Archive for October, 2010

Malaysia in the Era of Globalization #38

Wednesday, October 27th, 2010

Chapter 5: Understanding Globalization (Cont’d)

The Forces Driving Globalization

Much as the Industrial Revolution of the 18th Century was driven by machines, so too is today’s globalization propelled by technology, in particular Information Technology (IT), and knowledge. The Industrial Revolution began with the invention of steam engines that were used primarily to pump water out of mines. Later they were adapted for other uses, from weaving machines to steamships and locomotives.

The mechanized weaving mills revolutionized the textile industry; locomotives and steamships, transportation. Machines could produce goods not only in mass quantities but also of consistent and reliable quality. And those goods could now be transported to vast distant markets, thanks to cheap mechanized transportation modes. The locomotive was also instrumental in opening up the vast American continent and propelling America into a major economic power.

IT is based on the digitization of data. Data, be they voice, graphics (pictures) or text could be reduced to blips of “off” and “on” switches, and then transmitted over cables or satellite at the speed of electricity (light). The entire text of this book could be reduced to billions of such bits and then transferred to a reader at the other end of the globe where he or she could download them on the computer and be able to read my book in exactly the same way as it was originally presented. The whole process would take seconds. To rely on airmail would have taken days if not weeks.

Through the wonders of IT I can listen in real time to a sermon delivered at a Jerusalem mosque and also view the khatib (preacher) as he is delivering it. Sitting in my home I was able to watch on the Internet Mahathir addressing the 2001 UMNO General Assembly. And if someone had a digital video camera, he or she could have recorded the reactions of the crowd and transmit the images worldwide, giving viewers another perspective on the assembly instead of relying solely on the “edited” videotapes that were being broadcasted by the state-controlled television channels. All these are made possible by the digital revolution.

Just like the early steam engines found their way into other activities, so too has IT weaved its way into every facet of modern life. Even the simplest household gadget like a coffee maker has a computer chip embedded in its innards to enable the homemaker to program it to start brewing at a certain time. Through the computer, which is the prime symbol of IT, I can communicate with someone at the end the globe just as easily as if he were in the next office cubicle.

The locomotives and steamships of the Industrial Revolution made mankind conquer the physical obstacles of geography, specifically distance. To 18th Century Britons, faraway Ceylon was not some imaginary island in the tropics but a place where they could order their beloved tea. Geography ceased to be a barrier to trade or travel.

With the IT revolution we have again made a quantum leap in progress with respect to geography. We have effectively or virtually eliminated it. We have now effectively neutralized the “tyranny of geography.” With IT, it matters not where you are, as long as you are connected to the information superhighway, it will take you anywhere on the globe in split seconds. IT makes possible the free flow of data and information across borders.

There are two remarkable aspects to the IT revolution. One is that there is no central authority in charge – no government, UN Agency, or powerful corporation. It is as amorphous as it is ubiquitous. Two, the costs are declining as fast as the technology is improving. Not only are the fixed costs (computers, laying of cables, satellites) decreasing; the marginal costs are declining even faster. Once the cost of launching the communication satellite into orbit is paid, the additional (marginal) cost of adding an extra channel is simply the cost of the technician turning on the switch.

The forces driving globalization are essentially these: technology, specifically in IT; capital (money); and ideas (knowledge). IT makes possible the near instantaneous transfer of funds worldwide. When MAS buys a new 747 jet from Boeing, there is no signed check to be delivered or mailed. Instead the moment escrow is closed, the funds are immediately wired from MAS’s bank in Kuala Lumpur to Boeing’s in Seattle. Likewise, when a reader in Malaysia orders my book from Amazon.com in America, he could use his debit or credit card to transfer money from his bank to Amazon.com’s bank. Whether the transaction is for $50 or $50 million, the same technology is used at the same transaction cost. Money is not the only item that can be transferred via the Internet. More important is the transfer of ideas. Information is now no longer the preserve of those in power but diffusely distributed.

During the Industrial Revolution, with machines doing the work of workers, there was a quantum leap in the productivity in all sectors of the economy. Where previously it would take a farmer a whole week to till his little farm with his ox and primitive plow, a tractor could do it in a matter of hours. In the factory, one worker could look after a dozen weaving machines, each producing yards of cloth per hour, an output that previously would have occupied thousands of workers. In transportation, steamships could reliably deliver goods to distant markets in a much shorter time than would the old schooners.

