Author: Hafiz Noor Shams

For more about me, please read this.

Categories
Economics

[2122] Of the proper question is, is GST more burdensome than sales and service taxes?

The Malaysian government plans to introduce goods and services tax replacing the current sales tax as well as service tax in 2011. I generally prefer consumption tax to income tax because one, it somewhat accounts for externality related to consumption (making it a close cousin to my favorite tax, carbon tax) and two, it is a flat tax. Libertarians typically love flat tax. And probably, three, it is a middle finger to Keynesians and socialists out there.

My position with respect to GST in Malaysia is essentially one of agnosticism at the moment as I try to grasp its merit and demerit, despite my disposition to consumption tax (If there is an abolition of income tax alongside the introduction of GST, I would probably rush to the defense of GST immediately). I am therefore open to argument from both sides.

I do have problem rationalizing opposition to GST based on the argument that GST is regressive however. To the best of my knowledge, sales tax and service tax are flat taxes. That makes them regressive. They are consumption tax too (practically indistinguishable really) because they too can be passed to consumers (though a study of tax incidence suggests passing the tax to consumer is slightly more complicated due to dependency on elasticities).

Given that both types — GST and the current taxes GST is proposed to replace; for the sake of convenience I am lumping sales tax and service tax as ‘the other taxes’ — are regressive, the appropriate question to mount a proper opposition to GST is how more burdensome GST is compared the other taxes to the lower income groups, not whether GST is regressive or not by itself. In order words, what are the marginal effect?

I do not know the answer. Obviously a study has to be done to answer that but my first impression would be that it is less burdensome — less burdensome by meaning of less taxation — because the rate of GST proposed is much lower than the average rates of sales tax and service tax, at least for 2011.

The proposed GST rate is 4%.[1]

According to Malaysian Industrial Development Authority, services tax in Malaysia is 5% while sales tax is typically charged at 10% although there are goods charged as low as 5% to as high as 25%.[2][3][4] There are exemptions where no tax is charged but leave that aside for now.

Clearly, ignoring the anomaly of exemptions, GST is theoretically less burdensome than the other taxes of interest at the proposed and current rates.

Therefore, I am having problem with the basis of opposition to GST as expressed by several politicians from Pakatan Rakyat and possibly Khairy Jamaluddin. The latter spoke earlier in the Parliament, raising his concern about the regressive nature of GST.[5] Like I said, the proper concern should be how much more burdensome is GST against the other taxes, not that GST is regressive.

For Tony Pua’s assertion that the government should postpone the implementation of GST until average citizens earn higher income[6], which I assume GDP per capita is a convenient proxy for that, this is not convincing.

Assuming that rate of GST is the same as the average of rates for the other taxes — ignoring the effect of changing quantity demanded and quantity supplied as well as elasticities that eventually lead to change of tax revenue; those changes would probably bring down aggregate demand given the efficiency of GST but no matter because that is an entirely different issue — tax collection for both should be the same theoretically.

Theoretically because the other taxes are susceptible to tax evasion. Tax evasion is less of a problem to GST because value-adding activities are recorded more diligently across value-chains. That makes it more efficient in terms of tax collection. This advantage that GST has against the other taxes should enhance the appeal of GST, not less, if one is interested in having better taxation system. The opportunity for tax evasion is not a good point to base one’s opposition to GST, again, if one is interested in having better taxation system.

Note however, again, the proposed rate of GST is lower than the current average rates of the other taxes. Any net gain from the switch to GST is likely due to efficiency of GST rather than increase in theoretical taxes.

Nevertheless, Pakatan Rakyat or rather DAP does sound good criticism that weeding out corruption and addressing mismanagement of country’s resources would probably enhance the government’s bottom line compared to expected increase of tax collection of RM1 billion due to GST.[7]

Yet, I think Rajan Rishyakaran makes a good point when he writes, “the need for the GST goes beyond plugging budgetary holes — it serves the need to flatten the tax base.”[8]

I would add further that the function of GST is to diversify sources of revenue for the government rather than raising revenue. Unless all Malaysians suddenly convert to minarchism, which I do not mind of course, given the well-known fact that Malaysia has narrow taxpayer base,[9] diversifying the source and indeed widening the base is a good idea.

