For some economists, such as Prescott (1996), the renewed interest in growth over the last 20 years stems from their belief that business cycle fluctuations ”˜are not costly to society’ and that it is more important for economists to worry about ”˜increasing the rate of increase in economy-wide productivity and not smoothing business fluctuations’. This position has been publicly expressed earlier by Lucas in May 1985 when delivering his Yrjo Jahnsson lectures. There he argued that post-1945 economic stability had been a relatively ”˜minor problem’ especially in comparison ”˜to the costs of modestly reduced rates of growth’ (Lucas, 1987). More recently, Lucas (2003) has repeated this message using US performance over the last 50 years as a benchmark. Lucas argued that ”˜the potential for welfare gains from better long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management’. [Brian Snowdon. Howard R. Vane. Page 33. Modern Macroeconomics: Its Origin, Development and Current State. 2005]
Category: Economics
I am unsure how seriously I should entertain the current thought I am harboring. I am thinking of something that is absurd at the first pass but on second thought, it is not so. I meant to write this as a satire for The Malaysian Insider in a fashion that I have done earlier but given my tight schedule, I have refrained from doing so.
I fear I might forget this line of reasoning if I do not record it down anytime soon. And so, here it is.
Minimum wage can be redefined as a guarantee of certain level of wages to those who are employed at the minimum wage level at a firm covered by the minimum wage law. Consider an economy-wide minimum wage law that typically covers low-skilled employees.
In that case, the law discriminates between those who work as employees and those who work by themselves. This statement can be stated more convincingly as a comparison between, for example, a security guard (essentially a low-skilled employee) and a pisang goreng (Malaysian-style banana fritters) seller. Let these two individuals have the same expected income from their economic activity sans minimum wage for the employee.
Is there a reason why the security guard deserves minimum wage, but not the pisang goreng entrepreneur?
The discrimination is unfair and unjust.
This of course is not a call for minimum wage for entrepreneurs. That would be ridiculous. This is just to highlight some of the moral deprivations of the policy.
An interesting parallel appears here between economics and exit, on the one hand, and politics and voice, on the other. Just as in economics it had long been thought that the more elastic demand is (that is, the more rapidly exit ensues whenever deterioration occurs) the better for the functioning of the economic system, so it has long been an article of faith of political theory that the proper functioning of democracy requires a maximally alert, active, and vocal public. In the United States, this belief was shaken by empirical studies of voting and political behavior which demonstrated the existence of considerable political apathy on the part of large sections of the public, for long periods of time. Since the democratic system appeared to survive this apathy rather well, it became clear that the relations between political activism of the citizens and stable democracy are considerably more complex than had once been thought. As in the case of exit, a mixture of alert and inert citizens, or even an alternation of involvement and withdrawal, may actually serve democracy better than either total, permanent activism or total apathy. One reason, stressed by Robert Dahl, is that the ordinary failure, on the part of most citizens, to use their potential political resources to the full makes it possible for them to react with unexpected vigor—by using normally unused reserves of political power and influence—whenever their vital interests are directly threatened… [Albert Hirschman. Exit, Voice and Loyalty. Chapter 3. 1970]
Foreigners from poorer countries working in unglamorous low-skilled industries in Malaysia have it tough. Stereotyped, some Malaysians associate them with the worst.
They are blamed for various problems — from the high crime rate to stagnating wages — while their contributions to the local economy are ignored. Seeing low-skilled foreigners as a source of trouble, there are Malaysians who want to limit the number of these foreigners in the country.
In times when economic growth is an obsession, that protectionist sentiment needs to be kept in check. It needs to be kept in check because immigration can be a key to economic growth.
More generally, population growth can lead to economic growth. High population growth rate enlarges the size of an economy in absolute terms. In this respect, immigration is the easiest route to take.
That is not the main reason why immigration is a powerful tool for long-term economic growth, however. Instead, it is the potential of their children along with ours.
The larger a particular society is, the likelier it would organically host inherently exceptionally talented individuals. Creation of talents does depend on multiple factors such as quality education quality but it is impossible to deny that some people are exceptionally brilliant compared to others. In a perfectly level-playing field stripped of other effects, these individuals would distinguish themselves from the masses, regardless of environmental factors.
Economist Robert Lucas once explained this to demonstrate the link between population growth, technical progress and economic growth. He wrote: ”If I could re-do the history of the world, halving population size each year from the beginning of time on some random basis, I would not do it for fear of losing Mozart in the process.”
These highly talented individuals would contribute to society and make it richer. By richer, it is not only in terms of material wealth but also other aspects that make life worth living.
If Malaysia is to enjoy the benefits of a larger population in the long run, it has to adopt a relatively open immigration policy. This can easily be done by granting productive foreigners who have spent considerable time in the country a pathway to citizenship, or at least a shot at permanent residency.
Some may consider this as an overly liberal policy. It is not and in fact, it is a realistic policy. Consider for a moment that there are more or less two million foreigners in Malaysia. That figure is before accounting for illegal aliens. One surely cannot believe that the government can reduce the number by a significant margin, much less boot of all of them out without hurting the economy.
Many of them have lived in Malaysia for some time. Many do speak Malay. They are acclimatized to Malaysian culture. In other words, the cost of accommodation and integration for them and for Malaysian society would not be too great.
At the same time, Malaysia does not have a comprehensive welfare system, which is a typical barrier to open immigration policy. As new citizens, they will have to work their way through. They have the necessary motivation to work and to contribute to society. This reduces the short-term cost of such liberal policy.
Implementation of the liberal policy may even give a short run boost to the local economy. Foreign workers face radical changes in their future given that they have to return to their home country once their stay permit expires.
It is reasonable to speculate that that places a limit on their spending within the local economy. If one has no future in the country, one has little reason to spend too much in that country — little incentive for them to undertake large, long-term purchases or investments at individual levels.
If they are given the chance to pursue Malaysian citizenship or permanent residency status, and if such speculation is a fact, then that limit could be removed. This could boost private demand in Malaysia.
In fact, some of these foreigners have proven to be entrepreneurial sorts. Citizenship will grant them security. That encourages them to establish private enterprises, which can only enhance the vigor of the free market and reduces the need for government involvement in business, if there is ever a need for such statist involvement in the first place.
This cannot be bad for the local economy in both the short and long run.
First published in The Malaysian Insider on October 1 2010.
