The End is Near

If you fellas think that BN taking over the Perak State Government is bad, you ain’t experience the worse yet. Wait a couple of months and you will start feeling it hit your wallet left, right and centre. If the situation still continues to deteriorate after that, then you will really understand just how bad things are.

What am I talking about? No, it is not politics – that is gloomy enough and everybody has just about said everything about the unconstitutional ousting of the legal PR Perak State Government, and I am not adding to the list anymore. What I am stressing here is the economy, our Malaysian economy.

Contrary to what local experts predict, Malaysia’s economic fortunes have always been a follower of the two East Asian dragons, namely Japan and China. When things are looking bright and sunny for these two countries, all Southeast Asian nations profit from it. Well, things aren’t a bed of roses for them any longer.

Japan’s export statistics in 2008 were a record of sorts. Economic figures reported an annual 35% drop in exports. Industrial production figures look grim with a reported 8.9% month-over-month drop. When there is less demand for Japanese goods, they trim back on their purchases of raw material and intermediate goods. They also temporarily shut down their overseas operations and scale down their local operations to ensure that their local employees are not wholly affected. When this occurs, it pushes the unemployment figures up as these multi-national companies start to shed unnecessary indigenous and overseas staff. This will in return nudge the local demand for such goods down as well. Additionally, weak domestic demand will automatically blunt the domestic-oriented businesses' incentives to invest and less investment means fewer opportunities to recoup the losses. Strike one dragon down.

Now China is a different scenario altogether. In the US, the bubble burst at the top of the pyramid bringing down banks and insurance companies thus undermining confidence in the complex financial instruments and the banks that owned them. This brought about their downfall and when banks fail, consumer confidence nosedives and credit dries up. No business can exist without some kind of credit and zero credit unhinged the whole financial system and eventually brought the American house of cards down. When the biggest creditor in the entire world experiences a credit crunch, the global financial system automatically follows suit. In China, it is the other way around where the grassroots are first to feel the pinch. It is these small factories that are failing now as the majority of them were manufacturing goods exclusively for the US and EU markets. When export orders are drastically slashed, their wafer thin margins became losses. To survive, they reduced employment and it is these migrant workers (from interior China) that are the first in line to go. Last week, the Chinese Government admitted that at least 20 million of these migrant workers would be unemployed after Chinese New Year.

The similarities of both dragons to overly depend on their respective export-orientated industrialization to boost their economies in the past are creating similar consequences today. Not only that, the penalty for this over reliance is shared amongst all Southeast Asian nations that do business with these two dragons. South Korea and Taiwan (the lesser dragons) are not spared as well because their respective economies are similarly tied to the American economy.

Now, what are the probabilities that these Southeast Asian nations will escape this global economic crisis like they did in the early 1980s that was brought on by the Third World debt crisis, especially Malaysia, Thailand and Indonesia? Then, we had the American Plaza Accord in 1985 to thank for. This legislation imposed a compulsory reassessment of the Japanese Yen against the greenback because the US-Japanese trade deficit was getting ridiculously out of hand. By forcing an increase in the value of the Japanese Yen, the US Government made Japanese-imported products more expensive. The Japanese keiretsu had other ideas. Instead of allowing the American policy to dictate them, they manipulated the capital cost of the manufacturing process by shifting all labour intensive operations from Japan to other Asian countries with low wages. Not only were operational costs kept at a minimum, these multi-national companies were granted special concessions and preferential treatment as well as being the “good guys”. Henceforth, this influx of Japanese capital in the guise of foreign direct investment permitted a lot of Southeast Asian nations to evade the credit crunch of the 80s. This triggered the rapid growth as enjoyed by the aforementioned three countries.

When China was admitted into the International Labor Organisation, its consummate reserve of cheap labour attracted more than US$50 billion in foreign investment annually. To survive, transnationals had no other options but to relocate their labour intensive operations to China, lest they get left behind. This was what is to be known as the “China Price”, and this took away jobs from the transnationals’ countries. The entire stack of dominoes relied entirely on the US market and it came tumbling down once the US economy imploded. Accordingly, Asia’s export orientated economies became deserted and their reliance on foreign earnings crashed.

It does not matter if Malaysia’s economists think that the nation is safe from this “Global Economic Tsunami” owing to the fact that we are decoupled from the American economy. There is no such thing! Almost every country in the world relies on the US and EU economies to boost their own. Even if a particular country does not deal direct with the US or EU, it will have to export to other nations that does and when that country depends on the US and/or EU as its export market and when the American’s economy implodes, every country in the world is both directly and indirectly affected.

It also does not matter if Malaysia’s economists say that we are a nation that is able to sustain ourselves domestically. If China, with its estimated 1.33 billion people is incapable of creating a domestically driven economy that is self-sustaining, what are the chances that Malaysia “boleh”?
 
The consequences of a world economy falling apart will be ugly. One of the unavoidable penalties of growth is the creation of a middle working class. The other is the increase in income and wealth inequality. Remove the jobs from the middle working class and the effects would be an increase in poverty. The rich will still be rich but the unemployed will be sliding towards hardship. Now mix them up amidst political inequalities (NEP comes to mind) and you have a highly combustible element in the creation.
 
The end is near.
   – Hakim Joe