Tuesday 5 January 2010

Choosing between today and tomorrow

MANY of us hope that the new year would bring us more cheers than 2009 did. Most expect our economy to be better in line with the predictions of many commentators. At the same time, some would take a more cautionary approach as there are many unanswered questions such as the possibility of a W-shaped recovery, which means that the worse is still not over.

As we plan for a more successful 2010, most of us would be scanning the business landscape to appreciate how far things had and will continue to change.

In the corporate sector, the environment would be more challenging as trade barriers are further dismantled when tariffs are reduced to zero for almost all goods in the six Asean countries including Malaysia. The various free trade agreements (FTAs) between Asean and its trading partners such as Australia, New Zealand and India would result in more trade within these economies resulting in more downward pressure on price while increasing competition.

When the situation gets tougher, the pressure would be on executives to achieve short-term results to satisfy the demands of investors and other stakeholders. In fact, most top executives are on relatively short-term contracts which would be renewed only if targets are met. To reinforce the focus on immediate results, incentives such as bonuses are tied to short-term performance such as annual profits.

As demonstrated during the global financial crisis, short-term thinking combined with the the inherent susceptibility of human to greed resulted in catastrophes which were not imagined as possible.

There are many issues we are facing now that require us to make the choice between short-term comfort and long-term interest of the society as a whole. Issues such as the proposed introduction of the Goods and Services Tax (GST), the sustainability and cost of basic needs like water and electricity could result in adverse long-term consequences if the focus is solely on short-term benefits.

The problem with long-term thinking is that we as a society do not have the patience to wait and often expect results to be demonstrated immediately. This creates a natural stress to decision made in choosing between long-term sustainable strategies that may not be popular with the mass and short-term popular choices that may not be sustainable in a longer-time horizon.

The proposed GST is an effort to shift the ways the government is funded — from direct taxes based on income to indirect taxes based on consumption. Given our dependence on petroleum related revenue, which forms a significant portion of our income tax base, we are at risk if we begin to consume more than what we produce and our reserves get depleted. Market talk is that this point is not that far away.

Of course, the introduction of GST will not be easy and will involve a lot of initial pain especially in the form of effect on prices and the burden of managing paperwork to comply with the system.

This issue needs to be debated based on facts, and having our long-term sustainability in mind. Perhaps town hall-like activities would bring more public participation in debating this issue which is important in seeking ideas and building buy in to a decision.

Sustainability seems not to be something that we take seriously at the moment. Nothing much happens here post-Copenhagen although our prime minister did make our commitment known at the climate change conference. This is where we have significant exposure, especially in respect of our palm oil industry.

The recent action by Unilever which severed ties with an Indonesian company on the basis that the company failed to take necessary measures to protect the environment could escalate into a more serious trade issue.

The progress-versus-sustainability debate will again require us to reflect the sort of future we want to pass on to the next generation. Again we have some who feel that they would not live long enough to experience the dire consequences to be bothered about taking serious decisive actions now.

We are lucky that most of our basic needs are highly subsidised by the government. However, most fail to appreciate that the funds came for us, the taxpayers. Subsidy to a certain extend distorts not only the allocation of resources but also our behaviour. The cost of treated water is so low that most of us do not feel appropriate to conserve water. For example, just observe people taking ablution at the mosque. Most will use water as if it is not wrong to waste although Prophet Muhammad reminded Muslims to conserve water when taking ablution even at a flowing river. The same applies to electricity as well.

While the solutions would not be as straight forward as what we would expect, the will to decide based on the long-term well-being of this country is important. How far are we willing to change and endure short-term pains in order to have a better future?

This article is also published at the Edge Malaysia website here:

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