Why I blog

Many of my good intention friends asked why I started this blog and write on topics many reserved for private conversations. I like to share the quotations below as I cannot explain better.

First they came for the communists,
and I didn't speak out because I wasn't a communist.
Then they came for the socialists,
and I didn't speak out because I wasn't a socialist.
Then they came for the trade unionists,
and I didn't speak out because I wasn't a trade unionist.
Then they came for me,
and there was no one left to speak for me.
                                         Pastor Martin Niemoller (1892–1984)

Martin Luther King, Jr. equates silence to death.
“Our lives begin to end the day we become silent about the things that matter.”

We live in a wonderful nation, blessed with resources and absence of natural disasters.  We have made good economic progress.  The country is peaceful, although crime has become a nagging problem.  Those who articulate constructive criticisms, differing views, probing analysis and challenging questions are not because they are ungrateful or less loyal.  Quite the opposite. It takes a lot of effort …and pain !

I am reminded of a past incident.  An advice from a Malaysian tycoon in my younger days. That he has limited time and opportunity to be with the “power that be”.  Therefore, why talk about social or economic issues or issues affecting others? Just concentrate on getting what you want.

Sadly, that’s what many do.  It’s a lot more pleasant, more rewarding and less intellectually demanding to sing praises and to agree. 

The children’s tale, “The Emperor’s New Clothes” is telling.  Many do not know they are naked with those around them singing praises. 

I chose not to listen to the tycoon.  He has since become a lot richer and more powerful.   I maintain my dignity, my value and my soul.

Say NO to Corporate Kings

The role of every Government is to do what is best for its people.  “What is best” is often debated, lacks clarity and changes over time.  Besides, it differs from one person, or group of persons, to another.

Luckily, there is no ambiguity in economics.  “What is best for the consumer” is more choices, lower prices and better quality. Clear, concise and quantifiable.

Yet, why is it so difficult for many Governments to deliver what is best for the consumer? Why can’t Governments deliver something as simple as what is best for the people in terms of goods and services?

Malaysia: Competition Commission Act 2010

Gazetted on 10 June 2010, the role of the Commission created by this Act is to advocate for competition and to penalize anti-competitive behavior.

While the Commission has the power to impose penalties for the infringement of the provisions of the law, it does not have the power to prosecute or to block or reverse any transaction. Persecution is only with the written consent of the Public Prosecutor.

There are also four criteria that allow parties to be exempted from the Act. They include identifiable social benefits or where the detrimental effect is matched by the benefits. This is worrisome, especially when the decision to exempt is outside the purview of any oversight.

In September 2013, we saw the first substantial action of this Commission. It ruled that the merger of Malaysia Airlines and AirAsia in 2011 was in breach of the competition laws and fined both parties RM10 million each.

A tour of other jurisdictions

Competition law has been in existence since the Roman Republic around 50 BC. Today, the two most widely quoted laws are the United States Antitrust laws and the European Union Competition Law.

Basically, these laws have the following characteristics: Prohibit the restriction of free trade and competition, ban abusive behavior by firms dominating a market or engaging in anti-competitive practices. The laws also supervise mergers and acquisitions that threaten the competitive process.

While protecting the interest of the consumer is the underlying principle, its other objective is often also ensuring that entrepreneurs have an opportunity to compete in the market economy.

Senator John Sherman provided the moral justification in 1890, “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life.”

As for economic justification, the entire theory of economics is based on competition leading to efficiency and better resource allocation.

Ever since the break-up of the Standard Oil Company in 1911, the US has enforced rigorously against anti-competitive practices, from cartels and collusion to mergers, price discrimination, exclusive dealings, predator pricing and intellectual property.

Enforcement is effective in the US for the following reasons. The Federal Trade Commission, the US Department of Justice, state governments and private parties who are sufficiently affected may all bring actions in the courts to enforce the antitrust laws. Large companies must also notify the Federal Trade Commission and the Department of Justice’s Antitrust Division prior to attempting any merger exercise.

Private parties, who can prove that they are injured by the actions of firms that act in anti-competitive behavior, can sue to recover three times their actual losses.

The commitment to enforce is based on a fundamental belief that competition is good, where the Supreme Court believes the Act is to protect free enterprise, and the ultimate goal is to protect consumers.

Back to home

Cars in Malaysia are among the most expensive in the world, with exorbitant profits accrued to a few car importers who are given exclusive permits.

What economic benefits do they provide to consumers?

