Category: Economics

The following illustrates the GDP per capita of countries attending the Langkawi International Dialogue. Seychelles has been left out because it is an outlier and it is messing up the graph.

The next graph shows the human development index of the same countries with the exception of Tanzania (the omission is purely a matter of aesthetic). Seychelles has been left out because there is no data for the small island state. Out of this set of countries, Malaysia is the only country classified within the “high human development” group.

What is the point of these two graphs?

One will quickly see the difference between Malaysian and these countries. What I am driving at is that Malaysia and these countries are essentially at two different stages of economic development. To put it bluntly, these African countries are behind the curve (with the possible exception of Botswana).

With that, the optimal economic policy at encouraging economic growth for the two groups are likely to be different. If there are overlaps, the overlaps are likely to be limited.

I am posting this because several Malaysian media have reported the Malaysian Prime Minister Najib Razak stating in his speech at the Langkawi International Dialogue that innovation is the key to growth.^[1][1a] The audience? Leaders and delegates of the listed African countries.^[2]

It was not that best of all messages. Why?

Innovation-based economy is just not for the African countries attending the Langkawi pow-wow.

The actual act of innovation is really more relevant to countries sitting close to the technology frontier. While Malaysia is not at the frontier like how the United States and other advanced countries are, Malaysia is definitely closer to it than the Africans. That means innovation does have a role to play in the economic growth of Malaysia, and increasingly so given where Malaysia is on its developmental curve.

To paraphrase the idea, the farther a country is from the frontier hence the less developed a country is, the less relevant innovation should be to its economic policy.

What is more relevant for least developed countries is learning by imitation.

This does not mean any innovation is unwelcome in these African states. Innovation is certainly good but to engage actively it as part of government policy is likely to be an expensive exercise when compared to the imitation path. This is an important point because many of these African countries are not exactly rich. One has to be close to the technology frontier to innovate in a big way so that innovation becomes the engine of growth. For the African countries, they have a lot of ground to cover.

Really, there are other basic issues requiring attention first, like water and electricity coverage. It is not absurd to pour billions into innovation-based activities while basic infrastructure is missing?

The countries have to prioritize their resources and imitation is the more cost-effective developmental path compared to innovation policy set.

The imitation path may not be sexy but it has proven to work. Look no farther than the four Asian Tigers, namely Hong Kong, Singapore, South Korea and Taiwan. In fact, look at the experience of Malaysia for the most part of the 1980s and the 1990s. There were some innovations, but it was mostly about copying foreign technology and diffusing the relevant technology to the masses. Economist Paul Krugman famously wrote it was all about perspiration, not inspiration.^[3]

Even more relevant for these African countries are something more basic than innovation. It is simply capital accumulation and good institutions. In the orthodox growth model, it is assumed that savings are automatically translated into investment in productive activities that increase production and wealth. This is an overly optimistic view of human behavior. There are friction between savings and investment and that could be corruption. Looking at the records of a majority of these African countries, corruption is a big issue. In the case of Zimbabwe, it is simply gross mismanagement of the economy.

If I were the keynote speaker instead of the PM, I would have asked these African countries to learn the Malaysian lesson of the 1980s and the 1990s, the one which was about capital accumulation and good institutions instead of innovation.

To be fair, the PM did mention about the application of technology (I would like to criticize the “appropriate technology” approach but I will reserve for another day) and good institutions. But that does not make the innovation suggestion any less wrong.

^[1] — PUTRAJAYA, June 19 (Bernama) — Prime Minister Datuk Seri Najib Tun Razak has called on African and Caribbean nations to embrace innovation as a key priority to achieve a competitive edge globally and take their economies to new heights. [Mikhail Raj Abdullah. Embrace Innovation to Score High in Global Business Rankings – Najib. Bernama. June 19 2011]

^[1a] — 16. A term often associated with advanced economies these days is innovation. Countries that make innovation a priority have achieved a competitive edge over others, with countries like Korea and Taiwan who have invested heavily in this field succeeding in taking their economies to new heights.

17. There is no doubt that countries with knowledge and innovation-based economies score high in international business rankings. For example, Scandinavian countries with small populations still have among the highest per capita incomes in the world. Innovation, specialisation and internationalisation of their large-scale research facilities have helped them overcome the small size of their domestic economies. [Najib Razak. LID 2011 Keynote Address. June 19 2011]

^[2] — See LIST OF COUNTRIES ATTENDING LID 2011. Bernama via Yahoo! News Malaysia. June 17 2011

^[3] — Consider, in particular, the case of Singapore. Between 1966 and 1990, the Singaporean economy grew a remarkable 8.5 percent per annum, three times as fast as the United States; per capita income grew at a 6.6 percent rate, roughly doubling every decade. This achievement seems to be a kind of economic miracle. But the miracle turns out to have been based on perspiration rather than inspiration: Singapore grew through a mobilization of resources that would have done Stalin proud. The employed share of the population surged from 27 to 51 percent. The educational standards of that work force were dramatically upgraded: while in 1966 more than half the workers had no formal education at all, by 1990 two-thirds had completed secondary education. Above all, the country had made an awesome investment in physical capital: investment as a share of output rose from 11 to more than 40 percent.

Even without going through the formal exercise of growth accounting, these numbers should make it obvious that Singapore’s growth has been based largely on one-time changes in behavior that cannot be repeated. Over the past generation the percentage of people employed has almost doubled; it cannot double again. A half-educated work force has been replaced by one in which the bulk of workers has high school diplomas; it is unlikely that a generation from now most Singaporeans will have Ph.D’s. And an investment share of 40 percent is amazingly high by any standard; a share of 7O percent would be ridiculous. So one can immediately conclude that Singapore is unlikely to achieve future growth rates comparable to those of the past.

But it is only when one actually does the quantitative accounting that the astonishing result emerges: all of Singapore’s growth can be explained by increases in measured inputs. There is no sign at all of increased efficiency. In this sense, the growth of Lee Kuan Yew’s Singapore is an economic twin of the growth of Stalin’s Soviet Union growth achieved purely through mobilization of resources. Of course, Singapore today is far more prosperous than the U.S.S.R. ever was–even at its peak in the Brezhnev years–because Singapore is closer to, though still below, the efficiency of Western economies. The point, however, is that Singapore’s economy has always been relatively efficient; it just used to be starved of capital and educated workers. [Paul Krugman. The Myth of Asia’s Miracle. Foreign Affairs. November 1994]