, specialization on the global value chains, in the form of lower costs and higher profits, as well as a class of highly compensated individuals who reaped the rewards associated with expanding markets and new economic opportunities. Not only were some left behind; others were racing ahead, (see STORM 2023, Gross Inequality in Global Wealth).

This is an outcome from immense generation in capital accumulation and expropriative exploition in labour pointing to the contradiction between overall welfare and distributional conflict generated by global trade. Additionally, the speed and intensity of these changes ensue dynamic tension in a new dimension where economic idealism and political governance did not meet the redistribution spread-effect from capital winners to labour losers.

At the same time, Western governments were becoming increasingly concerned that competition with China was “unfair,” given its use of subsidies as well as restrictions imposed on companies seeking access to its market. This spurred demands for more confrontational policies toward China – to the point whose ulterior intention is in destabilising China’s economy (John Ross) – often with a justification that the country was no longer a poor developing economy. On the other hand, economic sanctions and export controls by the US and its allies do pose a threat to China’s socialist economic development, (Ye Yan (叶研)).

The second phase of the deglobalization movement began with calls for resilience at the onset of the pandemic in 2020.

But what is resilience?

Even with the COVID-19 epidemic or solar panel production as examples, they only show that international trade has indeed increased resilience where, as an instance, the US actually preserved trade relationships; importers traded with foreign partners more regularly and sought out new suppliers, even though overall trade volume fell.  Many academic papers have indicated, based on quantitative model simulations, that international trade makes economies more diversified and hence more resilient (Caselli and others 2020; Bonadio and others 2021). Their conclusions are that supply shocks are less correlated across economies than within them and that access to multiple suppliers makes it easier to respond to country-specific shocks.

Therefore, if sanctions and export controls become a banal tool of interstate competition, they will not only lose their potency; they are impairing the global order they once are supposed to protect.

Then, those arguments against trade that emphasize the fragility of supply chains are not consistent with evidence. These arguments were used to stoke the protectionist sentiment. In fact, trade grew fast in 2021 as the world turned a corner in management of the pandemic.

The third phase surfaced – as part of geopolitical process – with Russia transborder crossing into Ukraine in February 2022.

As Russia cut gas supplies to Europeans and energy prices skyrocketed, the pitfalls of reliance on a single country for imports of a critical input became clear. The concerns were not intrinsically about Russia. However, by extrapolation, countries began to wonder what would happen if they had to decouple from China overnight. Policymakers concluded, if they had not already, that it would be better to decouple immediately on their own terms.

As Alicia García-Herrero has stated that international welfare is a zero-sum game. The United States imposed a ban on exports to China of advanced logic and memory chips and the machinery to produce them. Semiconductor technologies certainly do have military applications, and the export bans could set back China’s military. However, nevertheless to say that these technologies have many more applications in the civilian sector, too, and so these bans would also retard civilian technological development. Therefore, we have a world shifted from one in which trade, competition, and innovation in all countries were encouraged to one in which the most advanced economy sought not just to compete but to fransactionalise to a foreclosure.

It needs to be said that globalization has benefited an emerging “global middle class,” in places for instances like China, India, Indonesia, Malaysia and Brazil, along with the world’s top 1 percent. However, people at the very bottom of the income pot, as well as the lower-middle class of rich countries, lost out; locally, we got, especially in urban areas, where three-fourths of Malaysians reside, in the  UNICEF 2020 Report that shown low income female-headed households are exceptionally vulnerable. Further, amongst Malaysia’s 50 Richest 2020: they already get 16.4% of the national income share of wealth; see Khalid 2019.

Indeed, globalization may have contributed to more spatial inequality. This is because geoeconomic fractionalisation could likely lead to more trade between high-income economies that are friendly or allied to each other. Then, the Increasing emphasis on environmental and labour standards in trade agreements would raise entry barriers for very poor countries that find it difficult to meet these stringent requirements. Without access to expansive foreign markets, there is no appropriate route for poverty reduction and development in such economies (Goldberg and Reed 2022).

