Politics of race and corruption impoverishing Malaysia: Tengku Razaleigh Hamzah

“Without a doubt, Malaysia is slipping. Billions have been looted from this country, and billions more are being siphoned out as our entire political structure crumbles,’ claims former finance minister Tengku Razaleigh Hamzah speaking at the 4th Annual Malaysian Student Leaders Summit. “Yet we are gathered here in comfort, in a country that still seems to ‘work’ – most of the time. This is due less to good management than to the extraordinary wealth of this country.”

“Last year, we received US$1.38 billion in investments but US$8.04 billion flowed out. We are the only country in Southeast Asia that has suffered net FDI outflow,” he said. “I am not against outward investment. It can be a good thing for the country. But an imbalance on this scale indicates capital flight, not mere investment overseas.”

“When race and money entered our game, we declined,” he said. “The same applies to our political and economic life.”

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The End of Men: Hanna Rosin

The attitudes and social behaviour of men will have to change if they are to compete successfully against women in the modern global economy, claims Hanna Rosin in the latest edition of The Atlantic.

“With few exceptions, the greater the power of women, the greater the country’s economic success,” Rosin writes. “Aid agencies have started to recognize this relationship and have pushed to institute political quotas in about 100 countries, essentially forcing women into power in an effort to improve those countries’ fortunes…

“Last year, Iceland elected Prime Minister Johanna Sigurdardottir, the world’s first openly lesbian head of state, who campaigned explicitly against the male elite she claimed had destroyed the nation’s banking system, and who vowed to end the “age of testosterone”…

“Researchers have started looking into the relationship between testosterone and excessive risk, and wondering if groups of men, in some basic hormonal way, spur each other to make reckless decisions. The picture emerging is a mirror image of the traditional gender map: men and markets on the side of the irrational and overemotional, and women on the side of the cool and levelheaded.”

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Deficit will increase at current pace on public payroll cuts: IMF

The International Monetary Fund’s (IMF) Country Report for the Maldives, published earlier this month, pegs the country’s fiscal deficit in 2009 at 26.25 percent and notes that while the “political climate for public expenditure cuts remains difficult… the coming months will be a crucial test of [the government’s] ability to prevail.”

The report provides a neutral assessment of the country’s economic condition and its progress towards economic reform and reduction of its significant budget deficit.

It notes that the authorities “have taken remarkable steps to bring about the very large fiscal adjustment”, most explicitly, salary cuts to government employees of between 10-20 percent, “something seen in just a handful of countries worldwide”, alongside “a 40-60 percent increase in electricity tariffs.”

The IMF also lauded the governments “initiation of a program for public employment reform that will ultimately reduce the government’s payroll by one-third”.

The government was facing “intense political pressure”, the IMF report observed, after being compelled by the Civil Service Commission (CSC) to restore salaries backdated to January 1.

“The government has so far paid wages at the reduced levels, including for the police and army, who are not governed by the CSC,” the report said, adding that the decision had been “publicly challenged by the government on legal and economic grounds.”

A final court resolution on the law suit filed by the CSC could take up to one year, the report noted.

Meanwhile, parliament passed the 2010 budget “with amendments totaling a seven percent (4.25 percent of GDP) increase over the government’s proposed budget.”

As a consequence, the report stated, “the annual deficit targets for 2010 and 2011 will be missed on current policies.”

Therefore, it stated, a “key risk” to the country’s economy “concerns the ability of the government to maintain the public sector wage cuts. A negative outcome on this would have a large fiscal impact,” the report said, adding that government’s target for public sector employment cuts had already been pushed back a year from the end of 2010 to the end of 2011.

Secondary risks to the economy included delays in passing taxation reforms through parliament, and “planned public employment cuts.” Tourism was “bouncing back”, it noted, but whether this would affect the recovery of the domestic economy was “highly uncertain”.

Therefore, the government’s capacity to withstand political pressure on the issue of cuts would decide the country’s fiscal recovery “in the near term”, the IMF suggested.

The report was critical of the government’s decision to acquiesce to parliament’s recommendation to restore the wages of independent commissions in January this year, and its commitment to pay civil servant pension contributions from May 2010 until wages were restored to September 2009 levels.

The IMF report acknowledged that “direct redundancies were proving difficult”, however “the transfer of employees to the private sector (which accounts for about two fifths of the planned payroll cuts) has taken place in line with projections.”

