Friday, 14 January 2011

‘Go east, young man’

Tan Sri Lin See-Yan takes a nostalgic trip to his hometown Ipoh with his whole family in tow.

I SPENT the year-end holidays with my entire family, plus two new grandkids in tow on a nostalgic “balik kampong” trip to Ipoh.

Our target was The Banjaran, a new resort and spa perched at the foot of limestone hills and caves in Tambun (world famous for its pomelos) outside Ipoh. It's a world class hot-springs retreat with only 25 villas (each with its own hot-spring jacuzzi and swimming pool). It's an eco-friendly resort with lots of green (even a spice garden) and picture perfect surroundings. It comes with a fantastic wine-cellar set inside natural high ceiling limestone caves, complete with Malaysian style Bali-Thai type spa that provides complete relaxation. It also has a pool of garra rufa fishes that love to chew-up dead and excess hard cells your feet may spare.

This venture is the brainchild of Tan Sri Jeffrey Cheah who must be congratulated for creating a visionary retreat, using to the maximum all that nature has endowed around the scenic caves. It's a treat.

Ipoh was built on the riches of tin-mining. With tin now a distant memory, Ipoh is at the heart of a thriving industry of small businesses besides nearby oil palm plantations, thriving E&E foundries and chip makers, and small farms growing groundnuts (world famous Menglembu), pomelos, star fruits and seedless guava. Ipoh has always been famous for its food especially hawker food, offering the best there is in Asia from fresh large-headed Tualang udang gala (prawns) to its thick and juicy bean sprouts, from delicious baby-bottom-soft sa-hor-fun to its amazing chicken-feet preparations; from the smoothest ice-kacang there is to its best spread of traditional hawker food imaginable. It is not uncommon to eat five times a day here (we did six!).

What impressed me is the vibrant spirit of private enterprise that Ipoh has come to be now famous innovation in biscuit making, coffee and charcoal toast, ornamental fish, delicate tow-fu-fa, unusually large tropical fruits, and ready-to-serve food, including exotic sea-food. For me, a must is dry curry-mee and sui-kau for breakfast and sa-hor-fun soup plus beef tendon balls for lunch, dunked down with lots of Ipoh coffee.

The last time I was here, most shops were small, dirty and crowded (but with long queues). At my favourite place in old town, the owner has since embraced technology new and bigger premises, now clean and spacious, computerised ordering from a long wish list, and spread-sheet billing and accounting.

Business is thriving. There is also Ipoh's famous biscuits, like the delicious curry-puff shaped pastry with steamed coconut-egg jam filling sells like hot cakes: most buying 5-10 boxes of 10 each; only Singaporeans buy them by the 100s. No doubt, private entrepreneurship is thriving no government assistance (want government to remain hands-off and just improve service delivery). It's not just local business they export and attract tourists. Unfortunately, the town remains rundown with little renewal. What a pity. But its new suburbs are modern.

Looking forward to 2011, they are an optimistic bunch. It's this optimism about what they do in Ipoh that impresses me. They are transforming. Better government facilitation in terms of ready availability of finance, quick access to land for expansion, and improved infrastructure and logistics are what is needed to solidify this transformation. In Ipoh, the beginning of transformation is on the move. This is as it should be throughout Malaysia. There is hope yet.

Shift in optimism
Hope and change overused words since the great recession. For the past 400 years, the West monopolised optimism. Their intellectual discourse on enlightenment eventually led to harnessing of technology and modern management to impose their will on the world. US founders offered not just life and liberty but also the pursuit of happiness. Optimism is now shifting you want to prosper, go east; that's where the action is. Growing pessimism in the United States is overwhelming politics as shown in the mid-terms.

Winning Republicans are hardly optimistic reflecting I think rather more anger and resentment. Europe is no better, with mass demonstrations from Athens to Dublin, London to Paris, Rome to Madrid. I sense there is pessimism even at the euro-zone core. The best seller in Germany is T. Sarrazin's Germany Does Away with Itself. The French have J-P Chevenement's Is France Finished, and French Melancholy by E. Zemmour.

In contrast, modern art in China is colourful and bright, portraying rising materialism, growing prosperity and open lifestyle. Painting is aggressive and innovative; always ready to experiment. The contrasting attitudes have become more marked since the recession which shook the very foundations of the system the West built, and have now lost confidence in.

The growing growth gap is stark. China and India will each grow by close to 10% in 2011 (like in the previous two years). With recovery, the United States will grow 3% and euro-zone, 2%.

Unemployment is worse: near 10% in US where more than 1 million may have given up looking for work. Europe is even worse unemployment is very high among youth in Germany; 41% of Spanish youth is unemployed. The malaise goes deeper. Growing numbers of American parents worry their children's living standards may be worse than theirs. After all, medium workers' real income has remained more or less the same since mid-70s. They worry that failing schools and lack of suitable jobs will handicap them in pursuit of the American dream. European dreams are different they remain cosy in their EU-cocoon with generous welfare security. But high debt and rising social discontent in the context of an aging population are not making it easy to continue carrying the burden of unaffordable entitlements.

Emerging Asia is in constant motion building infrastructure and logistic hubs, and institutes of higher learning. China's university population has quadrupled in past 20 years. Unesco estimates 38% of world scientific researchers is based in emerging nations in 2007 (30% in 2002). Chinese and Indian world class enterprises now compete aggressively with their western counterparts. In technology, these firms are redefining the boundaries of the possible.