It is a good idea because, like the Pulitzer Prize winner Thomas Friedman puts it in his article entitled The First Law of Petropolitics, if he is right, government dependency on tax as revenue encourages accountability. That can further develop democratic culture in Malaysia. Dependency on oil revenue does not do that.[10] Add to that the fact that oil is a finite resources, diversification is a a way forward.

If the rate of GST gets higher than the average of the other taxes, then opposition to it is very proper. That however is an opposition to the rate, not GST per se.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

p/s — I realized that I have not defined the meaning of regressive. Consumption tax like GST is a flat tax. By regressive, it does not refer to actual rate increases the lower one’s income is where progressive means the opposite. Rather, it refers to the fact that those with lower disposal income will spend greater fraction of their income on basic items. Since flat tax increases that fraction on the, if I may use the term, poor, it is arguably regressive. The difference between the two ‘regressive’, should be differentiated, even if the effect maybe the same.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR: The government plans to impose goods and services tax (GST) at 4%, said Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah.

”We are replacing the current sales and services tax, which is currently at 5% to 10%,” he told reporters at the Culture, Ideas and Values Workshop organised by Foundation For the Future at Country Heights Resorts in Kajang. [Govt may impose GST at 4%, says Husni. The Star. November 26 2009]

[2] — See Service Tax. Accessed December 3 2009.

[3] — See Sales Tax. Accessed December 3 2009.

[4] — See Taxation. Accessed December 3 2009.

[5] — The first parliamentarian to raise concern about the introduction of GST is Khairy Jamaludin. When he spoke on this matter, there was hardly any response to it. As usual the mainstream newspapers shied away from this heavy stuff. [Further thoughts on VAT/GST. Mohd Ariff Sabri Abdul Aziz. December 2 2009]

[6] — Today, out of a population of 27 million, there are in effect only 1.8 million tax-payers who pays any income tax, or only 6.7% of the population. Even if we were to take into account only the 12 million working population, it is only 15% of them who have pay any taxes. The 85% who don’t pay are those who actually don’t qualify to pay any taxes because their income is too low. However, with the implementation of GST, every single one of them whether they are earning RM500 a month or RM1,500 a month or even RM2,500 a month, who don’t current pay any taxes, will be forced to bear the heavy burden of the GST.

Therefore, it is only fair that the income levels of the average Malaysian is raised to a level where the overwhelming majority of working Malaysians are already taxable before the switch is made to a GST or indirect taxation system. [GST: First blood. Tony Pua. December 1 2009]

[7] — IPOH, Nov 29 — DAP has urged the Federal Government to reconsider the proposed 4 per cent Goods and Services Tax (GST), claiming it would do nothing to narrow the nation’s current deficit budget and would only further burden the poor and the middle class.

Party secretary-general Lim Guan Eng said that the Government should, instead, concentrate on fighting corruption and realising savings of at least RM28bil annually instead of a mere RM1bil in additional revenue from GST. [DAP: No sense gaining RM1b from GST to lose RM28b to graft. Clara Clooi. The Malaysian Insider. November 29 2009]

[8] — Tony Pua did point out several other ways to raise revenue (auctioning import quotas, for example) and save money. Nevertheless, the need for the GST goes beyond plugging budgetary holes — it serves the need to flatten the tax base. [GST for high-income economies. Only.. Rajan Rishyakaran. December 1 2009]

[9] — International agencies such as the International Monetary Fund (IMF) and World Bank have long pointed to Malaysia’s narrow tax base as being unviable in the longer term, given that only a tenth (or an estimated one million-odd workers) pay income tax and the nation’s overdependence on oil earnings, which contribute more than 40 per cent of federal revenue. [Najib plumps for GST to fill revenue hole. Business Times via The Malaysian Insider. November 25 2009]

[10] — [The First Law of Petropolitics. Thomas Friedman. Foreign Policy. May 2006]

Categories
Liberty Society

[2121] Of refusing to agree to disagree

Is it not great to witness the culture of freedom spreading in Malaysia, no matter how painfully slow progress has been so far?