Each new generation of machines would in turn help produce even more complex and powerful machines. Old engines that were once powered by wood gave rise to newer models that burned coal, and later, natural gas and gasoline. Their designs too changed radically, from the internal combustion engine to diesel-powered ones and later, gas-powered turbine and jet engines. Each new design represented an improvement in efficiency.

Similarly, the present IT revolution means more than just the ease of transferring data. It permeates into every facet of the economy. Earlier I gave the example of the improved productivity in my own medical practice made possible by computers. When I published my first book The Malay Dilemma Revisited in 1999, I did not use a single sheet of paper nor spend a dime on postage stamps. I did the entire writing straight on the computer, edited it directly onscreen, and then e-mailed the entire manuscript to my publisher. When it was ready, it was e-mailed back to me for proof reading, again directly from the screen, and then re e-mailed back to the publisher.

Previously (and also presently with many publishers), the whole process would have consumed many a tree for the papers needed, and hundreds of dollars worth of postage, and countless hours of retyping. But with modern word processing software, corrections and editing involve only a few strokes on the keyboard.

When my book was ready for marketing, my publisher was able to e-mail the announcement to thousands of potential readers worldwide, again without spending a cent on stamps. Additionally the book was made available on major on-line bookstores without it being actually physically present in the bookstore. When a customer orders my book, that order is immediately transmitted electronically to my publisher, from where the book would be immediately printed and shipped out. The entire transaction, whether across town or the globe, could be executed in seconds and at a marginal cost of pennies (marginal in contrast to the fixed cost in the purchase of computers and software).

In another area, using sophisticated software, airlines can now predict with a high degree of certainty how many seats would be sold on any given flight based on past experience. It can then use this information to offer the anticipated unsold seats to last minute discounters (“bucket shops,” to use the language of the trade), thus converting what would have previously been empty non-revenue producing seats into productive ones. Again using computers, the airline could plot the most economical (least fuel consuming) route. Oil companies regularly use sophisticated computers to mine data abstracted from their explorations, thus reducing considerably their chance of a dry hole. The American military uses computers to guide their “smart” weapons to devastating effects, as the Iraqis learned to their sorrow during the Gulf War, and as the Talibans are now experiencing.

It took a while for economists to recognize the tremendous gains in productivity IT makes to the economy. In part this was because those improvements were not readily apparent or measured, unlike the obvious gains of the Industrial Revolution that were readily seen and thus measurable.

The modern technology that accelerates globalization is not limited only to IT. The costs of travel, transportation, and communication have also dropped steeply due to advances in technology. With such gains in productivity, costs are lowered and the savings passed on to consumers. An airline trip is now within reach of the average Malaysian.

During my student days in Canada I hardly made phone calls home; it was just too expensive. Today, Malaysians in America call home almost every weekend! The cheap cost of transportation also made it possible for retailers in America to order their merchandise from faraway places like Indonesia. It makes geography and distance minor cost factors. It is this that fuels international trade, and with it globalization.

In 1938, the ratio of the world’s imports to gross product was about 7 percent; by 1970 it crept up to only 10 percent. By 1996 however, it nearly doubled to over 18 percent. That is to say a greater proportion of the world’s products and services are being traded between nations. The statistic that is more significant is that countries that have a greater ratio of the value of their international trade to their gross product tend to be more prosperous. Stated differently, trading is the way to prosperity for nations; the more we trade the more likely we are to prosper.

Next: The Corollary to Globalization

Malaysia in the Era of Globalization #37

Wednesday, October 20th, 2010

Chapter 5: Understanding Globalization (Cont’d)

Trading in Money

Malaysia cannot modernize its financial sector and capital markets in part because its leaders are stuck in the pre-globalization mindset, especially in their attitude towards money and capital. While to consumers everywhere money is now simply a convenient medium of commercial transaction, to Mahathir and other Third World nationalists it assumes a more important symbolic function. Currency represents the nation’s sovereignty. It is instructive that one of the first orders of business for many newly independent nations is to declare a new currency or to rename its old one. Malaysia has the ringgit, and to symbolize its new beginning, prints a portrait of its king on the paper notes. Money is no longer simply money, rather a powerful symbol of the nation’s sovereignty.