Nonetheless, the IMF calculated that if the government continued to pursue economic reform at current pace and policy, the country’s fiscal deficit would increase by one percent of GDP in 2010 and 4.5 percent of GDP in 2011.

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“Islam and commerce are synonymous”: President Nasheed

President Mohamed Nasheed addressed the 6th World Islamic Economic Forum in Kuala Lumpur yesterday, outlining the links between Islam and trade and expressing hope that the forum, and commerce between Muslim countries, will grow in the future.

The forum, which was held from 18-20 of May, was a platform for governments of Muslim and non-Muslim nations, and business leaders, to meet and discuss trade and economic issues.

This year’s theme, Gearing for Economic Resurgence, focused on the role of Islamic banking and financing, and how it can play a role in building a more stable global finance system.

Speaking at the forum, President Nasheed said he believed it was “appropriate that modern day Muslim nations meet to trade and invest with one another.”

He added it was important to “forge ties with nations of other faiths, just as Muslims have done over thousands of years.”

Nasheed noted that “it was through trade and commerce that Islam was introduced to many parts of the world.”

The spice trade brought Islam to Central and South East Asia, China, and Sub-Saharan Africa, he continued, and it was trade that brought Islam to the “then Buddhist Maldives.”

Arab merchants were attracted to the Maldives in the 12th century when they found out about the “abundant supply of Cowry shells…[which] were used at the time as an international currency. “

Because of the islands’ geographic location, said Nasheed, many merchants also stopped in the Maldives during their travels from the Spice Islands to the Middle East, and waited for the monsoon.

President Nasheed noted that the famous 14th century explorer, Ibn Battuta, also came to the Maldives during his travels and was “impressed by combs made from turtle shell, as well as rope and fibres, which were exported abroad.”

Nasheed reiterated that Islam and trade have always been closely tied, as “in the past, trade brought Islam, and Islam brought greater trade. To my mind, Islam and commerce are synonymous.”

Moreover, he said, “Muslim people have a strong culture of commerce” and the Qur’an was “explicit about correct terms of trade and commerce.”

President Nasheed said although “some people belittle Muslims and Islam—they like to portray Muslims as backward and impoverished people,” he believes “the signs of growing Muslim prosperity are everywhere: from the glittering desert cities of the Arabian peninsula, to the vibrant export economies of Malaysia and Indonesia.”

He added that, “as Muslims, we can be confident in trading and investing with one another.”

Open economy

Although the Maldives’ economy was once “relatively closed”, the president told the delegates, the current administration had “introduced a radical programme of privatisation and public-private partnerships.”

“We believe that the free market is the most efficient and effective mechanism to deliver goods and services,” he said. “We are offering investment opportunities across the board: from housing to hotels; from energy to education.”

The president said historically Maldives “exported cowry shells and provided respite for sailors. Today, the mainstays of our export-oriented economy are tuna and tourism.”

He added that Maldivian tuna is “caught sustainably” by pole and line, making it “some of the best tuna available on the market.”

A ruling made in March by the Cabinet has now allowed long-line fishing for Maldivian vessels, which is more harmful to the environment. Although the government has defended its decision, there are still concerns from the fisheries industry and environmentalists that long-lining will adversely affect the industry and the environment in the Maldives.

President Nasheed ended his address by saying Maldivians and other Muslims have “always been entrepreneurial people” and the “dynamism and creativity of the Muslim peoples” should be harnessed and built upon.

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Comment: Fixing the economy will be painful

In my last article, I spoke about the seemingly intractable problems that our Maldivian economy faces – most notably the fact that we have spent far too much than is sustainable given our level of economic activity.

The theme here is to talk about how to deal with these problems and the challenges we face in doing so. No doubt explaining the problems – especially with the benefit of hindsight – is much easier than suggesting remedies. Moreover, given the extent of our past excess and misdeeds, the remedies required are likely to be both bitter and painful.

Our immediate problem is how to reduce our fiscal deficit. On a theoretical level – this is quite simple.

Approximately 50 percent of our expenditure is on paying government salaries and allowances – and we can cut down foreign travel, close down our embassies, turn off air conditioners at our offices – but ultimately unless we make some inroads into this important component of public spending – it will be impossible to do anything meaningful.

No doubt, all efforts must be made to reduce waste before we start slashing either incomes or jobs. The higher salary levels must take bigger cuts than the lower paid staff – as the government has already done so.

