Mahathir’s words

FOREIGN DIRECT INVESTMENT
By Dr. Mahathir Mohamad on September 17, 2010 9:52 AM | Permalink | Comments (28) | TrackBacks (0)

///1. One reason advanced by the advocates of letting the Ringgit to be traded abroad is that it will encourage foreign direct investment.

2. There was a time when Malaysia practically pioneered encouragement for foreign direct investment. It was even before FDI became popular with many developing countries as a shortcut to economic growth. Malaysia wanted FDI for job-creating labour intensive industries because of the need to create employment opportunities for its workforce at that time. It was really not about growing the economy.///– Mahathir

Malaysia started to offer pioneer status to foreigners for tax advantage before May 13 in 1969 and NEP. That started industrialisation in a big way. NEP discouraged FDI and for a while, the government had to go easy on the implementation of its Industrial Coordination Act to encourage more FDI. The easy flow of oil money makes FDI less important and it allows a certain person to enjoy selective amnesia.

///3. For Malaysia at that time, foregoing taxes and even local participation were not important. The Government did not rely on FDI to fill its treasury.///– Mahathir

When Petronas succeeded in bringing in money to fill the treasury, FDI became unimportant. Oil windfall benefits UMNOputras but kill the country’s competitiveness. Was it not curse in disguise when natural resources rendered Malaysia to be a failed state?

///4. The policy of attracting FDI was so successful that it resolved the problem of unemployment until it created a problem of labour shortage. This led to an inflow of foreign workers and the expatriation of billions of Ringgit back to their countries. FDI no longer helped Malaysia’s growth.///– Mahathir

The peculiar problems Malaysia faces arise from the fact that foreign workers were of low or unskilled level because the industries that employ them were of labour intensive nature. Those industries find no hosts elsewhere. Besides because there was shortage of skilled local and foreign workers to complement high technological industries investors of high-tech industries do not come to Malaysia. The situation where FDI brought in only unskilled labour with antecedent social problems has its root cause in NEP where trained indigenous Malaysian human resources, more of those born of the unwelcome races, have to find opportunities abroad. So NEP has finally come back to haunt the government.

///5. But being used to this easy approach we keep on inviting FDI believing that it would still help with our economy. But let us look at what really happens when there is foreign direct investment.///– Mahathir

The government encourages FDI so that the total equity share capital in KLSE and the corporate sector ballooned. That would make the NEP demand of 30% for Bumiputras increase in value and becomes less attainable since the share given to Bumiputras were sold off at the earliest possible chance. Besides It helps the government to claim that the NEP target has not been reached.

///6. Most people think that there would be an inflow of capital. But actually only about 10 per cent of the capital needed was brought in. The rest is borrowed from local banks, preferably foreign owned banks. It is therefore Malaysian money that is invested.///– Mahathir

NEP wants Malays to invest in business. How is it wrong for investors to resort to funds from bank which has the function of facilitating the use and supply of money?

///7. Apart from tax exemption Malaysia also subsidised the operations of foreign owned companies through subsidised electricity, fuel and domestic transportation. Of course the Malaysian workers contribute through their cheap labour.///– Mahathir

If the government practices distorted economy through subsidies to woo low income voters, that subsidies cannot be said to be directed to encourage foreign investment. The low cost investment environment has already been factored into the investment decision by FDI.

///8. There is another type of FDI which is even less beneficial. This take the form of investments in the stock market. Usually the objective is not to benefit from profits and dividends but from capital gains.///– Mahathir

Investors in stock market will make profit from whatever source possible, dividends and capital gains and avoid capital losses, wherever the capital are sourced, be it local or foreign. Only corrupt government uses regulations to extract capital gains for the favoured sector of the population. Investments in stock market aim naturally at making profits.

///9. When foreign investors buy Malaysian shares, the prices are likely to appreciate. Foreign institutional investors, especially pension funds can easily push up share prices with their repeated purchases.///– Mahathir

Foreign investors are not immune to losing money in stock markets. That depends on knowledge, information and foresight. Some rouge government collude with investors, local or foreign to manipulate stock market. An independent judicial system, appropriate regulations and governance would discourage manipulations. The mechanic of stock market investment is the same everywhere, but the judicial system in the country has been destroyed.

///10. When the prices are high enough the investors would dump the shares and collect capital gains. The local investors would lose money as prices depreciated.///– Mahathir

Certainly laws in the country do not prevent local investors from dumping their shares when the price rises and collect their capital gains. Local laws do not shield foreign investors from losing money as prices depreciated.

