Caught in middle-income trap

By Dr FONG CHAN ONN

A graduate teacher starts at RM2,500 per month in Malaysia, compared to RM6,196 in Singapore and RM15,661 in Hong Kong. Malaysian wages have fallen behind partly due to the gross divergence between the suppressed Malaysian CPI and that of the world.

OVER the last few months, there has been much discussion on the issue that Malaysia has been caught in the middle-income trap. In this article, I will discuss the rationale on why Malaysia has been caught in this dilemma, and some of the steps we need to take to emerge as a high-income economy.

"Many countries caught in the middle-income trap have deliberately jump-started their economy through a high wage policy" DR FONG CHAN ONN

 

From independence to the 1980s, Malaysia progressed rapidly. From an agricultural society in the 1950s, it evolved into an Asian Tiger Economy by the 1980s, mainly through labour-intensive industrialisation.

However, subsequent attempts to further deepen our industrialisation process met with mixed results; and Malaysia’s economic well-being generally remained stagnant, while many other countries galloped away under the scenario of a rapidly expanding world trade.

This is because of the following factors:

Price controls 

In 1946, the colonial government enforced price controls in Malaya to avoid economic hardships after World War II. This policy holds until this day.

Price-control items include basic necessities such as rice, flour, sugar, fertilisers, milk, chicken and even bus and taxi fares. Because of controls, these commodities are much cheaper in Malaysia compared to outside.
For example, as of December last year, a kilo of raw sugar in Malaysia was RM1.35, while the world price was RM2.20; that of rice is RM2.75 per kilo compared to world price of RM6.75.

Since basic necessities constitute a large component of the Malaysian CPI, the cumulative effect of price controls for over 60 years has been a gross suppression of our CPI compared to world CPI (see Figure 1).

Workers’ annual pay raises are linked to the nation’s CPI. The gross divergence between the (suppressed) Malaysian CPI and that of the world has also led to a corres­ponding significant divergence of Malaysian wage rates compared to that of the world.
This, in reality, is the major reason why since the 1980s, Malaysian wages have fallen behind wages of the rest of the world (see chart on Page 28). As an example, a graduate teacher starts at RM2,500 per month in Malaysia, compared to RM6,196 in Singapore, and RM15,661 in Hong Kong.

Besides restraining Malaysian wages, price controls also severely distort the domestic economic factor proportions, resulting in many factories using non-efficient economic production processes. With diesel and fuel prices controlled, and workers’ wages suppressed, manufacturers choose to use more fuels and labour as inputs – instead of more machines – resulting in low-quality Malaysian products and, of course, low productivity growths.

Subsidies

Subsidies began in 1961 under the Control of Supplies Act 1961. Subsidised items include petrol, gas, sugar, rice and other basic items.

In the 1970s, when the price of oil was under US$12 per barrel, petrol subsidy was a bearable cost to the Government. However, with the present high oil prices (over US$75 per barrel), this has become a disastrous predicament for the Government to continue bearing.

As Figure 2 shows, the cost of subsidies has ballooned from 3% of government operating expenditure in 1998 to almost 30% in 2008!

The high cost of subsidies in turn restrains the Government’s ability to upgrade infrastructures such as public transport. It also retards the Government’s ability to provide competitive incentives for attracting high-income activities into the country.

Agriculture sector drag

The dominance of oil palm and rubber in the agriculture sector is unfortunately a significant drag on the nation’s ability to leapfrog into a high-income economy.

Given the plantation terrain, oil palm harvesting and rubber tapping remained manual in nature and (unlike grape or wheat harvesting) not easily mechanised. Up to this day, they remained as low-wage activities, fossilising our dependence on foreign labour (about 300,000) for the continued “vibrancy” of the plantation sector.

The unavoidable presence of these foreign workers in plantations also meant that many labour-intensive manufacturing operations could still continue to exist in the countryside (even in face of local worker shortage) because of the easy “mobility” of these foreign workers from estates to factories. This also means that it is very difficult for the Government to disallow or curtail foreign workers in non-plantation sectors, when it sanctions such a large presence of foreign workers in plantations.