In reality however, this is both a political and a logistical nightmare. We all know members of family or friends struggling to make ends meet on the current civil service salaries. Laying off a large chunk of the population at a time of an economic crisis seems counterproductive to regenerating the economy.

Logistically, it is complicated because a system of voluntary first-come-first-serve resignations, particularly if the government is willing to forgive their education ‘bonds’, would mean that the most capable civil servants would depart first, leaving us with the least dynamic people actually running government. In an increasingly polarised community, it would be difficult to distinguish between people fired on the basis of professional incompetency or political allegiances.

Difficult though these policies may be, a country that has a third of its total work force working for the government is simply not sustainable. The key therefore becomes how to do this in a manner that has the least negative impact on our economy. For this – three broad initiatives are required.

First and foremost, significant opportunities for retraining must be made available. This must be combined with a public relations campaign on how retraining should be for anyone at any stage of their career. It must also be based on market requirements – with significant impact on developing skills necessary for our economy.

The tourism sector, foreign languages, technical skills, accountancy and business skills are just some of the options. More initiatives can be introduced to both existing and new private providers of training through public-private partnerships.

Other policies that must be pursued include the allocation of reduced rent or free land for private education providers, tax exemptions on educational material, as well as rebates of fees for those who successfully pass courses and find employment.

Secondly, access to credit for starting small businesses must be expanded. The key obstacles to this – particularly the high costs of borrowing from a narrow financial sector – must be addressed. The high costs of borrowing are partly due to the fact that the legal options for banks in the case of non-performance are uncertain.

Furthermore, without a credit information system, there is a significant missing component that makes people more disciplined when paying back their loans.

Last but not least, the fact that we realistically have one-and-a-half banks in the country (BML and to some extent SBI), the market mechanisms forcing these firms to be both efficient and customer orientated is missing. We need to encourage more banks to set up shop in the Maldives – and allow people access to a wide variety of banking products.

Finally, significant incentives must be provided for the private sector to start employing more Maldivians. This must be done first and foremost by revising our labour law. The existing legislation is overly burdensome and expensive for businesses – and more flexibility must be allowed.

With the coming of a new taxation mechanism, significant leeway must exist for the government to provide rebates and other incentives for those who employ more Maldivians. Start-up companies must also be provided with exemptions – particularly in strategic sectors deemed important for long-term growth.

However, even if we can introduce these policies – and this is a big ‘if’ given our intractable inability to get anything done within this political system – let us also not kid ourselves into thinking it would not involve a significant amount of hardship.

Even with countless retraining facilities, or access to credit or even benefits for private sector to employ locals – there will be a group of people simply unable to maintain their existing living conditions and as such their situation will no doubt deteriorate. One must assume that the current ‘pickiness’ of the local population to defer certain kinds of jobs to foreigners must also be revisited.

For those vulnerable groups, basic levels of protection – particularly in terms of access to healthcare and education – must be allowed. The current trajectory of the Government’s Madhanaa (health insurance) policy must therefore continue – and perhaps must be provided at subsidised rate to those unable to find jobs.

On a more fundamental level therefore, what we are looking at is a paradigm shift in the role of the state. If you take a long-term view of the Maldivian economy – it was effectively characterised by a system of subsistence fisheries and small scale agriculture – with the government earning revenue from trading of the excess products generated from these primary industries.

The country therefore had a system of governance that effectively involved a (selectively) benevolent state providing welfare for those that it deemed worthy – especially through jobs. Furthermore, the direct arm of the government – being mostly in Male – was felt on a smaller percentage of the people because the population of the country was more evenly distributed.

With the emergence of tourism however, we saw a dynamic private sector go on to take the driving seat of the economy. The state no longer has, or should have, the resources to provide direct employment to the people on such a large scale. No doubt, a basic level of protection to all must be provided – and what constitutes this basic level will continue to be debated for years to come. The role of the state must now become that of the regulator and the facilitator – allowing jobs, productivity and wealth to originate and be distributed according to forces of a dynamic market system.

All comment pieces are the sole view of the author and do not reflect the editorial policy of Minivan News. If you would like to write an opinion piece, please send proposals to [email protected]

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National debt easing, says Dr Shaheed

Minister of Foreign Affairs Dr Ahmed Shaheed has told Miadhu that the Maldives’ national debt stood at 110% of GDP at the end of 2008 according to International Monetary Fund (IMF) reports.

Dr Shaheed said he is “not ashamed” to tell the truth about the country’s financial situation, because international financial institutions are monitoring the country’s external debts.