It is this symbolic attachment to the currency that irrationally dictates many economic policies. Governments often go to extreme lengths to defend the value of their currency when market conditions dictate otherwise, as happened in Thailand and Malaysia during the 1997 crisis. They forget that the value of a currency is a reflection of consumers’ and investors’ confidence in the underlying economy. A weak economy will have a weak currency, regardless of the nationalistic frenzy used to whip support for it. Malaysia lost billions and nearly exhausted its foreign exchange reserves in the early part of the 1997 economic crisis trying to defend the value of the ringgit, only to admit finally that the market was correct.

Even as a medium of commercial transaction, money or more accurately cash, has been supplanted by other instruments. The most widespread is the credit card. Even when I travel abroad I carry very little cash, only a pair of credit cards with the second as insurance in case the first is stolen or lost. With that I could purchase anything and execute any transaction. It is also safer and more convenient; if stolen all I have to do is notify my bank and the card would be rendered useless and a new one reissued. In practical terms my credit card with my picture on it is as good as the paper money with the King’s portrait on it!

To an increasing number of people today money is just a commodity, like rubber and sugar. And like those commodities there is a market in money futures, that is, in predicting or anticipating its future values. Just as sugar “futures” traders take the risks from the producers and consumers of sugar, so do currency traders take the risk from lenders and borrowers.

In its simplified form a commodity futures trader works thus. Imagine I am a beverage manufacturer and use tons of sugar every day for my product. I cannot afford to have the price of sugar, my prime ingredient, fluctuate wildly. I need it to be relatively stable so I can budget appropriately. But the price of sugar, like other commodities, will vary depending on weather, political upheavals, world markets, and labor disputes, among others. As a wholesale consumer, I do not have the time or expertise to monitor the various market conditions affecting the price of sugar, otherwise I cannot devote my full energy towards producing my primary product. All I need is a steady supply of sugar at a reasonable and predictable price. Enter the futures trader. For a fee he will guarantee for me my supply of sugar for the next few months (or years) at an agreed upon price. If the price of sugar drops he will reap his profit, but if Castro throws his usual political antics and the price of sugar suddenly jumps, then I will be protected but the trader will lose in the deal.

And if that sugar commodity trader were prudent, he would spread his risks by diversifying. That is, he would also invest in other commodity futures so that if he were to lost money in sugar, he would be able to recoup in soya beans, for example.

Traders in currency futures too serve a similar function. Assume MAS were to borrow US $100 million to buy a 747 jet and have to repay the loan in US dollars. MAS’s revenue however, is in ringgit (at least the bulk of it). If the ringgit appreciates in value with respect to the US dollar, then MAS will need fewer ringgit to service the loan. That would be a bonanza to the company. However if the ringgit were to depreciate, then MAS would have to spend more to service the same loan. Small variations in the exchange rate would not be disruptive, but wild fluctuations could put the company under by making the amount of loan payments unpredictable.

Competent financial managers guard against such unanticipated changes by “hedging,” that is, for a small down payment (“options”) he would be guaranteed a certain amount of dollars at a preset conversion rate. As with the sugars options discussed earlier, if the dollar appreciates then the currency trader would absorb the loss and spare MAS the added costs. By securing such options, MAS would be acquiring an insurance policy against the potential weakening of the ringgit. The debacle that snared MAS and many other Malaysian companies during the 1997 economic crisis was in part because they borrowed huge sums of dollars that were “unhedged.” When the ringgit depreciated, the costs of those loans effectively went up.

Thirty years ago almost all cross-border transfers of currencies were for payments of goods and services, that is, for payments of actual trading. Today the overwhelming bulk of cross-border movements of funds are by currency traders using money as a commodity, trying to exploit changes and small differentials in exchange and interest rates in the different markets. Every day over trillion dollars are sloshing around the world’s money markets, and only a very tiny fraction of that is being used to pay for actual physical trade in goods and services.

Money is now a commodity, to be traded across borders just like sugar and rubber futures, and with as much sentiment as for those products. Just as traders at the Chicago Commodity Board earn more than the farmers who produce those commodities, so do currency traders make more money that those whose hard work generated those cash in the first place. Mahathir may rail against these speculators but they are not likely to disappear. I have always regarded futures trading as nothing more than 90 percent gambling and 10 percent useful economic activities (protecting producers and consumers from the risk of price volatility), but as long as it serves even that small an economic function, it will remain. No government can outlaw it; doing so would only drive them underground. Then they would become 99 percent gambling.