To observe individuals debating in the public sphere on issues that none was willing to ponder so openly in the past is an encouraging development for all freedom lovers. It opens up windows and doors of an old house to exchange stale air with fresh, belonging to that of delightfully fragrant summer days.

The bright light of summer now shines where darkness once reigned. With it, old perceptions succumb to more liberating views to present all with new possibilities to explore. The barrier to fulfilling individual potential is now less intimidating to overcome due to advancing freedom.

That barrier must continue to be chipped away. Challenges to greater freedom must be conclusively addressed, no inch must be surrendered.

With continual erosion of the fear of freedom, many Malaysians now are eager to practice their individual rights, especially free speech. They express their opinion in public space on issues ranging from the crucial to the comical. Along with liberty comes diversity of opinion, regardless of the validity of the opinion held.

There is a mechanism to sort out the issue of validity of opinion or ideas while respecting liberty. The mechanism is in the nature of spontaneous order and free competition, as each individual — or at least those who care enough — tries to convince the other of a position while others poke their fingers at that position, just as the invisible hand acts to allocate resources in a free, competitive market. It is the natural selection of ideas.

The act of convincing others through intelligent debate must continue to happen, if the process of natural selection is to separate the wheat from the chaff. If a society is interested in having the best ideas proliferate while phasing bad ones out to the margin, actions that prevent natural selection deserve rejection.

Most of the times, such actions detrimental to natural selection are easily identifiable because at its heart is coercion. A few common examples backed by coercion, as practiced by the governments all over the world — Malaysia definitely included — are banning of books, censorship on television and prohibition of public speaking. Others involving intolerant individuals include issuance of security threats, be it simply rhetorical or real.

Subtler is a situation when there is there is absence of coercion. Yes, challenges to the advances of liberty do not merely come in the form of coercion only. One way that it can exist is in form of thought-terminating clichés that try to end discussions held in the public sphere.

I have to be more concrete about this and I intend to do exactly that: how many times, when faced with difficult issues, has one heard the phrase ”agree to disagree”?

On the surface, a person who suggests for all to agree to disagree so politely sounds like a great liberal democrat. It signals willingness to tolerate diversity of opinion. The truth cannot be any farther however; the phrase somehow has wrongly gained reputation as the liberal thing to do.

Unable to convince others or unable to mount convincing rebuttals to a brilliantly presented point, and in a situation where all sides refuse to budge, such a suggestion when forwarded so politely immediately resolves tension. Case closed. Discussion ended. Criticism ceased.

Meanwhile, those who refuse to agree to disagree unfairly risk being accused as intolerant of diversity of opinion.

This is downright wrong.

The phrase and the spirit of ”agree to disagree” has nothing to do with free speech and the concept of liberty at large. Far from it, it seeks to end criticism without debating on points raised.

It does not promote free speech but in fact, it brings upon adverse effects to the agenda of freedom. This spirit masks itself as a liberal ideal but it is really an effort to cover a sign of weak intellect, by creating a force field to insulate the promoter of such illiberal spirit, from criticism.

Free speech does not come with freedom from criticism. Such insulation is the antithesis of the idea of freedom. At its worst, those who seek such insulation are intolerant of free speech. At the other end, at its best, they are either appealing to political expediency or running away from the issue.

The illiberal spirit of ”agree to disagree” is not the proper way of respecting diversity of opinion and liberty. The right way is by continually debating on the issues, no matter how sensitive they are — rationally and respectfully, without threats and force. It is the right way because the only factor that makes a point unassailable is its soundness.

All are entitled their own opinion but that does not mean every opinion is valid. The assertion that the Earth is flat is an opinion but we know that that is untrue. The spirit of ”agree to disagree” ignores the point on the validity of the idea. It treats all ideas as equally valid and sound when that is not the case. It is because not all opinions or ideas are valid that none should be beyond inspection and criticism. Hence, the invalidity of the appallingly inadequate spirit of ”agree to disagree”.