The cumulative effect is that there are now about 2.3 million low-skill foreign workers in Malaysia, making up about 20% of the workforce. They are in the manufacturing, petroleum, construction and domestic-help sectors. Lately, they have also penetrated into retailing, food and beverage, tourism and hotel industries.

The foreign-based Electrical and Electronics (E & E) firms have already declared, in their dialogue sessions with the Government, that they would be forced to move out if foreign workers were to be limited or stopped! This argument, if accepted, will mean that our economy could remain in the middle income trap for the foreseeable future.

Where do we go from here?

South Korea’s GDP per capita is US$16,450, Singapore US$34,346, Hong Kong US$29,559, while Malaysia is still at US$7,469. It must be remembered that in the early 1970s, we were at parity with these countries. In five years’ time they would be even further ahead. What are the bold steps we need to undertake to enable us to leap out of this middle income trap?

I will attempt to elaborate on some of these steps:

Phasing out subsidies and price controls


Price controls and subsidies have created artificial market prices that distort the domestic factor proportions and impede economic efficiencies. The Government has to be bold to find ways to phase out price controls and subsidies; maybe not all at once but over a time frame of say five years. Malaysia is a small country and we cannot live in isolation from the rest of the world economy.

Petrol subsidies, in particular, should be removed within one to two years; while extensive information campaigns are carried out to enable motorists to adjust to living within the context of petrol prices being set in accordance with the world crude prices, as is the practice in many other countries.

In conjunction with the phasing out of subsidies and price controls, the Government must introduce a transparent system of social safety net, providing welfare assistance to the needy, the disabled, the aged, the unemployed and the poor. A coupon-system (together with MyKad) can be introduced where those in need are given subsidies for basic necessities and other essentials such as petrol.

Of course, this implies the need for the Government to create a nationwide data-base of those in need, not unlike the registration system for welfare payments, but more comprehensive in nature taking into account employment status and also proving channels for verification and counselling.

High wage policy

Malaysian wages have been suppressed by market factor distortions for too long. The Government should encourage our wages to be pushed up in line with the rest of the world. When the rakyat can take home more pay, they are then better enabled to adjust to the reality of world prices that will be felt when controls and subsidies are phased out.

Many countries caught in the middle-income trap have deliberately jump-started their economy through a high wage policy. Singapore is a good example; in the 1980s, its economic progress stagnated and the Singapore Government deliberately compelled companies to increase their wages by 50% or more. Though painful at first, this ignited “a second industrial revolution” in Singapore when companies became much more capital-intensive and focused on high-end manufacturing and financial activities. Today, it is a vibrant economic hub of Asia.

We could introduce a similar high wage policy by initially requiring vulnerable sectors such as plantation and agriculture, labour-intensive manufacturing, construction and services (such as restaurants and hotels) to have decent minimum wages.

The plantation companies, in particular, should be required to pay higher wages to attract more Malaysians to work in this sector.

As an example, the 2008 Annual Return of the Asiatic Group – a typical mature plantation company – shows that its total wage payment (RM83mil) constituted only 18% of its before tax profits (RM456mil); and it can certainly even double its wage bills and still remain extremely profitable!

Employers would then have to use more equipment in the new scenario; many of our skilled workers who are now in Singapore can then be enticed to return to these higher skill positions, and in the process uplift the productivity of our economy. The multiplier effects of this would be translated into higher wages for the supervisors, managers and other professionals as well.

Innovative incentives for high-tech activities

The traditional incentives offered by Malaysia in the form of pioneer status and capital investment allowances are not attractive anymore. High-tech start-ups are risky ventures; they need large capital, and hence access to venture capital and government assistance. They also need speedy Internet access and rapid logistics.

They cannot work in an environment where restrictions are placed in terms of equity ownership or employment of expatriates. They, most of all, expect rapid decision-making by us in processing their applications. In early 2000, the Indian information giant Infosys wanted to invest in Malaysia and sought approval for their expatriates to work here; our hesitancy and delay in decision-making caused them to relocate to Mauritius!