Left wing social science professors may condemn these commodity traders. Why should these young hustlers in their bowties and red suspenders working in the comfort of their air-conditioned trading pits, and who cannot tell apart the wheat from the shaft, be earning more than the hard working wheat farmers? It is sinful and unjust. If anyone should benefit from any increase in the price of grain, it should be the farmers, not those speculators. This was the theory behind the Soviet collective farms, with the farmers (with the help of the state) controlling not only the production but also the distribution and marketing of their products.

The collapse of the Soviet farms proved the fallacy of such a system. Farmers should stick to farming, marketers to marketing, and risk takers (commodity traders) to managing financial risks.

Currency traders like George Soros indeed make a killing – when they guess or gamble right. But when they are wrong, they eat more than humble pie. They could be wiped out. The near collapse of the billion-dollar hedge fund Long Term Capital Management in 1999 is a grim reminder of the stakes in this new form of “trading.”

Economists and others who have long tried to grapple with how to control or tame currency trading have been humbled by their attempts. Many a conference and seminar have been devoted to rebuilding the “architecture of international finance.” The fact that there is no solution as yet points to the difficulty of getting unanimity on the issue.

Chile once charged a premium for short-term capital (“hot” money) by requiring a portion to be deposited in a non-interest bearing account with the central bank. That was then. Now with the intense competition for foreign funds, Chile has done away with that novel scheme.

The Yale Nobel economist James Tobin suggested a similar concept, the so-called Tobin Tax, to damper speculative activities of currency traders. The fact that such schemes have not been adopted suggests that there are associated costs. Ultimately it is borrowers, not lenders, who would end up bearing the added cost. Thus instead of ranting and raving against currency traders, we would be wiser to accept them and to learn their ways in order to protect ourselves. Countries should concentrate on producing goods and services efficiently, and let the currency traders assume the foreign exchange risks.

While Mahathir may now righteously condemn currency traders, specifically George Soros, his own central bank was actively involved in the foreign exchange market. Indeed Bank Negara’s excessive speculative activities in the early 1990s prompted the United States Federal Reserve Bank to issue a stern warning. As it turned out, that was unnecessary as Bank Negara was later humbled by the loss of billions on a wrong gamble on the dollar. The difference between Soros’s and Bank Negara’s loss is that with the latter, it is the Malaysian taxpayers who ultimately foot the bill while Soro’s loss was borne entirely by his affluent clients and investors.

Thirty years ago there was no currency trade. For one, there were only a few major currencies in the world so there was not much room to speculate. Today, every tiny little independent country wants its own currency; thus opportunities for speculators are wide open. The other reason is that currencies then were tied to the value of gold. Money then held its value. The US dollar was the last major currency to “de-link” itself from gold. Without an underlying precious metal to support it, the value of paper money is based largely on the confidence people (the market) have on the underlying supporting economy. Of course if the world were to have a single currency then those speculators would be out of business.

In this Internet age, money is nothing more than blips of positive and negative charges (digitization) spinning around the globe at the speed of light seeking the highest returns commensurate with the risks. Once we consider money as a commodity in addition to its traditional functions, we will then better understand and come to terms with the currency market, which is now so much an integral feature of globalization.

Next: The Forces Driving Globalization

Malaysia in the Era of Globalization #36

Wednesday, October 13th, 2010

Chapter 5: Understanding Globalization (Cont’d)

Missing the Japanese Lesson

In truth many misread the Japanese success story. As Harvard’s Michael Porter observes in his book, The Competitive Advantage of Nations, the successful Japanese companies that now dominate global markets – the Sonys, Olympus, and Toyotas – had survived rigorous competition at home. They competed aggressively among themselves and only the most vigorous, those who have mastered the art of satisfying their customers and reducing the costs, go on to conquer the world. Meanwhile their “protected” industries – their banks and other financial institutions – are wallowing in misery, unable to compete beyond their shores.