Lastly, greatest risk may be to peace on planet earth.  If there is a dramatic shift away from multilateral trade toward trade within empires or informal spheres of influence or quasi-alliances, then this pivot shall more than likely exacerbated tensions – and eventual conflicts – between countries and nation states.
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A more detailed discussion on this topic can be found in the published paper, Brookings Papers on Economic Activity , March 2023, (“Is the Global Economy Deglobalizing? And if So, Why? And What Is Next?”).

Global trade transition in global supply chain shift – greening an economy

7th June 2023

PROLOGUE

By the third quarter of 2022, the value of global trade in goods was well above the levels of same period in 2021 for both developing and developed countries.

Trade in goods grew 10% from last year to an estimated $25 trillion, due in part to higher energy prices. Services were up 15% to a record $7 trillion.

However, on a quarter-by-quarter basis, trade declined in all geographic regions – except for East Asia, which showed considerable resilience.

These situations come at a time when Global Trade could hit a record $32 trillion for 2022, but a slowdown that began in the second half of the year is expected to worsen in 2023 as geopolitical tensions and tight financial conditions persist, according to the latest Global Trade Update, published by UNCTAD on 13 December, 2022.

1. INTRODUCTION

Global supply chains are representives of the integrated structure of contemporary global capitalism, and any disruption to them often threatens the functioning of the system itself. The global supply chain, as an organic of capital and the organisation form of capitalism, is designed to raise the rate of surplus value labour extraction by capital. It facilitates the geographic transference of extracted value in arbitrage of labour from the Global South to the Global North. In a sense, global supply chains have contributed to dynamics of concentration in leading firms, and a marked shift in national income from labour to capital across much of the world.

However, presently, there is emerging a profound change of geostrategic dimension as great powers are retreating from the free trade system they have had created inducing a global supply chain shift. Great powers’ priorities are now refocusing and reording by global security concerns (Brookings Institute, 27/04/2023) which only sharpen capitalism from crises to crises. Unfortunately, the developing and emerging market economies, the ensuing global trading system becomes relentlessly reshaped, and affected, by these geopolitical priorities.

As an instance, in December 2022, Canada, Australia, France, Germany, Japan, UK and US announced the formation of the Sustainable Critical Minerals Alliance, and the Group of Seven (G7) is initiating to invest in a secure supply of critical minerals. For developing economies of the world, this is a return to Cold War politics; more so, when leaders of countries such as Zaire (the Democratic Republic of the Congo) with strategic resources were courted by one side or the other, usually with devastating governance consequences.

Another grim suite of implementations is whereby the US and the EU introduced a  combination of industrial policy, subsidies, and trade restrictions to motivate businesses at home and abroad to reduce greenhouse gas emissions. In the US, it is the legislation of an Inflation Reduction Act which includes $400 billion in subsidies for renewable energy and electric vehicles that contain a minimum amount of North American parts. This provision has prompted returning US companies’ investment to the United States and has attracted foreign investors such as BMW, Mercedes-Benz, Stellantis, and Toyota. The EU, similarly, has launched the  European Green Deal and a carbon border adjustment mechanism (scheduled to go into effect in October 2023), which imposes an “emissions tariff” on imports. For developing economies, the trade aspects of these initiatives look like “Fortress US” neo-mercantilism and “Fortress EU”. Indeed, the Global North rich countries which are fully responsible for the most climate-threatening emissions are locking others out of the fortresses their prosperity built.

2. CONSEQUENCES

The world economy may split into two rival blocs: the consequences are modeled in recent work by the WTO that projects welfare losses (or cumulative reductions in real income) as high as 12 percent in some regions, with the largest in the lower-income regions.

For developing economies, the uncertainties of the global trading system mean that most will want to negotiate trade, investment, aid, weapon purchases, and security from several sources. India and some African countries, among others, still rely heavily on Russian arms. Others depend on Russian energy, food, and fertilizer. Joining in sanctions against Russia for its cross-border incursion would cost them dearly. Many countries are strongly dependent on China’s aid, trade, and investment and are currently resorting to bailout loans from China. They also need markets in Europe and North America.