We should follow the world trend, and be rapid, decisive and agile in our engagement with high-tech entrepreneurs. We have to introduce innovative incentives to attract them to come here. This includes the offer of cash grants (as a form of venture capital), and R & D research grants to companies to set up their bases here.

In keeping with the common practice of many other countries, the Government must also be willing to offer work permits and permanent resident status to highly qualified scientists and other highly educated individuals to entice them to work in Malaysia not only as a second base but also as a second home.

IT infrastructure and public R & D centres

Malaysia was among the first to recognise the importance of IT by the establishment of our Multi-Media Super Corridor in 2001. But other countries have since superseded us in IT infrastructure. Consider this: our Internet download speed is only 2.2 Mbps, compared to South Korea’s 23.6 Mbps and Singapore’s 8.0 Mbps; our broadband penetration rate is only 30% compared to South Korea’s 97%!

Entrepreneurs now expect to be able to work through their notebooks while commuting in rapid trains and cars. They expect to be able to do video-conferencing while on the move. Our current download speed does not allow for these, and more importantly does not allow the functioning of many of the new IT applications.
The Government needs to quickly bring the state of our IT infrastructure up to parity with the global standard as a precondition for pushing Malaysia towards a high-income economy.

Further, one of the most effective methods for rapid societal debuts of new scientific ideas and innovations is the availability of public R & D centres for niche areas, where high school and university students can be encouraged to experiment with their ideas.

This was how Steve Jobs was stimulated to design the first Apple personal computer in the 1980s in Silicon Valley. And a major reason for the success of the present Korean film industry is the Seoul Animation Center; a centre where Koreans who have interest in animation for movies, computer games, or digital advertising could drop in, play around with their scripts and hopefully end up with viable commercial products.

The Government should follow this trend by setting up R & D centres in 3-D Animation, Computer Accessory Inter-face, Micro and Nano-Technology, Horticulture, Aquaculture and others deemed suitable to our resource endowment. With the proper involvement of schools and colleges, this could lead to the formation of interest groups focusing around the availability of facilities at the centres. Ultimately, this will lead to more passion for science and technology among the young, and the germination of new ideas for products and services.

Leverage on Malaysian professionals and experts overseas

According to an estimate by MEF, there are at present more than 500,000 Malaysian professionals working abroad; and they are in major cities such as New York, London, Paris, Tokyo, Beijing, Hong Kong, and Singapore working and doing research in areas like medicine, financial services, engineering, accountancy, logistics, construction, venture capital and other services.

In my interaction with many of them, they said that they very much want to contribute to Malaysia’s progress. Given the right conditions, I feel that they could be persuaded to set up base here. Unfortunately, often times, we have not engaged them sufficiently.

As an example, the renowned UK liver transplant surgeon Datuk Dr Tan Kai Chah wanted to set up base in Malaysia but could not do so because, as a Malaysian, he was required to do a compulsory three-year government service. Singapore, having gotten wind of this, headhunted him. His liver centre in Singapore is now very much sought after by patients near and far.

Learning from this, we should attract our Malaysian professionals to return to Malaysia, by the Government setting up a Special Group to identify them and then engaging those who are interested to return or at least set up base here.

This engagement should be done discreetly so that their individual requirements can be assessed and met, and their problems resolved. If their foreign spouses want to work, if their children need special education, if they need R & D grants, etc, all these we should be able to resolve. Then and only then can we gain leverage on the large pool of brainpower that we already have.

We should act quickly in this respect, for such talents are being aggressively headhunted by other governments. The Government should do all it can to ensure that our professionals, with their wide international exposure, will end up on our shores and not become other societies’ assets.

Strategic location

Kuala Lumpur’s location at the heart of Asean and its multi-cultural environment enhance its attraction for many emergent high-income activities. We have often forgotten that KL is only 300km away from Singapore and it also has access to deep seaports and airports. Fortunately, AirAsia did not forget this and, riding on the wave of budget air travel, has developed KL as the low-cost air hub of Asia-Australia. With our current lost-cost structures, KL could similarly be developed into the low-cost shipping and logistic hub of Asia.

