Open:

Immigration is good for the economy. Unless the allocation of resources is already optimal everywhere, a redistribution of resources (human in this context) can increase the wealth and welfare of the collective. Workers moving from a poor country to a rich one become more productive as they are combined with more and better capital, management and infrastructure. Workers from rich countries moving to poorer ones bring experience and expertise which they can impart to the local labour force.

Immigration is a basic human right. The location of a person’s birth is a matter of chance and there is no moral justification for compelling someone to stay where they are. People fortunate enough to be born in rich countries have no moral justification for excluding people from poorer countries.

Special cases: Immigration may be due to natural disaster, war, persecution or economic duress. Such immigration is supported on humanitarian grounds.

Shut:

Immigration displaces local employment and depresses wages.

Immigration creates increased competition for resources, public goods and social welfare. Indirectly, it also increases budget burdens and the national debt.

Immigration increases inequality.

Immigration raises issues of cultural integration which can lead to social friction, increased crime and pose security risks.

Overcrowding and population density. There is an optimal population density which maximizes welfare.

Open and Shut:

The pragmatic view is that some immigration is unavoidable, necessary and desirable. Where there is a shortage of labour skilled or otherwise, immigration can be a useful way of alleviating shortages. Immigration can even be encouraged in specific industries, sectors, demographics. Immigration can also be encouraged to import specific types of demand, say to attract capital and demand for financial services or luxuries.

The pragmatic view is unlikely to welcome all types of immigration, only those accretive to the incumbent population and economy. It would also take into consideration its existing endowment and supply of public goods, resources and land to avoid over-competition and over-crowding.

Opponents to immigration raise some difficult questions. Immigration is disruptive. While in aggregate, the economic benefits are clear and the critiques, raising unemployment, lowering wages, increasing inequality, have mostly been debunked, this is only true in aggregate. Immigration does create unemployment and depress wages, in specific parts of the economy. At the same time, they bring benefits to employers and consumers by lowering wage costs, and dampening inflation. Averages and aggregates do not reveal detail.

Beyond economics, opponents of immigration raise other, less tractable questions.

The first duty of a government is to its citizens, not to immigrants. If the majority of citizens oppose immigration, the government cannot ignore them. This risks making immigration a highly polarizing issue.

Welfare systems have been built over time and, as underfunded as most of them are, they represent the savings of generations of citizens. Can immigrants draw on these same reserves having not yet contributed to them? Can their future contributions be counted on? Immigrants may be itinerant and thus a burden on the system or they can be sticky and increase the tax base thus funding future generations of welfare.

Is a reasonable level of population density also a basic human right and is overcrowding a valid reason to moderate immigration? How dense is too dense?

How should a country balance the rights and obligations of citizens and incumbents against immigrants?

Even if we accept that sanctuary has priority over most other considerations, to what extent should immigration be allowed in the context of space and resources?

The question of immigration is unlikely to be settled. The current distribution of people across the planet is the result of millennia of migration as the species sought out ever more hospitable living places. Once the barriers were natural or physical but today they are political and man-made. At the same time, many of the features that make a place attractive are man-made, made by earlier settlers, who understandably attach a cost to that effort and enterprise. As incumbents, they have rights to who can join their community. But also we have to recognize that this planet is not entirely ours. To some extent, we share everything on the planet, the rewards and consequences, whether we realize it or not.

The zeitgeist is increasingly anti-immigration to the extent that even the pragmatic view is insufficient. Unless we adopt at least a more accommodating position, policy will be more restrictive than is economically efficient and the price will be paid in real wealth and welfare. But we need to move beyond even this pragmatic view. The benefits of immigration go beyond economics. When properly managed (with proper integration with the existing community), immigration fosters cultural understanding and empathy. It is hard to put a value on such qualities but in a world that is growing more contentious and less cooperative, it has value.

Hard data is scarce and noisy but according to estimates by the World Bank and OECD, the financial sector accounts for 20-30% of GDP in developed countries. The IMF estimates that total global nominal GDP is some 77.6 trillion dollars of which financial services account for 13.1 trillion dollars or 16%.

What services does the financial sector provide? Mainly they provide banking services, insurance and wealth management. In some way, shape or form, the financial sector’s function is to act as an intermediary between savings and investment. Seen this way, finance is an enabler, an infrastructure. One wonders if it is an efficient allocation of human and capital resources that 20% of global output is dedicated to finance.

How would you see it if the transaction costs of using your credit card was 20%?