If that ersatz culture spreads and becomes the way of the majority, then that society, our society, is building its foundation on sand, incapable to supporting argument as good as we should because each time there are disagreements, we agree to disagree. Such weak foundation cannot support a liberal society in a convincing manner.

A free society will continually examine and re-examine any idea presented in the public space. Any action that discourages that, whether laced with coercion or not, is incongruous to the greater spirit of liberty and the goal of building a liberal society.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on November 30 2009.

Categories
Society

[2120] Of future Swiss minarets, or lack of it

There are several countries that, in my mind, symbolize tolerance and openness to different cultures. The Netherlands was one of them, until the rise of right-wing politics best represented by Geert Wilders as its public persona. Switzerland was probably one of few that belonged to this class. The reputation of Swiss humanitarianism further enhanced that image. Such generalization is mostly likely naive, especially after the successful referendum to specifically ban the building of minarets in that little Alps country.

I was aware of the movement to ban it much, much earlier but somehow I considered it as a fringe group’s initiative that was likely to fail. What I did not know, or bother to find out was that the Swiss People’s Party (SVP), the one pushing the initiative, is a major party even if it does not dominate Swiss politics. It is in fact, the largest party in that country.[0] I have clearly underestimated influence of right-wing politics there.

The hostility to minarets is worrying not primarily because it is backed by coercion and really, an attempt at subjective measurement and imposition of taste, which is the classical response from libertarians. Behind the hostility is really incapability to tolerate religious differences and downright racism. A high-ranking SVP official said, “This was a vote against minarets as symbols of Islamic power.”[0a]

Granted, Muslims can practice their religion without the minarets. What matters in all religions should be sincere belief, however irrational such belief may be. Minarets, everything physical and if I may add, religious laws imposed by state as demanded by conservative Muslims, are just ostentatious showing of piety.

That however is not the issue. The issue is the drive behind the ban, which is xenophobia directed against Muslims.[0b] As rightfully pointed out by the Times, the yes vote “played on fears of militant Islam… There are some 350,000 Muslims in Switzerland, or 4 per cent of the population. Most bear as much similarity to the theocratic fanatics of al-Qaeda and the Taleban as Archbishop Rowan Williams does to the snakehandling sects of Appalachia.“[1]

It sends the message that Muslims are increasingly facing restriction in ways that they could practice their belief peacefully without causing actual discomfort to others. It sends a message of prejudice. The SVP’s black sheep poster sends an even stronger message of intolerance that really fueled the move to ban minarets.

It is a gross generalization to say the Swiss society is becoming intolerant in black and white terms, given that only 58% of voters voted yes. There is a sizable — very large — minority that is probably liberal enough to oppose the move. The federal government itself does not favor passing the motion. Moreover, turnout was in the low 50s. Unfortunately, 58% of yes out of total turnout is sufficient to sanction the state to ban it. More instructively perhaps, out of 22 out of 26 cantons — the highest administrative division in Switzerland — voted yes.[3]

There are more nuance to that fear that probably attracts centrist voters to the wrong side of the divide. Unlike in Malaysia where the accusation that foreigners commit disproportionately more crime than local which is not supported by statistics, statistics in Switzerland may actually indicate that Muslim immigrants disproportionately commit crime compared to Swiss. But the operative word is immigrants rather than Muslims. Yet, even that does not tell the whole story.

Like Indian students in Australia who seem to disproportionately become victims of crime probably because they live in unsafe neighborhood due to financial constraint (as well as a myriad of other factors),[4] financial constraint is probably the reason why these immigrants had to resort to crime. I am not absolving criminals but that issues of financial constraint which push groups to the societal margin has to be addressed. There are suggestions that this is a result of strict citizenship requirement.[5]

That problem of financial constraint should not be solved through means advocated by economic left, no. Immigrants would ripe disproportionate benefits while contributing very little. That is a recipe for other disaster. Rather, citizenship processes need to be liberalized and integration made easier. Without citizenship, these immigrants will find it hard to support themselves respectfully and contribute to betterment of Swiss society and beyond.

And of course, it is easier to lump good citizens and as well as good immigrants who are Muslims with Muslim immigrants who actually commit crime. That is the nature of generalization. It is easy to do.