The Government should also aggressively promote KL as the focal centre for business transactions between East (China, Korea and Japan) and West (India and Middle East) Asia.

A few enterprising Taiwanese direct-sale companies have already established processing centres and warehouses in Malaysia for export of their products to the Middle East because Malaysian-labelled products are more easily accepted in these markets. This is only the beginning of a new wave of opportunities, as East and West Asia get better connected.

Green energy

Flooded with sunshine, strong winds and free from natural disasters, Malaysia is an ideal location for green renewable energy R & D and manufacturing. Renewable green energy has to be promoted to be Malaysia’s new strength. The world’s top three solar companies have now located themselves in Malaysia. One of them (Sun Power) is building the world’s largest solar power manufacturing plant in Rumbia, in my constituency in Malacca.

The Malaysian Industrial Development Authority (Mida) must work hand in hand with the solar companies to come up with incentives and a strategic policy to match that of China, which is currently the world leader in solar power. We must seize this opportunity to nurture a cluster group of ancillary suppliers to provide materials and supporting services to the solar companies, just as we did when we started with E & E in 1972. We must not miss this boat to build a “Solar-con” manufacturing base to equal that of the silicon hub of Penang.

Medical care and pharmaceutical trials

With an aging population all over the world, high quality medical care has become an emergent high-value economic sector. Highly-trained Malaysian medical specialists are working by the hundreds in Singapore, London and Dublin. More importantly, they are highly respected in their fields. They could and should be encouraged to set up base here and transform Malaysia into a world-class international medical centre. The big advantage is that our cost is half that of Singapore, and one-third of that of Hong Kong, the United States and London.

If we reorganise ourselves, we can be among the top in this area. The urgent necessity is for the Government to reconsider compulsory government service for recognised Malaysian medical experts. Isn’t it better to allow them, already in their late 30s, back to create employment and build up our medical base, as opposed to rigidly requiring them to work for three years in government service at great personal and family sacrifice to themselves?

Malaysia, with our multi-ethnic population and extensive bio-diversity, is an ideal place for R & D in pharmaceutical products, particularly in the conduct of trials for new drugs, before their formal acceptance by the authorities. This can be in the area of cancer, Alzheimer’s, osteoporosis, bone conditioning, and heart diseases. The Health Ministry and Mida should quickly formulate a new strategy to attract pharmaceutical companies to seriously consider Malaysia as their new destination for R & D and trials.

Oil and gas activities

Petronas is known worldwide for being a successful national petroleum company. Petronas has done really well for the country in terms of generating oil and gas revenue from both Malaysian and non-Malaysian fields. Unfortunately, unlike the E & E sector, up-stream oil and gas production has not resulted in the emergence of a corresponding vibrant downstream oil and gas sub-sector. We are still very dependent on foreign oil and gas ancillary suppliers for many of the specialised downstream services, such as rig and platform maintenance and repairs, safety training, search and rescue, and other related R and D activities.

Kemaman, Miri and Bintulu are now vibrant oil-related towns. Petronas can play a more significant nurturing role and spin off more of these related activities (which are now sub-contracted to foreign suppliers) to independent Malaysian entrepreneurs of all races, so that we can begin to transform these towns into mini Houstons. Besides its economic benefits to the country, this would also greatly endear Petronas to the hearts of the average Malaysians.

In this article, I have argued that Malaysia has been inhibited from fulfilling its true potential by distortions (in the domestic economy) caused by various policies since independence; by phasing out these distortions and focusing on our strengths in new areas, we can and would emerge as a high-income economy in the not too distant future.

Datuk Seri Dr Fong Chan Onn was Prof of Applied Economics and Dean of Faculty of Economics and Administration, Universiti Malaya. He served in the Government as Deputy Minister of Education (1990-1999) and as Minister of Human Resources (1999-2008). Currently, he is the MP for Alor Gajah.