As very few of the locally manufactured cars are exported, it is clear this subsidy does not create globally competitive companies.

Another example is the domestic steel sector, which is globally uncompetitive and inflates the domestic costs of construction. Or the exclusive permits to import basic necessities like rice, sugar and beef. Many public sector procurements are also non-competitive and non-transparent.

Nothing is more real than personal experiences, where anti-competitive behaviors come in different forms. Let me share a few.

In 1995 when PhileoAllied Bank introduced online banking and stockbroking, the Kuala Lumpur Stock Exchange tried to stop this innovation by going to the courts. The reason was to protect their market share and commission rates.

And after the successful launch of OneAccount in 1996, the first current account that pays fixed deposit interest rates, Bank Negara stopped the launch of the OneCorporate account that would have given companies the same benefit. A few large banks protested.

In the name of consolidation of the banking sector, an innovative, technologically superior and profitable bank was forced to be sold in 2001.

More recently, on 20 August 2013, The Edge Communication received approval for its application of a publishing permit to publish a general daily newspaper, FZ.

On 28 August 2013, we received another letter from the Ministry that said “Penangguhan Permit Penerbitan”. The approval we received just a week earlier was now “deferred”. No reason and no indication for how long was given.

What happened during the one week, between 20 August and 28 August 2013? Three guys, each involved in separate media companies, met together and with others.

By 23 August 2013, I was already informed of the contents of the Home Ministry letter of 28 August 2013. The CEO of The Edge Media Group was told by one of the three guys.

The Government, which regulates the private sector, has now become “regulated” by such powerful private sector elites.

More important is the question WHY. Is it good for the consumer and the public?

Looking back at history, I entered into a partnership with the Berjaya group to combine The Edge and TheSun in 2002.  TheSun was turned around and Berjaya wanted to part ways in 2008.

In recent times, I have been approached if I would consider buying TheSun again.

I was also asked if I would consider partnering The Malay Mail and Malaysian Reserve.

FZ getting a license to publish a general daily newspaper would obviously be a threat to other publications. It will also remove a “rent-seeking” opportunity to some others who might profit from selling their licenses.

What is best for the consumer

We know what is best for consumers, even if there are some debates on long-term versus short-term goals, on employment and on supporting local industries and building a critical mass to achieve economies of scale.

We can incorporate these objectives into measurable trade-offs to arrive at clear, concise and quantifiable outcomes.

Implementing the following measures will strengthen consumer protection:

(A) Empower and enrich the Competition Commission with knowledge, expertise and enforcement capabilities. Ensure there are sufficient checks and balances to remove internal abuses and corruption.

(B) Mandate the courts to protect consumers. The doctrine is that competition is the ultimate safeguard against corruption, abuses, profiteering and inefficiencies.

(C) Where there are social issues, trade secrets or where it can be argued that certain forms of collusion may indeed have more positive than detrimental effects, let the courts decide in public.  The people will be the final arbitrator.

(D) Finally, amend the Competition Act and allow injured parties to sue through the courts for losses suffered from anti-competitive behaviors. Such actions can be taken independently of the Commission or the Public Prosecutor.  

What stand in the way of what is best for consumers? Powerful, extractive elites!

Are we willing to continue enduring “Corporate Kings”?

Some countries said NO more than 120 years ago. Most other countries have rejected them.  Is it not time for us to say NO too? 

China Stationery – too cheap or too good to be true?

CSL’s shares are currently trading at just one time earnings and one-quarter of its net cash value per share. Put in another way, imagine paying 25 sen for a one ringgit note! 

Its stock price has fallen from a 52-week high of RM1.13 to just 22.5 sen and one-fifth of its IPO price of 95 sen back in February 2012.  By comparison, its book value per share is RM1.18 sen and net cash value per share is 86 sen, as at June 2013. 

CSL’s past financials show strong earnings and balance sheet strength. 

In 2012, the company reported net profit of just under RM247 million, with EPS of 20.8 sen. Results for the first half of 2013 suggest a similar annualised performance, implying a full year EPS of around 20 sen – near its current stock price. 

Despite these seemingly attractive valuations and strong fundamentals, the company’s major controlling shareholder, Lead Champion Ltd has been paring its stake aggressively, a move which does not send a positive signal to investors. 

Is something amiss? Is the massive selling by insiders a precursor to something negative? Or is CSL shaping out to be the market’s “cheapest” stock right now? 