But even if that issue is solved, I doubt SVP and all right-wingers there would be happy. A racist would only use issue such as that only as a proxy of his or her ultimate goal.

But all that is in Switzerland. What does it matter to Malaysia?

Our own xenophobic racists have one more example to refer to, saying, “they did it, why can we not do the same?”

That is not constructive.

There also a question of identity in Switzerland which immigration will affect in a big way. This not really a question of racism and it is a legitimate concern. However, the world is changing and the best way is to adapt.[6]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[0] — The proposal had been put forward by the Swiss People’s Party, (SVP), the largest party in parliament, which says minarets are a sign of Islamisation.[Swiss voters back ban on minarets. BBC. November 29 2009]

[0a] — But Martin Baltisser, the SVP’s general secretary, told the BBC: “This was a vote against minarets as symbols of Islamic power.” [Swiss voters back ban on minarets. BBC. November 29 2009]

[0b] — Supporters of a ban claimed that allowing minarets would represent the growth of an ideology and a legal system – Sharia law – which are incompatible with Swiss democracy. [Swiss voters back ban on minarets. BBC. November 29 2009]

[1] — The referendum held yesterday is different from these. Instead of seeking to balance the conflicting claims and allegiances that characterise modern democracy, it targets one group for discriminatory treatment. The ”yes” campaign played on fears of militant Islam. Its posters depicted a woman clad in a burka, alongside a forest of minarets that resembled missiles.

There are only four minarets in the whole country, and none is used to call the faithful to prayer. There are some 350,000 Muslims in Switzerland, or 4 per cent of the population. Most bear as much similarity to the theocratic fanatics of al-Qaeda and the Taleban as Archbishop Rowan Williams does to the snakehandling sects of Appalachia. Many come from the Balkans, where a Muslim population recently suffered ferocious persecution under the genocidal designs of Slobodan Milosevic. [Intolerance of Islam. Times. November 30 2009]

[2] — The nationalist Swiss People’s Party has led several campaigns against foreigners, including a proposal to kick out entire families of foreigners if one of their children breaks a law and a bid to subject citizenship applications to a popular vote.

The party’s controversial posters have shown three white sheep kicking out a black sheep and a swarm of brown hands grabbing Swiss passports from a box.

The current campaign posters showing missile-like minarets atop the national flag and a fully veiled woman have drawn anger of local officials and rights defenders. [Intolerance of Islam. Times. November 30 2009]

[3] — See Minarets controversy in Switzerland at Wikipedia.

[4] — The Senate Committee has criticised the state governments of Victoria and New South Wales for not providing public transport concessions to overseas students. This has been a long standing demand of groups representing Indian and other overseas students. Lack of public transport concessions has also been partly blamed as a reason for attacks on Indian students as they prefer to walk home to save fares. [Attacks on Indian students not racism: Australian Senate report. Economic Times. November 27 2009]

[5] — Over 20% of Switzerland’s population is foreign. Most have been in the country for many years, and around a third of them were born in Switzerland.

Swiss citizenship remains very difficult to come by, and being born in the country does not give the children or even grandchildren of immigrants the right to be Swiss.

Crime figures

The Swiss People’s Party claims that foreigners commit more crimes than the Swiss, and says this justifies deporting them and their families.

In fact, crime statistics are not at all clear, partly because not all Swiss regions count crime in the same way.

A recent study by the Federal Department for Foreigners found that while, at first glance, foreigners appear to be committing more crime than the Swiss, foreigners, especially young men, are also more likely to be charged – whereas young Swiss may be let off with a caution for the same offence.

The study also found that young foreigners living in Switzerland were more likely to be unemployed and living in socially deprived backgrounds, than the Swiss.