CALIFORNIA IS THE FIRST FAILED STATE, etc

1. CALIFORNIA IS THE FIRST FAILED STATES of AMERICA:
Watch Intelligence Debates in Video: http://vimeo.com/8876485

2. USA banks failed list:
http://www.fdic.gov/bank/individual/failed/banklist.html

‘Cold fish’ feels the heat

ANALYSIS By BARADAN KUPPUSAMY
baradan@pc.jaring.my

There is little chance of reconciliation between the Penang Chief Minister, who takes pride in bringing logic and rationalism to politics, and his detractors in the PKR.

DAP secretary-general and Penang Chief Minister Lim Guan Eng is in the spotlight along with Pakatan Rakyat leader Datuk Seri Anwar Ibrahim, but for radically different reasons.

While Anwar, who is charged with sodomy, is fighting for his political life, Guan Eng is under attack from PKR MPs in Penang and elsewhere for alleged arrogance, ignoring political allies and running Penang as his personal fiefdom.

Former PKR state chief Datuk Seri Zahrain Hashim opened the floodgates, famously calling Guan Eng “a dictator, a chauvinist and a communist-minded leader”, and unfit to lead the state.

Zahrain was joined by Nibong Tebal MP Tan Tee Beng, who comes from solid Gerakan stock and joined PKR in 2008.

Tan alleged that Guan Eng does not share decision-making, does not consult others, including DAP leaders, and has “no class”, whatever that means.

A third PKR MP, Noordin Zulkifli, then entered the fray, lending support to what the other two MPs said.

The DAP, on its part, sees the vitriolic attacks as part of a wider plot to dethrone Guan Eng, break up the Pakatan coalition and possibly recapture Penang.

Personally, Guan Eng, the prime target of the criticism, has not opened up against his allies.

His response is muted and confined to dismissing the accusations as false and painting the critics as “frustrated” people who, while with PKR, had their hearts more with Umno.

The PKR has referred the three MPs to the party’s disciplinary committee but there is no nerve among the leadership — all focused on the sodomy danger to the chief — to court more problem by decisively acting against the them.

As a result, reconciliation seems impossible after such an open breach of Pakatan discipline and failure to maintain etiquette between allies and partners.

“It is quite obvious all three are prepared to burn their bridges with the PKR and Pakatan Rakyat,” said a DAP leader.

“There is no more reconciliation with them … absolutely zero!

“Our party members will not allow it … They will rebel if we embrace them again, not after what they have said and done,” the leader said.

The core of the criticism is Guan Eng’s ability to run a complex and economically developed state like Penang, and his alleged domineering style and unwillingness to share power with allies.

Guan Eng brings a lot of experience to his job but unfortunately, much of it is as a committed opposition rabble-rouser who was suddenly alleviated to high power, not because of anything he achieved but because of what Barisan Nasional did or did not do.

The euphoria of sudden and unexpected victory has easily covered the scars - personal and party as well.

The public also saw the unexpected winners as heroes and were forgiving and ready to overlook the warts.

Power and high office did not sit comfortably on some of the new leaders that the 2008 political tsunami threw up.

For all his dedication and single-minded pursuit of his CAT (competency, accountability and transparency) principles in administration, Guan Eng lacks the warmth and humanism of the elder Lim (Kit Siang) and others like Dr Chen Man Hin enjoy, both in the party and society.

The Kampung Buah Pala crisis was also an example of the lack of humanism.

While Lim and Dr Chen are loved, Guan Eng is feared, DAP insiders say.

“Guan Eng is a coldly efficient leader,” they said.

“He takes great pride in logic, rationalism and being correct and accurate all the time. Once his mind is made up, it is unshakable.

“He brings cold mathematics to politics,” said a former DAP leader.

“The heart, warmth and humanism are all lacking. That’s why he is feared, because he is too efficient.”

Guan Eng, an accountant and former bank executive, started his political career under pressure. He had an illustrious father in the elder Lim to match up to.

He was only 26 when he was elected Kota Melaka MP, defeating the nationally famous football captain Soh Chin Aun with a huge majority of 17,606 votes.

Ops Lalang saw him detained under the Internal Security Act (ISA) for 18 months from October 1987.

