Monday, October 24, 2016

Creating efficient sustainable growth: Remodelling system need fair competition

(打造高效可持重塑系需公平)
夏伟文 & 陈薛卉 (20 June 2016)

A barren land may produce few big trees but not a forest. Malaysia has a world badminton champion in Datuk Lee Chong Wei but didn’t have enough champion players to make a world champion team. One dominant reason for this is the “system”. Portugal and Argentina may have Ronaldo and Messi winning the world best player award for record of times but it is the German system that produce enough talents and good fundamental (include technical expertise and teamwork) to perform consistently at highest level and then, finally won the football World Cup.

Therefore, the foundation of high and sustainable economic growth should be good system in every aspect. In November/December 2014 article in this same column, we proposed a new analysis model as in Figure 1. As we can see, the “system” plays critical role as catalyst or platform to enable development for “human”, “science & technology” and “capital”. The “system” is akin to “soil, environment and root”. If it is good, it will grow strong branches in the form of “human”, “science and technology” and “capital”. Those branches will bear fruits of economic growth.


Figure 1: Four Economic Triangles



Unfortunately, some of main systems we are using now are ineffective, thus did not provide good platform for holistic and sustainable growth. Two aspects need foremost attention for remodelling. They are (i) the needs to induce fair domestic competition and (ii) reduce big government systems (will not be discussed here).

Fair competition within New Economic Policy framework
Officially, New Economic Policy (NEP) has ended in 1990 after a lifespan of 20 years. Subsequent policies are like “old wine in new bottle”, which make NEP like never ended. NEP has two main objectives which can be considered as “practical” rather than “racist”. It first objective aimed to eradicate poverty irrespective of races. The second objectives is to restructure Malaysian society to reduce identification of race from economic function with the purpose that Malays and other indigenous groups play full role in all aspect of economic function. This second objective is actually fair despite look like bias to Malay group. In general, the NEP (as well as any other affirmative policy in other countries) is actually based on Rawlsian welfare principle to maximize the welfare of the least well-off members, which in Malaysia case is the Malay group. With an extra push from privatization during Mahathir’s era, NEP successfully eradicated overall poverty and uplift Malay and indigenous group’s welfare, income and involvement in the economy. Thus, income distribution becomes fairer and the economic growth became healthier.

Taking a neutral and academic point of view, the problem of NEP (the Rawlsian-based system) is its longevity. Giving “unconditional” advantage with no expiry date to the least well off group will cause dependency. Dependency comes with (i) expectation that the advantage will be forever coming, and (ii) fear of losing everything if this advantage is gone. These will lead to slower improvement in productivity, cause misallocation of resources and give chances for political manipulation. The important thing here is NOT asking for completely removal of these advantages but to at least make it “conditional”, which is competition and synergy cooperation for both intra and inter groups.

A historical case of affirmative policy during the Germany re-unification in 1990 can be used as reference. During that time, Eastern Germany was ways behind West Germany. Robert J. Barro (Professor of Economics in Harvard University) in his book “Nothing is Sacred (2003: 95 - 101)” highlighted that Eastern Germany was given a lot of advantages. These advantages include a one-to-one currency conversion rate, taxing the West to aid the East development programs and wage-equalization effort. Like Malaysia, both are Rawlsian welfare system. As results, wage and salary payments per worker in eastern region (exclude Berlin) increased from 49% of the western region (include Berlin) in 1991 to 75% in 1995 and 77% in 2000.

However, productivity (measure in “gross domestic products per worker) grew much slower. In 1991, eastern region’s productivity is 31% of the western region. It only grew to 46% in 1995 and 48% in 1997/98. Meanwhile, between 1992 to early 2001, unemployment rate in the eastern Germany is about 6% to 8% higher than western region. In addition, Barro also criticized the Germany government’s transfer and subsidized policies (welfare system) that retarded migration from east to west. He believed more westerner working in the higher productivity environment of the west would be better.

These reflect that wages convergence can be forced through government policies but it cannot improve economic fundamental, which in this case are high productivity and low unemployment. It is like the government planting an adult tree in an unfertile land and hope the tree will grow healthily ever after.

Back to Malaysia, advantages in the name of welfare should not be overly-extended to the less productive people (regardless of race) and low value-added industries or economic sectors unconditionally as it may retard the country’s long term productivity growth. Others programs like Bantuan Rakyat 1Malaysia (BRIM) that did not help in increasing productivity or economic efficiency should be stopped. Education scholarship, research grant, entrepreneurship grant and others financial support should be given to the needed but by merit.

Figure 1: GDP per person employed Gap (Malaysia vs. Singapore) (%)
Note: Data sourced from World Bank. The number represents percentage of different (Singapore minus Malaysia) divided by Malaysia GDP per person employed.
There is no data on GDP per person employed (proxy to productivity) for both Malaysia and Singapore prior to year 1991. However, the trend after 1991 in Figure 1 implies that (i) Singapore’s productivity is way above Malaysia, and (ii) Malaysia’s productivity was very vulnerable (drop drastically) during crisis years like 1997/98 to 2000 and 2008 to 2010. Throughout those years, every worker in Singapore produces about 2.5 times to 3 times more output than workers in Malaysia.
Figure 2: GDP per capita Gap (Malaysia vs. Singapore) (%)
Note: Data sourced from World Bank. The number represents percentage of different (Singapore minus Malaysia) divided by Malaysia GDP per capita.
Figure 2 reveals equally embarrassing comparison. The different between Singapore’s GDP per capita goes up to 400% of Malaysia GDP per capita. In another words, average output per Singaporean is five times every Malaysian. Thus, what can we say about the long-term effectiveness of our affirmative policy and other development plans?

Solutions
Two simple solutions may be applicable. First is promotes fair competition in everything from government’s welfare support and procurement to providing business opportunity. Even with protective privilege to the Bumiputera group, creating competition within them may be very helpful in increasing efficiency and productivity. Same can be applied to protect domestic infant industries from foreign competition but at the same time promote domestic competition. United States, Japan and South Korea did practiced protectionism economy before their industries become strong. Yet, very fierce domestic competition existed to ensure rapid growth of strength. History has proven this solution. Malaysia protects domestic industries but lack of competition. Can our airline, automobile and telecommunication compete with foreign companies?

Second proposed solution looks weird but seems indirectly worked well in United States. It is to legalized abortion. Since 1991, homicide and violent crime in United States has fallen dramatically by 44% each. Rate for property crime has also reduced by about 50%. Research study by John Donohue (Stanford Law School) and Steven Levitt (University of Chicago) found that legalization of abortion in the 1970s. The logic is that “those children who were not born (abortion) would have been more likely to grow up in poverty and on welfare with a young and poorly educated single parent” (see Barro, 2003: 74 – 77). These unborn children would have been prime candidates to be criminals fifteen to twenty-five years later. Hence, their absent would contribute in drop of crime rate and perhaps also reduce government’s social welfare burden and improve overall productivity. There will be lots of debates on humanitarian ground versus practical needs.

Summary
Competition may be cruel. Only the fittest is to survive but this is the best system for civilization to grow and prosper. Even human genetic will automatically select the best gene to ensure our survival and growth. On the other hand, mercy is needed to correct the initial imbalances of strength. Helping hand (affirmative action) ensures the weak ones to grow strong one day and provide fair competition to the rest. Yet, beware that if we give unlimited mercy on the weak ones, we are also taking away their incentive and urge to improve.
[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 18th January 2016. Available online at http://www.enanyang.my/news/20160620/打造高效可持续增长基础br-重塑系统需公平竞争. This English version may be slightly different from the Chinese online/printed newspaper version]

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