He said the country’s debt was due to the previous government’s extravagance in buying presidential yachts and offices. He added that this debt was the reason for the government reducing civil service salaries as they had no alternative.

Dr Shaheed said certain leaders of political parties are trying to spin the facts, contradicting the IMF’s reports.

Dr Shaheed said working with the international community and multilateral financial institutions is easing the country’s debt. The USA has readmitted the Maldives into the General System of Preferences, its duty-free quota system as well as signing an agreement with the US’s Overseas Private Investment Corporation (OPIC) which encourages companies to invest in the Maldives.

The Maldives also hopes to be admitted into the US’s development assistance project, Millennium Challenge Account, as well as the Paris Declaration on Aid Effectiveness.

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Comment: The Maldivian Economic Situation

Economics is often referred to as the ‘dismal science’, partly because it mostly concerns us when things start to go bad.

In this sense, economics is a lot like medicine or public health. And so it is highly appropriate that we start comparing economic remedies to medicine – like what the President did when he asked the donor community for a ‘spoonful of sugar to help the medicine go down’.

You may find yourself asking what exactly is the sickness for which we have to take such a bitter medicine. So what I will attempt to do in this first part of the article is to try and explain to you exactly what happened to our economy – in as plain, jargon-free, language as I can.

In the second part of the article (to follow soon) I will try and show you the remedies we need to take and to shed light on how to avoid getting into a similar mess in the future.

In order to understand our recent economic history, you must first know the three ways in which a government can affect the economy: fiscal policy (how much it spends from its taxes, revenues or borrowings) or monetary policy (how much money it prints) and exchange policy (how it allows goods and services to come in or go out of the country). So lets look at how our Governments – both Gayyoom and the MDP – have used these levers over the last few years.

The Big Wave

The key defining moment to start is the Tsunami of 2004 where we faced a previously unimaginable event that brought economic activity to a virtual standstill. The tsunami, however, happened in the context of two other very key social phenomena. Firstly, there was an emergence of a movement calling for political change that proved especially resilient and vocal. Secondly, there was a dramatic increase in global prices – food and oil prices especially.

The response to this was naturally a large spending program to rebuild the country. No doubt, the initial spending by the Government went to Tsunami affected purposes. However by 2006-07 the Government started doing two things.

First, it increased the size of the civil service from about 24,000 to about 32,000 people, and secondly increased their average salaries from about MRF3,000 to MRF11,000. As a result, government spending went from 35% of GDP in 2004 to about 60% of GDP in 2006.

I need to take a few more moments just to put this level of spending into perspective. Firstly, it is mentioned above that we expanded the civil service to be almost 32,000 people – that is almost 11 per cent of the total population of the country!

The comparative figure for other small island countries (like in the Caribbean) is at four per cent. Furthermore, the public sector wage bill (ie. all the salaries and allowances paid to this 11 per cent of people) accounted for almost 50 per cent of all our expenditure and almost 70 per cent of all our revenue.

Of course, all this expenditure is fine if we can actually pay for it. The question then becomes – where did the money for all of this increased expenditure come from?

It came from three sources – grants, loans and the additional revenue from leasing out a number of new resorts. The understandable impact this had on the supply of money was a three-fold increase.

One notable side-effect of this was a rising inflation of more than 20 per cent over the years: a factor that contributed to MDP making controlling inflation a major policy pledge. However all of this would have been manageable but for the third policy lever of a government – the exchange rate.

You would no doubt know that we in the Maldives have a pegged exchange rate – ie. it is fixed by a central authority to a specific currency at a specific value (in this case Rf12.85).

A policy of increasing public spending, and thereby increasing our supply of Maldivian rufiyaa AND keeping a fixed exchange rate, can only work if we also keep increasing our foreign currency stock. This is because the pegged exchange rate works on the assumption that if somebody comes to the MMA or Bank with any amount of rufiyya looking to buy US$, we should be able to cater to this.

With increased rufiyaa in circulation there was a large increase in demand for USD, but there was no real increase in supply of foreign reserves. This caused the ‘real’ exchange rate to shoot above Rf12.85, and thereby cause even worse inflation. As trust in the system started to disappear, those who actually had US$ no longer trusted to put the money into local banks.

All of this enormous stress on the system was there well before the greatest global economic collapse since the 1930s struck.

The Global Financial Crisis (GFC)

The two specific impacts of the GFC were two fold.