In 1990 and 1995, he was easily returned as Kota Melaka MP but could not shake off his “cold fish” image.

Charged under the Sedition Act the same year, he was jailed for 18 months for criticising the handling of a statutory rape charge against a former chief minister.

The rigours of the Kajang Prison were a far cry from ISA detention.

“He was tough, hard and focused, and he survived,” a former inmate who befriended Guan Eng in jail said. “He did not break.”

Released 12 months later, a bitter Guan Eng had to sit out the 1999 and 2004 general elections because of the five-year bar against convicted persons from contesting.

He made a sterling comeback back in 2008, winning the Bagan parliamentary seat and Air Putih state seat, and made history by being made Pakatan’s Chief Minister for Penang.

The problem is, a DAP insider said, he sees himself as the DAP Chief Minister and not the Pakatan.

“He has also set a very high standard for himself, his party colleagues and allies.”

It is a level of commitment that many allies and colleagues are either unable or unwilling to match.

7 Gadgets That Changed the World

7 Gadgets That Changed the World

By Stephanie Pappas, TechNewsDaily Contributor

Companies like to call their new gadgets revolutionary. Amazon did it when it introduced its Kindle e-book reader in 2007, and Apple CEO Steve Jobs used the word often last week while unveiling his company's new iPad – a tablet computer that also doubles as an e-reader. Jobs even threw in a "magical" here and there when describing the device.

Corporations aren't the only ones predicting that the digitization of books will bring great change. Take author and journalist Steven Johnson, who's Kindle moved him to envision a paperless future:

"I knew then that the book's migration to the digital realm would not be a simple matter of trading ink for pixels, but would likely change the way we read, write and sell books in profound ways," Johnson wrote in The Wall Street Journal in April 2009. "It will make it easier for us to buy books, but at the same time make it easier to stop reading them. It will expand the universe of books at our fingertips, and transform the solitary act of reading into something far more social. It will give writers and publishers the chance to sell more obscure books, but it may well end up undermining some of the core attributes that we have associated with book reading for more than 500 years."

Only time will tell if these devices will live up to the hype, but throughout history, the truly revolutionary innovations are those that so fundamentally changed how we work and play that it's hard to imagine modern life without them.

With all due respect to many other game-changing inventions and technologies, here are seven gadgets dating back to the 15th Century that sent transformative ripples throughout society and whose legacies still make waves today.

7. The Printing Press

The original game-changing gadget was too big to fit in your pocket, but it revolutionized literacy all the same. Around 1450, German goldsmith Johannes Gutenburg transformed printing with his press, a table-sized machine modeled after the wine presses of the day. The invention used thousands of movable metal letters to quickly and cheaply copy text. Gutenburg's press took the spread of ideas out of the hands of elites and paved the way for the Protestant Reformation and the Enlightenment.

6. The point-and-shoot camera

George Eastman brought photography to the masses in 1888 with the Kodak camera. For the first time, the average person could freeze reality in images, which became worth, well, a thousand words. With the advent of digital cameras 100 years later, photography became even more ubiquitous. Now almost every cell phone comes equipped with a camera, and low-cost digital recorders like the Flip camera are democratizing video as well.

5. Radio

When Guglielmo Marconi patented his radiotelegraph system in 1901, he envisioned it as a way for ships to wirelessly communicate with one another. But by the 1920s, regular broadcasts of music and news exploded, ushering in a new era of mass media. From baby monitors to military radar, radio is now firmly entrenched in everyday life. The ability to harness radio waves eventually made possible all forms of wireless networking, from cell phones to Wi-Fi.

4. TV

Barely 20 years after radio shook the entertainment landscape, broadcast television sent out another temblor in the 1930s and 1940s. Television changed everything from the way people got their news to how advertising was done.

Despite being blamed for everything from our sedentary lifestyles to societal violence, TV isn't going anywhere, and in fact an incredible number of waking ours are spent in front of the boob tube. Last year, a Nielson report estimated that Americans watch more than 5 hours a day, on average. The Consumer Electronics Association (CEA) recently estimated that, recession be danged, ownership of high-definition TVs in U.S. households has doubled in the past two years.