As a result of its commitment to foreign trade, Malaysia enjoyed a boom in direct foreign investments in the 1980s and 90s. These later investors were chiefly in manufacturing, especially semiconductors. They were welcomed because, quite apart from the employment opportunities provided and foreign exchange earned, they spread the “Made in Malaysia” brand names worldwide. Malaysians also discovered that being a factory worker, even a foreign-owned one, was much more agreeable to working the land under the blistering sun. Indeed those foreign employers, yes even those companies owned by our former colonizers, were much more enlightened and generous with their benefits than native ones!

Thus it was a no-brainer for Malaysian policymakers to welcome foreign investors even if it that meant abandoning long accepted dogmas. For example, during the recession of the mid 1980’s, the government saw fit to relax the stringent rules on Bumiputra ownership and employment in order to attract foreign investors. Foreign investors were now no longer derisively labeled as capitalists or exploiters of workers; rather they were much-welcomed employers and contributors to the nation’s well being.

Having seen the tangible benefits of direct foreign investments and trade, Malaysia felt encouraged to liberalize further its markets. The initial steps were tentative and tepid, and consisted of mainly dismantling the massive barriers and tariffs. Later, foreigners were allowed total ownership of enterprises that catered exclusively for exports.

Remarkable things happened. For one, local industries forced to compete with imports were now producing better quality products. For another these investors, especially the Americans, transferred their superior technology and expertise onto local hands. These early successes emboldened the government to free up other sectors like financial and capital markets. Local companies could now tap foreign capital and likewise, foreign funds could flow easily into Malaysia. These liberalization steps notwithstanding, the government still controlled the financial sector and other “commanding heights” of the economy.

With the subsequent free flow of capital, Malaysia took off. With foreign portfolio managers now tracking the local stock market, the Kuala Lumpur Stock Exchange (KLSE) index zoomed; so too the local economy, especially real estate, fueled by the easy availability of foreign loans. The skyline of Kuala Lumpur was reshaped almost daily with the sprouting of new skyscrapers. Foreign lenders, smitten by their earlier successes, were rushing to lend lest they would be left out of this latest El Dorado. The herd mentality took hold, with money managers compelled to seek borrowers in Malaysia. Every little project could now get funded regardless of its economic sense.

Alas, all that came to a crushing halt with the economic crisis of 1997. The bubble burst.

For Malaysia the end results were essentially these: its currency devalued by about 40%; economic growth sputtered; and its high-flying corporate players grounded. But the most significant casualty was that the tentative liberalization steps came not only to a crashing halt but were reversed. Malaysia instituted strict capital controls and declared its currency illegal abroad. The economic consequences were severe enough, but the more significant impact was on the collective Malaysian psyche. Foreigners are now looked upon again with deep suspicion; viewed as the new colonizers and as the cause of the crisis.

There is no shortage of analyses on this crisis. But economic post-mortem lacks the certitude and finality of the medical variety. The debate continues. One feature is not disputed – the distrust of foreigners resurfaced.

The seeds of such suspicions however, had been sown much earlier, during the liberalization phase and the coming of the third wave of foreign investors. This third wave, symbolic of globalization, was made up not of planters, miners, or manufacturers as with the first two waves, rather of “knowledge workers.” To use the phrase of President Clinton’s Labor Secretary Robert Reich, they are the highly valued “symbolic analytic” workers: consultants, professionals, investment bankers, venture capitalists, and others. Their services were already highly developed and efficient in the West; thus they targeted the vast virgin territories of the Third World for their next conquest.

What galls Malaysia and other developing countries is that unlike earlier investors who seemed to bring tangible beneficial results to the host nation, these later investors appear to just rake in the profits. Western bankers and portfolio managers would invest in Malaysian companies, reap the profits, and then move on. To the uninitiated, they appeared to come into the market, speculated on some shares, and then walked off with their bounty. What Malaysians did not realize was that these foreign funds buoyed the KLSE index and the shares of many local companies. With the increased value of those shares these companies could leverage their equities to get even more loans. But when the crisis hit, foreign investors fled, chased away by among other things, capital control.

The KLSE tanked, losing nearly 80% of its value in dollar terms. Companies that had leveraged themselves precariously had to unload their shares. That in turn created a downward pressure on stock prices. Nearly five years later the KLSE index is just barely halfway up to its highest point just before the crash. It will remain sluggish until foreign money returns.

