By Jacob Nelson
In this article, I discuss demographics and some of its effects on the global economy. I also cover the changing patterns of global trade and the rise of countries like China. Finally, I take a look at opportunities for Malaysia in this changing world.
After 500 years of European domination of much of the world, the global economy has undergone major changes in the recent past. China has progressed so much over the past four to five decades and become a major world power.
Currently, a common Western narrative is that China is a bad actor. Call me sceptical but after 25 years in financial markets, I’ve learnt to question the prevailing narrative. To me, this narrative is partly coloured by a sense of insecurity in some Western nations.
Many advanced economies have high debt levels. During the 2008 Great Financial Crisis, trillions were deployed to rescue financial systems. One consequence was to leave advanced economies with high debt levels.
Now, in the financial world, advanced economies’ debt was seen as a safe asset. Recall that after the Asian currency crisis in 1997, many Asian countries accumulated US debt in their reserve asset portfolios.
In a speech in 2004, the then US Federal Reserve Bank chairman referred to a “global savings glut”. This was seen to be problematic because it depressed interest rates and the yields of US treasury notes and bonds.
This had implications for US pensions and for life insurers. These two groups of institutional investors have long maturity liabilities. The decline in interest makes their liabilities more onerous, and they are forced to buy long duration assets at higher prices. For various reasons, they are required to buy long maturity assets.
There are private pools of assets for pensions in the US, the UK and the Netherlands. In most of continental Europe, however, pensions are pay-as-you-go obligations of the sovereign. But, whether public or private, the effects are real.
So people in most advanced economies have private or public pensions and post-retirement benefits (usually, some sort of health insurance coverage).
I know of no time in history when almost all wealthy countries (AE) are ageing roughly at the same time.
The Baby Boomers (born roughly between 1946 and 1964) are retiring even as we speak.
This means that there will be more demands for pension payments. This is a phenomenon for most Western nations (and Japan).
Interestingly, this is happening at a time when sovereign debt levels are already high. Hence, it is not at all obvious that all nations will be able to meet their pension obligations.
For those thinking of retiring abroad, the availability of quality medical care figures highly.
In most European countries, the government provides some level of healthcare.
But in some other countries (especially the US), there is no such blanket. The cost of medical care (especially for an uninsured illness can bankrupt a family).
This will prompt many to consider retiring abroad. They will look for countries that have decent medical care available at reasonable cost, among other things.
Malaysia probably fits the bill on both these counts, ie decent medical care and reasonable cost. More and more pensioners in advanced economies are now finding it important to retire in reliable jurisdictions where costs are reasonable.
At the gross system level, the question arises whether what we have perceived as ‘safe’ assets (the US dollar and US government debt) until now will remain the preferred safe assets.
A change would have broad implications for currencies.
Global trade patterns are changing. China is now the world’s leading trading nation. Trade between Asia (including Japan, India, and Indonesia) and the rest of the world will increase.
China’s yuan is poised to become a major world currency. The Chinese authorities have to gradually open their capital account. They could be reluctant to do this now, while China is going through some adjustments, as the authorities fear large capital outflows. So they could focus on this after China resolves its current troubles.
China has also built extensive networks of high-speed trains even abroad. This is partly meant to expand China’s ‘soft power’ – by helping developing countries develop their infrastructure. The recipient countries will have to repay Beijing in yuan. This helps broaden the international acceptance of the yuan. So, China gets to export engineering expertise while getting broader acceptance of the yuan.
Note that Shanghai has oil contract trading denominated in yuan. Even a major oil exporter like Saudi Arabia has agreed to export some oil in yuan. That sounds like the beginning of the end of the petrodollar regime, which began shortly after World War Two.
Change sometimes happens slowly, but all these developments will boost international acceptability of the yuan.
Opportunities for Malaysia
Meanwhile, affluent Americans and Europeans will look for alternative places to retire. A broad impetus to stretch pensions will emerge and this is likely to become a major trend in the coming years.
This is an opportunity Malaysia can grasp and benefit from. Malaysia is a small country, and so we cannot change the course of world events. But we can adapt and prepare ourselves for a different world.
Previous Malaysian administrations deserve credit for trying to make it attractive for these foreigners to retire in Malaysia. They had the foresight to develop programmes like Malaysia, My Second Home for these foreign retirees. I also think that foreign income not being taxable in Malaysia will make it especially attractive for foreigners.
Malaysia already has a decent standard of medical care. We can and should aim for excellence.
It is also an advantage that many speak English in Malaysia. One characteristic that is sure to appeal to foreigners is the multicultural dimension.
If more foreign retirees opt to move to Malaysia, some entrepreneurs could decide to build retirement communities. Foreign retirees would feel more comfortable in communities where there is a predominance of people from their countries.
Check out this article from US News about the best places in Asia to retire. Note that three of the top 10 destinations are in Malaysia – George Town in top spot, Kota Kinabalu in seventh place and Kuala Lumpur, ninth.
Two assumptions underlie all this:
- Harmony exists between the ethnic groups in Malaysia – and it stays that way
- Good government in the country. The corruption scandals may well have stained that reputation. But this can be repaired – if there is political will
In the near future, the dominant trade routes are likely to be centred in Asia.
These routes change over time, usually slowly.
From World War Two until the 1990s, the dominant trade route was trans-Atlantic – between the US and Europe.
From the ‘90s, it switched to trans-Pacific trade between China and the US.
We could be at the point where trade routes are switching again – this time between China and the EU.
Not only that, the Asian countries with favourable demographics (and large populations) are India and Indonesia.
Now, in doing business, it helps to have cultural familiarity with your trading partner. You understand each other better. It helps develop trust.
As a result of the predominant ethnic and lingual composition of Malaysia, we are well-positioned as these major economies grow in influence. Malaysia is well-represented by Malays, Chinese and Indians, and many locals have close ties with Indonesia as well.
We can capitalise on all these opportunities. After all, we have lived together in harmony for hundreds of years. Most of us actually appreciate and like each other. I think that’s a fact.
Good government? We are far from perfect, but we can improve.
Given all these opportunities that are ours for the taking, let’s be optimistic about our future.
Dr Jacob Nelson has a PhD in accounting and finance from Washington University, St Louis, with research in applied economics, along with 25 years’ experience in financial markets with international financial institutions. Though he has lived abroad for four decades, Jacob remains a Malaysian who follows developments in Malaysia with great interest