On 12 Jun 2018, US President Donald Trump met with North Korean Supreme Leader Kim Jong-un in Singapore in what was hailed as a historic meeting. The document the two leaders signed state the following:

• The United States and the DPRK commit to establish new US-DPRK relations in accordance with the desire of the peoples of the two countries for peace and prosperity.
• The United States and DPRK will join their efforts to build a lasting and stable peace regime on the Korean Peninsula.
• Reaffirming the April 27, 2018 Panmunjom Declaration, the DPRK commits to work toward complete denuclearization of the Korean Peninsula
• The United States and the DPRK commit to recovering POW/MIA remains, including the immediate repatriation of those already identified.

So, slightly less detail than on a driving licence application. The document clearly lacks detail but can be viewed as a starting point for more detailed discussions towards these ends. In a press conference following the meeting, President Trump said he would halt joint military exercises with South Korea in the peninsula as well as, at some point, repatriate US troops from South Korea.

Critics of the deal cite the lack of detail on both sides, in particular the failure of the US to obtain serious concessions and detailed milestones for the denuclearization of North Korea. The joint statement also made no mention of “complete, verifiable and irreversible denuclearisation (CVID)”, which the US had insisted was the only acceptable outcome.

For the moment the consensus seems to be that Mr Kim was the winner in the deal. Time will tell. North Korea has not been above reneging on agreements. Neither has Mr Trump. So call it a draw for now.

One probable scenario, which I present as pure conjecture, but which seems plausible, is that sometime in September of 2017, North Korea’s nuclear tests went wrong resulting in a catastrophic and total loss of nuclear capability, and a 6.3 seismic event not lost on the Chinese scrutinizing their neighbours. A de facto CVID (Complete, verifiable, irreversible denuclearization) if you will.

Either of his own volition, or at the behest of the Chinese Premier Xi, Mr Kim sued for peace and reached out to both South Korea and the US. With self-inflicted and accidental CVID, Mr Kim would have seen the logic of trading North Korea’s perceived nuclear capability for concessions and a de-escalation of tensions in the Korean peninsula.

The approach appeals to the insular and isolationist instincts of President Trump, though less so to his intelligence and military forces. He is eager to come to some agreement which will let him retrench US forces from the Asian theatre.

Mr Kim gets, not a lot, but he gets something for nothing, an end to hostilities he can no longer afford.

Mr Trump gets something, an end to what he regards as expensive and wasteful military exercises and potential future repatriation of US forces, not to mention the glory of ending the sixty plus years of conflict in the Korean peninsula (which might in his own mind seed thoughts of a Nobel peace prize).

Singapore gets publicity, and the usual uncharitable grumblings of the locals inconvenienced by the summit or incensed at having to foot the bill for Mr Kim while they face rising healthcare costs, impending GST increases, and being the most expensive city to live in (according to the Economist Intelligence Unit’s March 2018 survey.)

The US gets, at this point, a host of promises, and the  hope of denuclearizing one of the most intransigent nuclear capable regimes in the world. They also get to disengage in Asia and repatriate assets and eventually, troops, from the peninsula. The military might see this in a different light than Mr Trump for if it comes to fruition it will diminish prestige, influence and power in the region.

And Mr Xi gets, something too. He gets a de-escalation of tensions between North and South Korea, and he also gets a diminished US presence and engagement in the Korean peninsula. Mr Xi might have negotiated the deal with Mr Kim himself but by encouraging Mr Kim to deal with Mr Trump instead, it meant that any concessions by the North Koreans would lead to reciprocal concessions by the US, not China. Basically, China would get what it wants while America foots the bill. Well played.

Conjecture and speculation of course but you see how it might make a lot of sense.

Average hourly earnings are growing at 2.7% YOY, well below the 3.6% growth rates seen pre crisis 2008. The unemployment rate has fallen steadily from 10% during the crisis to 3.8%. The JOLTS Quits Rate (which measures voluntary quits, presumably in search of better prospects) has risen steadily since 2009 to 2.3%, near its post crisis high. Skeptics of the recovery in the US labour market can point to few metrics of weakness, prime among them a stubbornly low participation rate (currently 62.7%).

The following chart shows the participation rate for the various age groups of the labour force. Apparently the age group most responsible for reducing the participation rate is the 16-19 year age group. Second is the 20-24 age group. These two groups have seen participation rates fall steadily since the late 1990s, presumably as the emergence of the knowledge economy encouraged greater investment in education and development of skills resulting in a later entry into employment.

The 25-54 segment participation rate may have fallen from 84.6% in 1999 to 80.5% in 2015 but it has since recovered to 81.8%.

From this picture of the US labour market, it appears that the market is tight.