This third wave of investors brought with them only their superior skills, symbolized by their ever-present laptops. Although their services were needed badly, they also ended up exposing the inadequacies of local talent and institutions. Thus when these new foreign enterprises easily captured local markets with their innovative products and superior services, their local competitors were reeling. When Citibank issued credit cards and consumer loans to civil servants based solely on the security of their job (a niche hitherto ignored by local banks), not only was it a huge success but it also irritated local banks. As the government and members of the ruling elite own these local banks, it did not take long before Citibank would be accused of unfair competition, and legislations introduced to curb its expansion.

This scene would be repeated with other financial institutions like brokerage and insurance companies, as well as other sectors. The professions too were quick to jump in to curb the inflow of foreign experts, under the pretext of maintaining “local standards.” The Bar Association was making threatening noises when the government was planning to open up the legal service to foreign competition. When the prestigious multinational law firm Baker & McKenzie was contemplating a branch in Kuala Lumpur, there was a huge outcry from local lawyers. Never mind that the vast majority of local firms are nothing more than one-lawyer operations and thus cannot even begin to comprehend the needs of modern multinational corporations. Nor are local lawyers trained in the intricacies of international law, or familiar with the new financial products and services that are being hawked by these new companies of the K economy. Fields like cyber laws, patent laws, and intellectual property rights that are the concerns of the new economy are not even taught in local law schools.

Instead of looking at these foreigners to upgrade local services and skills, Malaysians (agitated and aided by their leaders) view them instead as rapacious predators. There is mortal fear that the likes of Citibank and Bank of America if left unchecked would devour local banks. Similarly, the Merrill Lynches and Charles Schwabs would wipe out the country’s creaky and inefficient securities industry. Money managers like Fidelity and Templeton Funds, with their aggressive marketing and efficient services, would crush local competitors. The fact that local consumers prefer these companies with their more superior services and products is completely ignored by the authorities.

Malaysians, like consumers everywhere, look for the best value for their hard-earned cash. They could not care less who provide the services. But the authorities, stuck in the old school of economics and unable to unshackle themselves from their nationalistic mentality, insist that banks, insurance, brokerage firms, and other commanding heights of the economy remain under local control.

Like their manufacturing counterpart earlier, the local financial sector was protected from aggressive foreign competition. And just like the earlier manufacturers, the finance sector remains flabby, inefficient, and poorly managed, unable to graduate to the next level that increasingly sophisticated Malaysians have come to expect. Thus while international banks could clear foreign money drafts almost immediately, local banks would take weeks, all the while profiting from the free “float” at the expense of customers.

Next: Trading in Money

Malaysia in the Era of Globalization #35

Thursday, October 7th, 2010

Chapter 5: Understanding Globalization

Foreign Investments in the Third World

Countries like Malaysia that were once colonized are rightly sensitive about their independence. Thus they tend to look upon foreigners, including investors, with suspicion. The typical Third World initial experience with foreign investors had been with companies of imperial powers. These companies were concerned primarily with plantations and extractive industries. In Malaysia they were involved in rubber plantations and tin mining. The exploitative nature of such investments was quite obvious. Rubber, tin, and other precious commodities were exported to Britain where they were turned into high-value manufactured goods and then sold back in Malaysia and elsewhere at exorbitant prices. Meanwhile the rubber tappers and tin miners were paid pittance for their efforts. The bulk of the profits were kept in Britain with little if any repatriated to Malaysia. No wonder such investments became easy targets for the nationalists.

Even though those early investments were clearly lopsided and exploitative (asymmetric, to use a modern phrase), nonetheless Malaysia benefited immensely. First, the country would never have known that it was capable of growing rubber had the British not started the plantations. Rubber is not indigenous to the country; the British brought the seedlings from South America via London’s Kew Gardens.

Second, such investments ushered the nation into the world economy. Thus events in other parts of the world impacted Malaysia. Conflicts in the Korean Peninsula in the 1950s resulted in a heightened demand for rubber and the consequent bonanza for Malaysian rubber producers. But it was short lived. With the discovery of synthetic rubber, the bloom was off. Tin too enjoyed an unchallenged market for a while until the ready availability of aluminum brought on by cheap hydroelectric power adversely affected the industry. Now “tin” cans are made of aluminum, and the market for tin collapsed.