But despite the complex nature of the problem, the blunt approach has clearly struck a chord with many voters. [Swiss row over black sheep poster. BBC. September 17 2007]

[6] — To date there are only two mosques in the country with minarets but planners are turning down applications for more, after opinion polls showed almost half the population favours a ban. What is at stake here in Switzerland is not merely a dislike of foreigners or a distrust of Islam but something far more fundamental. It is a clash that goes to the heart of an identity crisis which is there throughout Europe and the US. It is about how we live in a world that has changed radically since the end of the Cold War with the growth of a globalised economy, increased immigration flows, the rise of Islam as an international force and the terrorism of 9/11. Switzerland only illustrates it more graphically than elsewhere. [Switzerland: Europe’s heart of darkness?. The Independent. September 7 2007]

Categories
Society

[2119] Of the horrible Putrajaya

Some time in May 2009, overlooking the sparse city of Putrajaya from the Shangri-La Hotel perched on top of a hill, a respected former top Malaysian diplomat rhetorically asked me, “is it not a great view”?

I somehow had the courage to respond, “I am unimpressed by it”.

In truth, as a person with amateurish interest in architecture, I am impressed by the buildings. It is the concept of Putrajaya that I find as unappealing.

The worst of all bads is the fact that the establishment of Putrajaya as a federal administrative center of Malaysia creates a distance between the federal government and the center of the country that is Kuala Lumpur. It is true that not all and in fact a majority of Malaysians do not live in Kuala Lumpur but with a population of approximately 1.6 million, it is by far the largest and the most influential city in the country. That number does not include satellite cities such as Petaling Jaya.

Compared to the relative emptiness of Putrajaya and its surrounding, there is a cultural and even political disconnect between the center of Malaysia and Putrajaya. Given weak democratic culture that exists in Malaysia, that does not help.

A more concrete factor that makes me dislike the city is the way it is designed. It is so vast that it is clear that motor vehicles are essential to it. Putrajaya may try to mimic Washington D.C. but that city on the Potomac is friendly to pedestrians. I have been there and I enjoy walking there.

The heat makes it all the more unappealing. Apart from dealing with the government, there is really no reason to be there. Another city that falls in the same class as Putrajaya is Canberra here in Australia. Judging from conversation with friends here, Canberra is as unexciting as Putrajaya.

It is, as if, Putrajaya was planned for giants with everything placed so far apart. And that is the ironic thing because despite being a planned city unlike Kuala Lumpur with its spaghetti-like streets, parking is a real issue in Putrajaya.

There are parking spaces but those spaces are located so unstrategically that many simply park by the roadside closest to the building of interest. The best example is probably around where the Ministry of Education, Ministry of Higher Education, Ministry of Health and the Ministry of Youth and Sports are. It was a disaster over there the last time I visited the horrible place six or seven months ago. It was as bad as the situation at KL Sentral. KL Sentral has legitimate excuse to supply: it is still under development. The same cannot be said about Putrajaya.

I could imagine how loudly civil servants and visitors will grumble when they read this:

PUTRAJAYA, Nov 30 (Bernama) — Putrajaya Corporation (PJC) will impose parking charges at the Precinct 1 government complexes and the Diplomatic Precinct’s car parks from Tuesday.

The areas have the capacity of 386 parking bays at the Perdana Putra Complex, Laman Perdana, B Complex and C Complex at Precinct 1, and 559 bays at the Diplomatic Precinct, it said in a statement.

PJC said this would enable adequate parking bays for the public and avoid traffic congestion. [Putrajaya Parking Charges Start from Tuesday. Bernama. November 30 2009]

Do not get me wrong. I support charging fee to solve parking problem but the city is badly designed, even when it was designed with motor vehicles in mind. In fact, somebody must have forgotten that he or she or they designed the city with motor vehicles in mind.

The vehicles have to be parked somewhere. It is as if all those parking spaces are placed as an afterthought. This problem should not have arisen in the first place, if the city pride itself as a planned city.

But perhaps, it is a matter of implementation. Putrajaya was supposed to have its own spanking intracity rail system. That went kaput during the Asian Financial Crisis. Buses are taking over now but I do not know now efficient they are. I have never tried it.

I do not intend to try it either. I plan to avoid Putrajaya like a plague. It is not in my favorite cities list.