For the full analysis, read The Edge Malaysia this weekend ...

A book review

Why Nations Fail

By Daron Acemoglu & James A. Robinson

I

Economics not long ago was at risk of becoming obscure and irrelevant. The perfectly informed and rational human agents of mainstream theory were nowhere to be found in the bubbles, financial crises and economic upheavals of recent times. All too often, Western policy-makers and market practitioners have been stunned when sensible economic prescriptions are blindsided by politics. 

Emerging from the consequent angst in academic circles is an approach that broadens the forces and influences seen to shape economic outcomes. Nobel-prize winner Daniel Kahneman's Thinking, Fast and Slow marries insights from the field of social psychology and neuroscience to economic behaviour. 

Blending prehistory, geography and anthropology, The Origins of Political Order by Francis Fukuyama's distills three ingredients for a successful and enduring nation: the rule of law, a strong state and accountability.

Older but in keeping is Albert O. Hirschman's classic text Exit, Voice, and Loyalty which contrasts the choices citizens make when trapped in failing organizations and states. 'Exit' is voting with your feet, taking your business elsewhere. Voice' is staying put and fighting for reform from within.

II

Daron Acemoglu & James A. Robinson, professors at MIT and Harvard University respectively, make a compelling addition to this trend in contemporary economics. Why Nations Fail draws widely across the globe and vividly into history to answer some big questions. Why do some societies prosper while others persist in poverty? Why does the global map of the richest and poorest countries look remarkably the same today as fifty, hundred and two hundred years ago with sub-Saharan Africa and Central America much poorer than Western Europe, North America, Australia and New Zealand. Without oil, the Middle East countries are also all poor. 

Traditional development economics (the 'dual economy' thesis, modernization theory, 'market failures') ignore politics. Therein lies their failure for it is politics, argue the authors, that drive everything. Get the politics right and all else follows. 

And what is right' are 'inclusive' institutions which incentivize citizens and create virtuous circles of innovation, expansion and widely-held wealth. Elements vital to keeping the virtuous circle going are pluralism where many, varied groups exist to check each other's power, laws applied equally, universal education, a free media to inform and empower, secure property and patent rights that encourage investment and open markets free of monopolies and progressive taxes. 

However, where 'extractive' institutions prevail allowing a narrow elite to monopolise economic gains, technological advances are blocked, productivity deteriorates and a vicious circle of enduring backwardness sets in. There is great and easy profit to be made merely by controlling power, expropriating the assets of others and setting up monopolies. Hence, the hostility to new technologies whose impact is both creative and destructive. Favouring new skills and economic groupings, innovation invariably undermines the power and privileges of the old, vested elites. 

However, inclusive institutions that adapt to allow ever broader sections of society to generate and share in the new wealth trigger a path of rising prosperity. On the other hand, extractive societies are ultimately unsustainable. Blocking newer, more efficient ways, old sources of wealth are rendered obsolete by more vibrant competition elsewhere. As the pie shrinks, infighting among elites for control intensifies. 

III

Acemoglu & Robinson's central thesis is that these institutional differences become crucially important at critical junctures, major events that disrupt the existing balance of power in a nation. The Black Death of 1346, expansion of world trade after 1600, the Industrial Revolution in the late eighteenth century and European colonization were among such defining moments. 

Hence why did the Industrial Revolution take off first in England followed by its settler colonies (the US, Canada, Australia), France and Spain but fail elsewhere? The authors trace the roots to the bubonic plague in 1346 which transformed and split Europe. Halved in numbers, the peasantry in Western Europe gained in bargaining power. Not so in Eastern Europe. Serfdom hardened to leave the medieval feudal order intact and the masses destitute. 

In England however the masses were further empowered by Glorious Revolution of 1688. Power shifted from the monarchy to Parliament which acted to open economic access to a broad cross section of society. England rationalized property rights, enacted patents for ideas, protected law & order and abolished monopolies and arbitrary taxation. 

Thus by the 18^th century, England had already developed the world's first set of inclusive political and economic institutions. This plurality of interests and freedom under a growing market economy allowed entrepreneurs and innovators to emerge and commercialise the scientific knowledge that had accumulated in Europe over several centuries. The impact was dramatic. The Industrial Revolution improved every aspect of the English economy: transportation, metallurgy, steam power and mechanization of textile production. The French Revolution in 1789 then led the institutions of Western Europe to converge with those of England.