3. The PC

Once upon a time, computers were room-sized behemoths well outside the price range of the average Joe. Home computers were available in the 1970s, but the market only really took off in 1981 with IBM's PC, which cost less than $1,600.

Since then, PCs have of course become smaller and more powerful, and they have paved the way for laptops, netbooks, smartbooks, smartphones and other mobile computing. Oh, and they made the Internet possible. By 2007, 75 percent of U.S. households had a broadband connection, and more than 230 million PCs were in use nationwide.

2. Smartphones

Continuing the trend toward smaller and mobile, smartphones enable users to surf the Web, send email and run applications, or "apps," from their phones. As with the PC, IBM took the lead on the world's first smartphone, introducing the "Simon" in 1993. Weighing in at more than a pound, the Simon offered a touch-screen keyboard, email and fax capabilities, and functions like a calendar and address book. It cost $900.

Smart phones got smaller and cheaper throughout the '90s, and the first decade of the 21st century saw Treos, Blackberries and iPhones becoming household names. Whether it's text messaging, social networking or Googling the answers at Trivia Night, constant connectedness is a given in the era of the smartphone. The Pew Internet & American Life Project estimates that on any typical day, nearly one-fifth of Americans use the Internet on a mobile device such as a smartphone or laptop.

All that convenience may make traditional cellular phones a thing of the past: According to Pyramid Research, by 2014, 60 percent of new handsets sold in the U.S. will be smartphones.

1. E-readers

As a relative newcomer, e-readers have huge potential to change the way we consume media, Dan Schechter, vice president for media and entertainment at L.E.K. consulting, told TechNewsDaily.

A recent L.E.K. study found that almost half of people who bought e-readers reported reading more newspapers, books and magazines than they otherwise would have. E-readers also offer the chance to make reading more interactive. Imagine a fashion magazine with embedded links to the designers' Web sites, or a scheme that would offer discounted e-books for readers who didn't mind seeing advertisements in the margins.

And while it remains to be seen whether Apple's new iPad will usher in a new era of tablet computing, the device has already had an effect on the e-book market, as seen in last week's e-book price dispute between Amazon and publisher Macmillan. Allowing publishers freedom to set prices could mean that the iPad (and other e-reading gadgets) won't hurt the publishing industry the way the iPod damaged the music industry.

While only about 10 percent of people currently use e-readers, the gadgets are "taking off," L.E.K.'s Schechter said. The tech analyst firm Forrester Research expects 10 million of the devices will be sold by the end of 2010.

"These are still first generation products and you're already seeing vast increases in reading," Schechter said. "It's pretty exciting stuff, and they're selling like hotcakes."

* 10 Profound Innovations Ahead
* iPads Could Encourage Bad Posture, Experts Say
* E-Book Wars: Other Publishers Likely to Raise Prices

Loopholes Allow Tainted Money Into U.S., Report Says

Real estate agents, escrow agents, lawyers, attorneys and others are involved in scandal

Feb. 4 (Bloomberg) -- U.S. lawyers, real estate and escrow agents and other professionals are enabling the flow of tens of millions of tainted dollars into the country due to loopholes in anti-money laundering laws, a Senate report says.

In one case, the son of Equatorial Guinea’s president relied on lawyers, shell companies, bankers and real estate agents to help move more than $110 million in “suspect funds” into the U.S., the report said. The money was used to buy a $30 million home in Malibu, California, and a $38.5 million Gulfstream jet, the report said.

“With the help of U.S. lawyers, real estate and escrow agents, lobbyists and others, politically powerful foreign officials, and those close to them, have found ways to use the U.S. financial system to protect and enhance their ill-gotten gains,” Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, said at a hearing today.

“While U.S. financial institutions have become more vigilant and built stronger barriers to keep out suspect funds, their anti-money-laundering safeguards still have holes,” he said.

The first three witnesses at the hearing, two lawyers and a lobbyist, invoked their constitutional right against self- incrimination and declined to answer questions from Levin.