Categories
Economics Politics & government Society

[2118] Of less variance for democratic states versus autocracies

Just weeks ago, former Prime Minister Mahathir Mohamad contrasted the development of China and India. As reported, he praised the single-mindedness of the Chinese government in developing the country and ridiculed the Indian government for being far too democratic and not focusing enough on development. He went on to state that freedom hurts the economy.[1]

Art Harun, a columnist at The Malaysian Insider replied to this in his column[2] stating examples where democracies have been successful, contrary to the former Prime Minister’s assertion.[3] Zaidel Baharuddin, yet another The Malaysian Insider columnist jumped into the debate at his blog by defending the former Prime Minister, stating that “starving hard working farmers in India who has to fight drought and fertilizer prices don’t give a damn about freedom of speech or expression.”[4] Art Harun took the chance to reply to the point and various other comments too diverse to cite here[5] by arguing that economic prosperity does not have to be mutually exclusive with respect to freedom as well as adding that they are other factors that need to be considered in the determination of economic development, like leadership.[6]

Indeed but all those discussions are gradually veering off course from the point the former Prime Minister made, about how democracies perform poorly against less democratic states in terms of economic development.

This point is not necessarily true. If one wants to make that point, one cannot choose two data points and make a conclusion out of it. That is the logical fallacy of hasty generalization. A better way is to take all of democracies and all of authoritarian states and compare them.

There are prominent studies on this. One important study states that while the existence of democracy or dictatorship does not affect the mean growth rate of economic development, it does affect its variance. That means there are less consistency in economic growth under authoritarian regime compared to democracies. Adam Przeworski wrote an important paper on the issue:

Political regimes have no impact on the growth of total income when countries are observed across the entire spectrum of conditions. Contrary to widespread concerns, democracies do not reduce the rate of investment even in poor countries. It appears that when countries are poor there is little governments can do, so that it makes little difference for economic growth whether rulers are elected or hold power by force. In wealthier countries, patterns of growth are no longer the same. Dictatorships rely on the growth of labor force and on keeping wages low, while democracies pay higher wages, use labor more effectively, and benefit more from technical progress. But while growth under wealthier dictatorships is more labor-extensive and labor-exploitative than under wealthier democracies, so that functional distributions of income are different, the average rates of growth of total income are about the same.

Thus, we did not find a shred of evidence that democracy need be sacrificed on the altar of development. The few countries that developed spectacularly during the past fifty years were as likely to achieve this feat under democracy as under dictatorship. On the average, total incomes grew at almost identical rates under the two regimes. Moreover, per capita incomes grow faster in democracies. The reason is that democracies have lower rates of population growth. In spite of rapid diffusion of medical advances, death rates remain somewhat higher under dictatorship and life expectancies are much shorter. Population grows faster under dictatorships because they have higher birth rates, and the difference in birth rates is due to higher fertility, not to age structures of the population. [Democracy and Economic Development. Adam Przeworski. New York University. Retrieved on November 30 2009]

Almeida and Ferreira in 2002 probably made a more direct case:

Less-democratic countries do seem to have variable growth rates and policies than more democratic ones. This corroborates the conjecture of Sah (1991). Possible explanatoins for this fact can be found in Rodrik (1999a) and in Sah and Stiglitz (1991).

The evidence presented in this paper strongly supports Sah’s conjecture. The empirical results are unaffected by many robustness and specification checks. The results are not sensitive to specific time periods, to different democracy indicies, to different econometric procedures, or to model specification. The results hold even after controlling for many plausible determinants of growth rates and democracy indicies, including the usual variables from the empirical growth literature, time dummies and country-fixed effects, GDP, natural resource dependence, and OECD membership.

The greater stability of growth rates and policy measures among democratic countries adds to the existing list of desirable features of democracies, such as the positive correlations between democracy and per capita GDP levels, between democracy and primary schooling (Barro, 1999) and between wages and democracy indices (Rodrik, 1999b). Our evidence also corroborates the common view that some autocratic countries have had the most impressive growth experiences. However, since the worst experiences are also associated with autocratic countries, in an ex-ante sense, autocracy is no prescription for growth. [Democracy and the variability of economic performance. Heictor Almeida. Daniel Ferreira. Economics and Politics. Volume 14. November 2002]

Of note is the relationship between wages and democracy indices as reported by Rodrik. People in the Najib administration may well take that into account.