In contrast, absolutist rule continued in the nineteenth century in Eastern Europe, the Ottoman empire, Africa and most of Asia blocking the spread of industrialization. China was a major naval power centuries before the Europeans. But by the fifteenth century, the Ming emperors had abandoned global voyages fearing that trade and new ideas would threaten their rule. Subsequently, independent cities, merchants and industrialization were non-existent in China for two centuries. Though never formally colonized, a weakened China was defeated in the Opium wars and forced into humiliating trade concessions by the European powers. 

Conditions were no less hospitable in India with society constrained under a rigid caste system, absolutist Moghul rule and the arrival of English colonial rule. In Southeast Asia, initial progress from a thriving spice trade reversed under the extractive plantations of the Dutch and English East India Companies. Only Japan played out differently in Asia. Like China, Tokugawa rule since 1600 was feudal, absolutist and banned international trade. However the arrival of the Americans in 1853 cemented opposition and led to a political revolution. The Meiji Restoration enabled more inclusive institutions and modernized Japan, laying the foundations for subsequent rapid growth. 

In the Americas, European colonization set the stage for divergence. In contrast to the inclusive institutions modelled after England that developed in the US and Canada, highly extractive ones emerged under the Spanish conquistadors on lands occupied by the once majestic Aztecs, Incas and Maya civilisations, forcing their living standards down to subsistence level. These institutions endure till today condemning the region to poverty. 

Africa was the part of the world least able to capitalize on the Industrial Revolution. Already lacking centralized states resulting in lawlessness and unstable borders (a continuing handicap shared with Afghanistan, Nepal and Haiti), the Atlantic slave trade decimated human and property rights and compounded Africa's backwardness. Ironically, while the discovery of the Americas helped England develop inclusive institutions by emboldening the merchants opposed to the Crown, it made Africa more extractive. lindependence, rather than creating a critical juncture to improve their institutions, has opened up a cycle of revolutions and radical movements that merely replace one tyranny with another (dubbed the ‘iron law of oligarchy’).

 With these vivid trajectories from the past five hundred years, the authors show how critical junctures served as a double edged sword in that how political institutions in various nations responded determined if they set off on a path of rising prosperity or poverty. Fascinatingly, small initial differences became more significant over time.

IV

Seeing institutions and incentives as the cause, Acemoglu & Robinson are dismissive of views that poor countries are poor because of their geography or culture, or because their leaders are ignorant. 

Witness the yawning gap between North and South Korea, identical twins in geography and culture but divided at the 38^th parallel six decades ago to evolve under very contrasting political regimes. Or East and West Germany before the fall of the Berlin Wall in 1989. Perhaps the most controlled experiment is in the little-known town of Nogales. Divided by a mere fence, residents on the north, belonging to the United States, face lower crime, live longer and earn three times the south side, part of Mexico. 

Hence it is not Islam that keeps the Middle East poor but the extractive nature of Ottoman and European colonial rule bequeathed upon today's authoritarian regimes. Could European descent be at the root of success? Yet Argentina, more 'European' than the immigrant populations of the US and Australia, has fallen mightily from the richest ranks at the turn of the twentieth century. Meanwhile, Japan and Singapore, with miniscule European heritage, are now as prosperous as Western Europe. 

Western policy circles (the IMF, World Bank, aid agencies) also come in for criticism with their approach assuming that merely enlightening political rulers about sound economics will 'engineer' prosperity. The politically powerful make economic choices that enrich themselves at the expense of the majority because they can get away with it, not because they are ignorant. 

V

But history is not destiny. Crossing into the 20^th century, there are striking examples of countries 'breaking the mold'. In the US South, the empowerment of black Americans through the civil rights movement coupled with intervention by federal institutions finally ended the domination of the southern white elites. In 1940, southern states were at half the average US national income. By 1990, the gap had vanished and in 2008, the nation elected its first black president. 

The rebirth of China is no less remarkable. Impoverished for three decades under Mao's disastrous policies of the Great Leap Forward and Cultural Revolution, China reversed course to embark on the most rapid growth in the world. It was Deng Xiaopeng's brilliant political coup that freed the way to introduce more inclusive market incentives in agriculture and industry, and allow foreign investment into selected cities. 

The common ingredient: political reform that seized the day to shape more inclusive economic institutions and incentives. While admittedly few, it is in these examples that the lessons of the book have their most appeal, offering a way forward to douse the fires burning in Egypt, Turkey and Brazil.