Circumventing Laws

The subcommittee’s investigation examined how some powerful foreign politicians, their family members and associates may be circumventing U.S. laws and safeguards to bring money into the U.S. financial system that may be the product of corruption.

The report said financial institutions generally have become more vigilant since the 2001 Patriot Act required more scrutiny of such private banking accounts.

Still, the 325-page report cited a series of lapses by banks. For example, an HSBC Holdings Plc bank in New York gave an Angolan bank, Banco Africano de Investimentos, “ready access to the U.S. financial system” despite the latter institution’s ties to corrupt oil and diamond industries, the report said.

HSBC Bank USA’s director of anti-money laundering compliance, Wiecher H. Mandemaker, testified today that the bank’s “broader practices today exceed even the more robust post-Sept. 11 federal regulations in a number of important respects.”

Source of Funds

Politically powerful people and their associates in other countries are able to bring into the U.S. millions of dollars without having to provide information on the source of the funds because of lax controls in other professions, the report said.

“Real estate agents, escrow agents, attorneys and others do not have the legal obligation the way banks do at the moment to take action to prevent their participation in suspect transactions,” Levin said at a briefing with reporters on Feb. 2.

Levin said today that as the U.S. leads efforts to stop the flow of illegal money into places such as Iraq and Afghanistan, it must do a better job of halting the movement of suspect funds into the U.S.

Among the report’s recommendations are that Congress enact a law and the U.S Treasury issue rules that would strengthen bank screening of politically powerful foreign clients.

The report called on the Treasury to repeal a 2002 exemption given to real estate and escrow agents for anti-money- laundering programs under the Patriot Act, which gave law enforcement greater latitude to investigate terrorism.

Names of Owners

Congress also should pass a law that requires people forming U.S. corporations to disclose the names of the beneficial owners, the report said. Professional groups such as the American Bar Association and National Association of Realtors should issue guidelines involving acceptance of funds from potentially suspect foreign sources, it said.

The report centered on examples from four oil-producing African nations that have been cited for corruption by organizations such as the U.S. State Department and Transparency International, a global group working against corruption.

Aside from Equatorial Guinea, they are Angola, Gabon and Nigeria.

In the case of Teodoro Nguema Obiang Mangue, the son of the president of Equatorial Guinea, the report said two lawyers helped him bypass anti-money-laundering laws by allowing him to use shell company accounts as conduits for his funds without telling U.S. bankers that Obiang was using the accounts.

‘Set Up Another’

“If a bank later uncovered Mr. Obiang’s use of an account and closed it, the lawyers helped him set up another,” it said.

Many of the professionals in the Obiang case were under no legal obligation to take anti-money-laundering precautions, the report said.

Attorneys Michael Jay Berger and George I. Nagler, both of Beverly Hills, California, invoked their constitutional right against self-incrimination and declined to testify today.

The report said Nagler worked with a colleague in the insurance industry to provide insurance coverage for Obiang’s 32 motorcycles and cars, which included seven Ferraris, five Bentleys, four Rolls-Royces and two Lamborghinis.

The report cited a 2007 U.S. Justice Department memorandum that said it was “investigating suspected criminal conduct” of Obiang, who is the minister of agriculture and forests.

Obiang hasn’t been criminally charged. The subcommittee investigators couldn’t confirm the investigation, the report said. A lawyer for Obiang didn’t return phone calls seeking comment.

Lobbyist Cites Rights

Another witness, Jeffrey C. Birrell, a lobbyist with the Grace Group in McLean, Virginia, also invoked his constitutional right against self-incrimination today.

The report said Birrell was hired by the late president of Gabon, Omar Bongo, to help buy six U.S.-built armored vehicles and get government permission to buy six C-130 military cargo aircraft from Saudi Arabia. The aircraft sale never occurred.

Birrell’s attorney, Ian Pitz of Madison, Wisconsin, said in an interview yesterday that the transactions were “undertaken with complete transparency and with required approval from the United States government.”

“We’re not aware of any wrongdoing by any party related to those transactions,” he said.

To contact the reporters on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.