First there was a ‘credit crunch’ – the flow of finances between international banks stopped because none of the banks trusted each other. Financing to all those many resorts that were given out started drying up so our reserves fell even more. Secondly, tourist numbers started retrenching – and those tourists that did come spent a lot less.

It was about this time that the historic change in government took place and the MDP came to power. To their horror, they soon came to realize that they inherited a fiscal situation far worse than they had imagined.

This was due to the fact that government spending is often done through contracts that have long-term implications. Governments sign contracts that burden future governments to payments – both in terms of principal and interest payments.

The amount that the MDP government had to pay in interest alone – for projects that they themselves had nothing to do with – rose from three to eight per cent of GDP between 08-09.

Here therefore we need to introduce the final basic concept – that of the fiscal deficit. This simply is the difference between what we earn and what we spend divided by our GDP.

In 2008, this was at about -12.5 per cent, but the worrying thing was that given the fall in revenue projected by the GFC, this was projected to rise to almost 33 per cent in 2009.

Once again let’s put these figures in perspective. The highest the fiscal deficit reached in the USA – in 1945 straight after the Second World War – was at about 20 per cent.

Obama’s hugely expensive budget this year will increase his to just over 11 per cent. In Sri Lanka, the IMF refused financing to the current President because his latest fiscal deficit reached 10.5 per cent!

However way you look at it, we are in a desperate, desperate situation.

Don’t Blame it on the Sunshine

A key question you may therefore have is – who is responsible for this mess? Was it pure malice? Incompetence? Or did we just get unlucky?

Those who seek to justify the acts of the former regime would say that yes, they expanded the domestic money supply, but what you must also keep in mind is that they had just successfully bidded out 60+ resorts.

Even if you take a conservative estimate, we are talking about almost US$3 billion of investments.

Even assuming 50 per cent Maldivian staff, this is about 7,200 new jobs in the resorts alone. The total bed capacity increase was expected at 12,000 – so that is about US$4.2 million PER DAY in revenue. As such, an expansionary fiscal and monetary policy was justified on grounds of the revenue, returns and most importantly, reserves from this resort expansion. They could never have been expected to foresee the Global Financial Crisis coming.

On the other hand, critics would argue that in the years of Gayyoom’s presidency, especially in his last two years, rational economics was not the order of the day. Rather, the preoccupation of the regime was to stay in power at all costs.

If that meant bringing 10,000 extra staff and increasing their salary four-fold, as well as signing up to countless and often pointless public expenditure projects by borrowing large sums of money at exorbitant interest rates – so be it.

Critics would argue that if the Government were interested in anything other than self-preservation, they would have at least invested the money more wisely. It was reckless spending for purely political aims with no thought to the future health or wellbeing of the economy.

My own personal viewpoint is that we should leave the blame game for another day – if we take it up at all. The challenges to our economy, and by definition our fragile democracy, are far too great to waste time pointing fingers. I understand that political points have to be scored, but there are no elections in sight for at least 3-4 years.

We have arrived at a situation where we need to politically co-exist if we are to heal our economy. For now, leave aside your talk of past corruption or the future hell that awaits us if we do not veil our sisters. We have jobs to create, youth to educate, industries to develop and opportunities to exploit. I for one would like to look back on these days as a time when we all, blue and yellow supporters alike, did some pretty remarkably constructive things in the Maldives.

All comment pieces are the sole view of the author and do not reflect the editorial policy of Minivan News. If you would like to write an opinion piece, please send proposals to [email protected]

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President calls for national dialogue on economy

President Nasheed has urged all political parties of the Maldives to opt for dialogue on national issues, during his weekly radio address, and spoke of the country’s economy.

The president said the government will be able to begin a number of new development projects within the next few months, provided with proper frameworks and funds.

He stressed the importance of passing the proposed taxation bill, and urged newly elected leader of Dhivehi Rayyithunge Party (DRP), Ahmed Thasmeen Ali, to work on passing the bill.

The President spoke of the budget deficit and the need to to ensure a fast recovery from the economic downturn.

The taxation bill, along with the loans agreed by the International Monetary Fund (IMF) and the Asian Development Bank (ADB), should give the country a budget surpluss by 2012, he said.

Before concluding his address, the president noted the significant increase in the number of tourists arriving in the Maldives this January. With 67,478 tourists arriving in the month, it became the highest number of tourists arriving in the month of January in the last five years.

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