For Malaysia these new industries also added a new and volatile political dimension: massive immigrations and the consequent race problems. Pressed by the need for cheap labor, thousands of penniless foreign coolies from China and India were imported, saddling the country with ethnic problems that it is only now beginning to come to terms.

As an aside, we should not blame the British in this regard; economic necessity dictated it. Decades later, independent Malaysia too had to import literally millions of cheap foreign labor to man its industries. Economic dynamics do not recognize race or ethnicity. Employers, local or foreign, native or colonial, always look for lowering the costs of production, and if that involves cheap foreign labor, so be it. In this regard present-day Malaysian political leaders are behaving very much like their earlier colonial masters whom they despised and severely criticized for making decisions based on short-term economic considerations and oblivious of the long-term social consequences.

With the lopsided nature of these early investments, it did not take long for ambitious native politicians to exploit the issue. These colonialists were now also hated as capitalists, out to exploit workers and natives (the two were often synonymous) all in the name of profits. All the good that these companies had done for the host country were forgotten in the nationalists’ rhetoric. The natives had conveniently forgotten that before those rubber plantations came into being, the landscape was nothing but impenetrable jungle. As for the tin, it remained buried underground.

Not surprisingly, with independence the first order of business for these new leaders was to nationalize these industries. They were visible reminders of colonial power as well as symbols of the exploitation of workers (read: natives). Besides, many of these leaders, having been trained at such elite institutions as the London School of Economics, were enamored with central planning and state socialism. They figured that they could run these industries better than the colonialists. The results, as we can now see so readily in Zimbabwe and Zambia, are disastrous. Once productive factories are now rusting under the tropical sun, and the ever-aggressive jungles now reclaim once thriving plantations.

Malaysia took a slightly more sophisticated route but the end results were the same. Instead of outright nationalization, it used its various state corporations to trigger corporate takeovers of these publicly listed colonial companies. Seasoned foreign managers were replaced by less-than-competent but politically powerful local operatives. To cite one particularly outrageous example, Ghaffar Baba, a top UMNO functionary but a man singularly lacking in experience or training in business or management, was made in charge of some of these blue-chip companies. Today not only is he a discredited politician, but he had been named in at least two personal bankruptcy suits. So much for his financial acumen! Sadly there are many Ghaffar Babas out there. Once great names in plantations (Guthrie, Socfin) and mining (Idris Hyraulic, Rahman) are today nothing but hollow corporations, more concerned with developing their real estate holdings than expanding their core expertise.

The next experience with foreign investors was during the pioneer industrialization phase in the decade following independence. These were aimed primarily at import substitution, to save foreign exchange. These second wave of investors were greatly welcomed as they were readily seen as contributing directly to the nation’s well being, first by producing much-needed consumer goods locally, and second for their export earnings. So enamored were Third World countries with these investments that they introduced various incentives to lure investors, including guarantees of a protected home market and generous tax incentives.

This Import Substitution Industrialization (ISI) mindset was popular in the 1950s and 60s in tandem with the dependencia thinking. This mindset looked upon trade as a “zero-sum” exercise: developed countries’ gain must of necessity be at the expense of developing countries. These “infant” industries were thus protected by tariffs to prevent “unfair” competition from well-established foreign firms. It did not take long for these protected industries to ante their demands, which were readily acceded to by a corrupt government. Insulated from the rigors and discipline of the marketplace, these companies would soon become flabby and non-competitive, their products expensively priced but shoddy.

Despite such outcomes, countries like Malaysia remain addicted to such protective instincts, inspired by the apparent successes of Japan and other East Asian countries that had instituted similar protective barriers. I say apparent because today these countries have lost much of their luster. The then prevailing view was that because of the protection afforded, their “infant” industries were able to develop gradually and learned from their mistakes. From those tentative steps in an insulated environment, they were then able to grow and then take on the world.

We all remember the crude jokes of the 1950s and 1960s on what “Made in Japan” implied! Today nobody remembers those ugly jibes anymore. If Japan had not protected those industries, so the argument went, they would not have had a chance to mature into their present highly competitive stature.

Indeed Japan’s success spawned many imitators, especially Malaysia. So impressed was Malaysia that Mahathir started a “Look East” policy in the early 1980’s to ape the Japanese. Come the 1990s however, Japan was a bust, its industries moribund and economy sputtering.

What gives? I will pursue this analysis in the next section.

Next: Missing the Japanese Lesson