///11. During the financial cirisis of 1997-98, foreign investors dumped their shares so as to quickly change the Ringgit into foreign (US) currency before further falls in the Ringgit would give them less foreign currency in exchange. This invariably caused a steep fall in the share prices and Stock Market Index with consequent losses by local investors.///– Mahathir

At that time Mahathir talked down the value of ringgit; ringgit tumbled on three occasions soon after he cursed currency traders. He could have made a fortune had he short-sold ringgit immediately prior to talking. Foreign investors then had no basis to analyse how the government would logically formulate currency decision on ringgit, as it appeared that that depended on the whim and fancies of the dictator. They dumped everything especially when the government chose to close CLOB. Billions of ringgit from foreign investments in KLSE were frozen and for years nobody would ever touch KLSE. It is not sure whether KLSE has ever recovered from government action which made Malaysia a pariah market.

///12. The Malaysian Stock Exchange makes money from commissions or the sales and purchase of shares. Consequently they are happy with more selling and buying on the Exchange. They therefore welcome foreign investors in the market. In fact they believe that if short selling is allowed they will make even more money. But these kinds of market activities do not benefit the nation./// -Mahathir

Any stock market would make money from commissions on stock transactions. The increase in volume benefits the Exchange which in turn benefits the shareholders and the government in tax revenue. It is hard to fathom how an increase in tax revenue is not beneficial to the nation.

///13. FDI is double-edged and caution is needed when deciding on encouraging it. Today FDI is not coming into Malaysia because countries such as China, Vietnam, even Thailand and Indonesia offer lower cost of labour. Besides the economic recession in America and Europe mean less capital is available.///– Mahathir

FDI choose not to come in because they do not want to have 30% of their equity depreciate in value to be disposed off to meet NEP. It is quite common to hear complaints of sour grapes.

Nothing stops America and Europe from placing their investments in where other FDI are now in, China, Vietnam, Thailand and Indonesia. Only FDI in labour intensive industries would be attracted to cheap labour. Most of the FDI which deserted Malaysia are because there is a lack of skilled labour. The malfeasance of government institutions in the country is another important factor.

///14. But what about the Ringgit? How will it affect the FDI? We need to know whether there was a lowering of FDI due to fixing the Ringgit exchange rate in 1998. If there was, was it directly due to the exchange control or other factors like increase in the cost of labour and competition with the above-mentioned low cost countries?

15. Actually when the Ringgit was fixed at RM3.80 to 1 US Dollar, the cost of investing in Malaysia was lower in terms of foreign currency. Now that the Ringgit has appreciated to RM3.20, the cost has appreciated. If we allow free trading of Ringgit abroad, two things can happen.

16. If the Ringgit strengthens then the cost of investment in Malaysia would increase, This would not facilitate foreign investments.

17. On the other hand the currency traders may once again cause the Ringgit to depreciate. This may result in increased FDI. But remember how we went into recession when our ringgit was devalued by foreign currency traders? Do we want to have that crisis again?///– Mahathir

It would appear that other countries in the world are free from the elementary consideration given above. The currency control imposed in 1998 did not land Malaysia into immediate trouble because there was windfall from Petronas to prevent a collapse of the economy. The self-styled economist thought that he indeed had a magic formula. Are Malaysian economy and the ringgit candidates for crutches through currency control?

///18. The present financial crisis in the world is due to the abuse of regulations in the financial market. No positive steps have been taken so far to regulate it. Certainly currency trading remains unregulated and selective.///– Mahathir

It sounds as if only Malaysian ringgit is attracted to currency speculators but not the currencies of other ASEAN countries or the rest of the world.

///19. The latest report says that every day currency trading is valued at four trillion dollars, equal to the total output of Germany in one year.

20. Whereas Germany’s 4 trillion dollars yearly output creates millions of jobs, businesses big and small and much trade, the 4 trillion a day currency trade creates practically no jobs, businesses or trade. Of course the currency traders make tons of money. In the process we know that they can cause a repeat of the crisis faced by the world when they lose. Why should the world allow such greedy people to put the world at risk.///– Mahathir

It is strange that Mahathir cares that the world might be at risk. He is now using the welfare of the world to advance his interest to stop ringgit traded abroad. Has he other ulterior motive beyond his ignorance about anything economics or finance?

///21. If we fully free our Ringgit the risk of being attacked by currency traders will once again be faced by us. Do we really want to have the financial crisis once again?///– Mahathir

Crisis presents both dangers and opportunities. Would that crisis ever recur based on the above elementary analysis?

///22. So I hope the Government will explain why it wants the Ringgit to be traded again. I hope it is not because we want to be good boys who will always do what we are told to do.///– Mahathir

It is refreshing to hear that ordinary citizens can request government to explain decision for policy making. But one would need to be knowledgeable about the subject matter to understand whether policy response has been correctly made on balance of probability.