Thus, inevitably, the great powers’ new priorities are currently being set and implemented unilaterally. If great powers are more and more concerned with balancing their own political and economic interests without regard for longer-term mutual interests, including those of other countries, the latter need to remind them that their support is conditional on processes that include them.

In fact, the rest of the world is preparing itself with collection of self-reliance measures on the nonalignment principle to make sure that both superpowers relate to each other in a way that would not do more damages and to endanger all people of the world.

3. IMPLICATIONS

The country prime reliance on foreign cheap labour has become the biggest policy issue in the country’s aspirations to move up the value chain and to attract foreign direct investment (FDI). The country needs to design a new mission objective on exiting the middle-income trap. Otherwise, the proceeds of growth have not been equitably shared especially with increases in the cost-of-living outstripping incomes. In urban areas, where three-fourths of Malaysians reside, the  UNICEF 2020 Report has shown that low income female-headed households are exceptionally vulnerable.

For a retarding development economy like Malaysia to attract quality FDI, the country should push domestic investment into strategic sectors to uplift national competitiveness in research and development, and more urgently to develop its own market niché. It is of utmost importance for Malaysia to develop its own competitive advantage that delivers sufficient return on equity to attract higher FDI into the country.

One of the prime national mission objective lies in green energy and technology as among the sectors that Malaysia should focus on in developing its own competitive Renewable Energy (RE) strengths, (Andrew Sheng, May 2023).

The six most common green forms are:

• Solar Power. This common type of renewable energy is usually produced using photovoltaic cells that capture sunlight and turn it into electricity;

• Wind Power;

• Hydropower;

• Geothermal Energy;

• Biomass; and

• Biofuels;

There are two (2) major types of renewable natural resources currently consumed in Malaysia; hydropower and solar energy.

The nation has already a RE Action plan established generation targets until 2050 when renewable energy should make 24% of the total energy mix, from 1% in 2011 and 9% in 2020 enabling more than 30 million tonnes of CO2 emissions to e avoided in line with the national target.

While UNCTAD has identified mitigation strategies – including diversification of suppliers, reshoring, near-shoring and friend-shoring – will likely affect global trade patterns in the coming year, however, the efforts towards building a greener global economy are expected to spur demand for environmentally sustainable products while reducing the demand for goods with high carbon content and for fossil fuels.

Emir Research consultancy has indicated that the country should strengthen the oil and gas (O&G) sector by enhancing the attractiveness of existing energy and petrochemical hubs, increasing and intensifying exploration in the South China Sea and offshore deepwater elsewhere in the world. The primary objective is to maximise outputs and include a more robust national stockpiling policy and stabilising infrastructure ecosystem in place.

Under this approach, through diversification and expansion, the O&G sector can then be transformed. Petronas and its subsidiaries shall transform from an O&G base or oil and energy corporation into a global industrial conglomerate. In fact, Petronas should not be limited in expansion and investments on the energy and renewable enery business and assets, but also leading to renewable  chemicals, petrochemicals, materials and other businesses.

Thirdly, the oil palm sector is likely to remain a major food oil for the world  and as a base oil for various other products. The ‘core’ business shall be widened with a flexibility to quickly adapt to market forces and competitive disruptions. For once, palm oil mills generate biomass (from palm residues) that can be utilised for power generation and other renewables, such as fuels, chemicals and materials.

EPILOGUE

The ongoing tightening of financial conditions is expected to further heighten pressure on highly indebted governments, amplifying vulnerabilities and negatively affecting investments and international trade flows.

Even as the global trade is slowing down
more than ever, the efforts towards rebuilding a greener global economy should be undertaken to spur demand for environmentally sustainable products, while reducing the demand for goods with high carbon content and for fossil fuels.

This is where Malaysia has to accept, adopt and be adaptable to a structural institutional reform on economic development in the decades ahead to be SIRED.