Harvard's Prof D. Jongenson sees Asian emerging markets as the “most dynamic eclipsing others such as Brazil and Russia the size of the Chinese economy (will be) on par with the United States by early 2020.” This may be difficult for many Americans to swallow. He warns the US should brace for social unrest amid blame over who lost US global economic primacy.

US growth prospects
The US “new normal” remains: sluggish growth, stubbornly high unemployment and weak inflation same like last year. The growth forecasts have since shifted higher for '11 to 3-3%. This is driven by extraordinary policy measures, including QE2 (a second quantitative easing by the Fed pumping US$600 into the economy by buying government bonds) and the 2nd stimulus package (US$800b through extension of the Bush-era tax cuts and a temporary reduction in payroll tax).

However, Harvard's Prof. M. Feldstein believes the outlook is less sanguine. The impact of fiscal expansion will be modest at best. The dire situation of state and local governments is likely to be a drag on growth. Indeed, growth was boosted in '10 by a fall in household savings. But households now worry about uncertain future, return to paring back debt and stocking more away - purely precautionary saving. Prof. S. Johnson of MIT puts it more bluntly: damage from the crisis and its aftermath have dealt US prominence a permanent blow - “The age of American predominance is over.” I believe the new normal will stay for some time mainly because US and European governments are unwilling to grasp the nettle on exit strategies.

The policy dilemmas before the major governments are clear: (i) in US, there is no political will to restructure - I see continuing resistance to the new reality of sluggish growth; (ii) in Europe, governments were forced to intervene with their balance sheets which implications are now being played out; and (iii) in China, management of continuing rapid growth has to deal now with rising pressures on inflation and the yuan. This has led Mr M. El-Erian of Pimco (the largest global bond investor) to conclude: “you see the muddling through approach continuing. Everybody might now want to kick the can down the road. The problem is that the longer you muddle through, the more you create problems. I see the new normal as being stable for a while yet.”

Impact of rising debt
More serious is contagion of the European debt crisis which started with bailout of Greece and then Ireland. Will this reach Portugal and Spain? The problem is likely to widen: (i) how far reaching will this impact other parts of Europe; and (ii) it's just a matter of time before this concern assumes

macro-proportions covering the entire national debt, including private sector. Soon, the worry will shift to banks and companies as they will now find it harder to borrow. The risk is if Spain is not protected, bigger nations will be next in line. Unlike Japan and Italy (where private sectors are net savers), Spain remains vulnerable even though its government debt is relatively lower, but it carries enormous company and household debt. Debt to GNP ratio of government and banks combined in the US, UK, core euro-zone and peripheral Europe are all at 150-200%. That's higher than at any time in the past century. How big is this problem?

Harvard's Prof Rogoff and Reinhart's research suggests a country's growth potential slows significantly once debt/GDP ratio exceeds 90% a level the US is at today. I agree with Rogoff at this time the crisis will not affect US and the majors they still have cards to play. Psychology, too, plays a big part since US is grounded more in growth than inflation and Europe being dead set against inflation will trade-off growth. Between the US and Europe, my bet is on Europe to be the first to raise interest rates. So, more pain for Europe.

Looking forward, some nations are unlikely to handle their debt overhang without restructuring, a la Argentina 2002. This is a messy process, with other high-debt nations swept in the contagion. In a globalised world, how big the problem becomes depends on confidence. So we do have a fragile situation not only in Europe but US as well. This situation is serious: in the event creditors and debtors worldwide erupt into a full-scale war, debt-financed growth will become history. Creditors do get tired of kicking the can down the road and debtors can get adjustment/austerity fatigue. Such an impasse can only be resolved in the long run through a transfer of wealth from creditors to debtors. I think the fear of default will eventually get creditors to blink first.

Fault lines haven't gone away
While it is clear the world economy has now recovered, it is also clear the crisis is far from over. This is because the deep fault lines uncovered during the crisis are still within the Western economies and global economic structure. According to Chicago's Prof Raghuram, they present two risks: (i) structural export dependency particularly in Japan, Germany and China; and (ii) unresolved clash of financial systems making it difficult to forge integration.

They will threaten global stability in two ways: (a) pre-mature tightening of monetary and fiscal policies poses the danger of tipping the world back to recession; and (b) failure to secure a medium-term structural shift to fiscal austerity, so vital for sustainable global recovery. So, the world remains a dangerous place; but nothing moves in straight lines.

One thing is certain: the West is not the power it used to be; their consumers cannot be relied upon as they used to be; and their financial standing are not as good as it used to be. Structural reform is needed to avoid another global crisis ahead. At the heart of it all is the US it may have missed the chance to rein in its largest financial institutions, many of which remain too big to fail and are getting bigger. In the long run, US must face reality inevitably it will be over taken by China as the world's largest economy; and the centre of economic power will gravitate to Asia. But America as the biggest mover will be in place for a long time.

As 2010 ends, Asia moves on aggressively. Manufacturing in Korea and Taiwan accelerated in December even as expansion in China and India slowed, with US and Europe supporting the region's exports. Overall, the world had a good 4Q10 as the US economy also continued to grow although the underlying fundamentals remain weak. But the world wakens to new challenges. The Internet now provides ready access to information for all, which previously was reserved for just a few. Medical advances are making strides in overcoming diseases and extending lifespan for the benefit of all. History reminds us that for so long only the privileged few can look forward to a better life. Today the masses in Asia can. Prudent growth and benevolent management will make this possible. Surely, that's good enough reason to be optimistic.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest.

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