Anyway, at the Library of Economic and Liberty, economist Byran Caplan, who introduces Almeida and Ferreira, reproduces the following diagram to drive the point home:[7]

Some right reserved.

Autocracies are represented on the left side and democracies on the right side. Note the variances and the means.

Bottom line is, there is more risk to having an authoritarian regime than a democratic one, in terms of economic development. If one wants to be more certain about achieving success, democracy is one of the ingredients one must consider.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — Dr Mahathir singled out India as an Asian country that “made the mistake of being too democratic” and compared it unfavourably with China’s authoritarian regime.

“India, of course, will grow, but more slowly than China. It has the numbers but is not making use of them well.”

He expanded on the theme at a press conference later, saying that people “don’t understand the limits of democracy”.

“Democracy can be a hindrance to progress because you spend so much time politicking that you don’t have time to develop your country.

“In China, there’s not much politics. So, they can spend more time developing their country.

“In a democracy, everybody has a voice, everybody has a vote. But, in Malaysia, they sell their votes, which is not good at all.” [Dr M: A lot to learn from China. New Straits Times. November 17 2009]

[2] —[Enemies of the State. Art Harun. The Malaysian Insider. November 19 2009]

[3] — Yes. According to DrM, the Westerners are wrong for making democracy and freedom the cornerstone of progress. The British are so free they go on strike every other day. Well, who sent people to the moon in 1969? Which part of the world had an industrial revolution? Why have Russia, East Germany, Romania et al embraced democracy and freedom? From whom did we buy our Scorpene? Why Glasnost and Perestroika? So the people know the limits of freedom and how to behave themselves properly and in accordance with the Government’s code of behavioural acceptance?

And finally, according to Dr M, apart from China, Japan, South Korea and Taiwan will lead the Asian charge.

Which made me thinking, were Japan, South Korea and Taiwan governed by a benevolent absolutist government? Do the people in these countries know the limits of democracy? If so, to what extent? And who impose and define these limits on them? [Enemies of the State. Art Harun. November 19 2009]

[4] — I’m pretty sure, those starving hard working farmers in India who has to fight drought and fertilizer prices don’t give a damn about freedom of speech or expression. It is those comfortably well paid lawyers with some extra time on their hands who are more concerned about these things and write about it.

Meaning, [b]efore you talk about democracy perhaps it is wise to first elevate the people’s (rakyat) quality of living, because like the maslow’s hierarchy of needs there are more important things to fulfill before they get to the self actualization level. [Sinatra_Z – An Answer. Zaidel Baharuddin. November 20 2009]

[5] — Ahiruddin Attan for instance compared the more democratic Malaysia, which is behind the economic development curve with the less democratic Singapore, which is ahead:

I don’t think the Malaysian Insider would publish such a piece. Good try, though, Z. I do agree with you (and Dr M). We don’t need to look so far, just across the Causeway. We are way more democratic than Singapore, and look at how many of us idolize the Republic for its progress and wealth. Given the choice, however, I’d stay put here, Z. [Art Harun vs The Lipas Man. Ahiruddin Attan. November 20 2009]

[6] — My question is, why can’t we have them all? Especially in a democracy, where we elect our so called leaders to look after our well being as members of a State?

I think in this day and age, it is downright insulting — and not to mention, pathetic — for any leader to say to the people that I will give you food on your table in abundance but you would have to shut up, toe the line and do as I say, all the time and under all circumstances.

For a leader to lay the blame on the people which he or she ruled — for not understanding the limits of democracy — as a reason for his or her failure to achieve development and progress does not speak much of his or her leadership.

A comparison was made with Singapore in one of the comments. It was pointed out Singapore did not have much of a democracy and they progress well. But that does not prove that Singapore progressed well because it was less democratic.

 

Hasn’t it occurred to any of us that Singapore progressed because of the mentality and work ethics of its leaders? [Freedom lifts us up to where we belong. Art Harun. The Malaysian Insider. November 24 2009]

[7] —[Democracy, Dictatorship, and the Variance of Growth. Byran Caplan. Library of Economics and Liberty. October 2 2009]