On 9 May 2018, the Malaysian general election saw an unexpected win for the opposition Pakatan Harapan coalition against the Barisan Nasional juggernaut despite extensive gerrymandering. Malaysians ended UMNO’s 61 years of rule, albeit with the efforts of UMNO alumni, ex PM Mahathir Mohammed, ex Deputy PM (and ex political convict) Anwar Ibrahim, and a few UMNO defectors such as ex Finance Minister Daim Zainuddin. Disgraced ex Prime Minister Najib, is effectively under house arrest as he is investigated for various financial shenanigans most notably the looting of 1MDB and the subsequent ham fisted coverup. The new government is in the driver’s seat and the direction of Malaysia is in its hands.

For decades, Malaysia has been regarded with mild condescension by its more successful neighbours. A policy of affirmative action for the indigenous races have weakened them rather than toughened them. Rampant and pervasive corruption from top to bottom, from millions to loose change has turned what in other countries is a commercial lubricant to a stultifying sludge. Racial politics has polarized a potentially industrious people who might as one achieve great things. Case in point is AirAsia founded 24 years ago when Singapore Airlines was already in its 47th year . AirAsia earns an ROE of 22% to Singapore Airlines’ 6.5%, yet it trades at half the valuation. Top Glove is the world’s largest maker of latex gloves with 25% of global market share. Not even Apple’s iPhone has that level of dominance in its industry. These pockets of enterprise have risen in spite of the government. 

There is an opportunity here to realize Malaysia’s potential. Momentum is of the essence; there is little time for mistakes or prevarication.

One: Unity and sense of purpose. The PH coalition must be united behind a common cause and that is to reform Malaysia to international standards of governance, law, and development. It is imperative that mischievous or opportunist elements are purged from the new management (or old management, as the case may be. Its complicated.) No personal agendas should be tolerated, only the good of the country and the people.

Two: Corruption needs to be addressed. It is true that no country is entirely free of corruption; some manage it better than others. Corruption has to be turned, co-opted, legalized, nationalized and rationalized into a single, efficient infrastructure. Rule of law is very important as it is transparent and efficient. Investment, foreign and local, relies on confidence and on rule of law. Within this framework the usual biases to favour the elite can be built in which ensure moderation, some optical semblance of equality or fairness, but blunts criticisms of cronyism, nepotism and favouritism. Investors want to know where they stand and that the rules will not change arbitrarily and quickly.

Three: Education. This will cost money and face political inertia. Malaysia has a young population which can supply a potential demographic dividend, but it has to be enabled. The percentage of population over 65 is a mere 6% and the working age population has grown from 63% in 2000 to over 67% today. This is a tremendous resource, but it needs processing. The education system requires a complete overhaul, not incremental patches. It is faster to import the expertise and model and for the country at this juncture speed trumps parsimony. The education needs to be more flexible to adapt to the demands of the economy so Malaysia can rely more on internal human resources in future. 

Four: Abolish Bumiputera policy. Set aside that Bumiputera policy is affirmative action for the majority (some 60% of the population), that it sows dissatisfaction and disenfranchisement among the non-Bumiputera, that it is basically unfair, that it encourages justification for reactionary corruption, that it is divisive and socially risky. Affirmative action weakens its beneficiaries. Adversity breeds strength. What made Singapore great was adversity and an existential threat which inculcated a constant, low level paranoia and preparedness for more adversity, a vigilance that often antagonizes, and a drive to show the world, which often wasn’t even watching, how great it was. And it succeeded. Singapore of this generation is basking rather slightly too complacently in its past success, evidence of the one of the factors behind the cyclicality of societies. Give a man a fish and feed him for a day. Teach him how to fish and feed him for a lifetime. Threaten depleted fish stocks, drought, famine and you will be surprised by the mettle you forge.

That’s a lot of words for concepts we can summarize thus:

Be united.
Be honest and just.
Get an education.
Toughen up.

The difficult part is getting everyone to sign up to it. The prize? Malaysia is a country with 31 million people and a nominal GDP of 296 billion USD, or a per capital GDP of 9800 USD, ranked 66 in the world, behind the world average of 10700 USD. Malaysia has identifiable problems with established and tested (by others) cures. Unlike some of its more developed neighbours it does not have to struggle to find the next stage of development. It just needs to fix things, to copy the solutions of others. The potential rewards of simply meeting the world average in terms of wealth and development will see a significant improvement in the welfare of Malaysians. 

PS: Don’t worry about the budget. Underinvestment in long cycle oil means a high chance Brent holds 80 for the next few years. In fact I would hazard to guess at least 100 from 2019. That will allow Petronas to plug the budget gap. The young population means a healthy dependency ratio which postpones the issue of the budget for at least a decade. Also, anti-corruption efforts will cut the cost of government infrastructure projects and maintenance by over half (if anecdotal evidence of the margins of rent extractors are accurate). Add to this some recovery of pilfered 1MDB money and the government can safely plug the GST gap for the next 3 years at least by which time the fiscal accommodation of the GST cut would have boosted growth.