Category: History & heritage

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Economics History & heritage Society

[3000] When history is blurry: reading Patricia Crone’s Meccan Trade and the Rise of Islam

Mecca has a long history. It is so long parts of its history is blurry and backed by uncertain sources. Pre-Islamic sources at best give imprecise descriptions of the city, if the city described is indeed Mecca. Meanwhile, traditional understanding of Mecca’s history before and during the coming of Islam was only developed much, much later.

The orthodox understanding takes the city as an important commercial and religious center prior to the coming of Islam. This much at least has been impressed upon the minds of many who grew up as a Muslim. The seige of Mecca during the Year 570 (the Year of the Elephant), the presence of the Kaaba and Qurasyhi caravaneers are proofs of Meccan commercial and religious prestige during pre-Islamic period.

In the 1987 book Meccan Trade and the Rise of Islam, Patricia Crone challenges the mainstream history of the city by juxtaposing non-Muslim sources with traditional Islamic ones.

The first half of the book goes with great length inspecting trade pattern of various goods that concerned Byzantium, Egypt and Syria in the north, Persia and India (including the Malay Archipelago) to the east, and Yemen and Ethiopia to the south. These chapters are really encyclopaedic entries more than anything else and reading them is a little more exciting than reading a high-level mathematical textbook.

But the conclusion is phenomenal in that all the major trade routes between these locations involving major commodities did not go through Mecca. For most goods by 400s and 500s, sea routes were preferred. The advent of sea trading meant Byzantium could now circumvent the Arabs. In limited cases where land travels were necessary, Mecca was miles off known routes. Meccan trade existed only in the sense that the city folks needed provisions and not in a way of an entrepôt or an emporium. Add to the fact that Mecca was too dry to support a large population with no special commodity of its own that others lacked, it is hard to reject Crone’s idea that Mecca was not a major trading center in pre-Islamic Arabia.

The second part of the book, I feel, stands on shakier grounds. Here, Crone argues Mecca was also not a major religious center. She states that there were three other pilgrimage locations nearby that were bigger than Mecca. This is an echo of her more controversial thesis written in a 1977 book, Hagarism: The Making of the Islamic World. But how does that negate the idea of Mecca as a major pre-Islamic religious center is something that I struggle to process and ultimately unconvinced. This is where other readings will come in handy.

The final part of the book explains two bigger themes that worked in the background: first it is about the state of Meccan (and the wider Arabian) society in the 500s and second, about the unreliability of sources of pre-Islamic Mecca history.

On the first subject, Crone understands Muhammad and Islam as a materialist instead of an idealist phenomenon. That is, the prophet and the religion were primarily a pan-Arabian proto-nationalist movement rising up against Byzantium and Persian influence (instead of the rise of a religion fighting the immorality and decadence of the Jahiliyah period).

On the second subject, these traditional Islamic sources were written long after the rise of Islam—the primary example being Ibn Ishaq—should be considered as an act of storytelling instead of history-writing. Crone argues many of these sources provide contradictory details of the same events. Crone goes on to claim that these Islamic sources place the need to tell ‘the moral of the story’ above the need to record history accurately. That is to say, outside proofs must be considered when (re)constructing the history of Islam.

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Economics History & heritage Politics & government

[2999] The three shadows of the 2000s and an eulogy for Abdullah Ahmad Badawi

Malaysia has not had many Prime Ministers, despite what it may have felt like during the merry-go-round contest that took place from 2020 until 2022. In this age where the idea of modern state is taken for granted, it is easy to forget that the modern country is young.

Even with a short modern history—modern meaning post-colonial—it is easy to claim that Abdullah Ahmad Badawi is one of those Prime Ministers who history are looking back kindly. Kindly, because when he passed away earlier this week, most have only kind words for him. Some wept. Kindly, because of the subsequent Prime Ministers who had far worse controversies and were utterly divisive.

The contemporary kindness appears incongruent to the intense emotions and harsh condemnations many felt and said no more than twenty years ago. Living through Malaysia of the 2000s, it is difficult to ignore the dramatic loss of popular support his administration underwent. I suspect there is a recency bias at work here for a majority of people. We forget.

Or maybe we forgive and forget because Abdullah was a kind man, and people generally return kindness with kindness.

I further suspect that we forgive because we now understand that many of the things that happened in the 2000s making life difficult for Malaysians was beyond his control. Living in the shadows of the 1990s was not easy for many. And living in the shadows of Mahathir Mohamad was difficult for Abdullah. But I think most importantly, we were all living in the shadow of a rising China, which could only be understood by looking back from the future, which is today.

The rise of China was a competition Malaysia struggled to address back then. The result is obvious. In the 1990s, Malaysia had a far higher per capita GDP relative to China’s. Now, it is about the same with China slightly ahead.

The rapid industrialization of China caused some Malaysian deindustrialization in the 2000s. As a result, Malaysia’s income growth of the 2000s was slower than it was in the 1990s. Already used to rapid growth, the 2000s growth slowdown (as I wrote in The End of the Nineteen-Nineties) felt like an era of unmet expectations. The Abdullah government fell victim to that. The unmet expectations fueled various dissatisfaction that were amplified by a newly popular and evolving technology that was the internet. Everything else—including the strong rise of energy prices that eventually led to the massive subsidy liberalization shock—was a second-order effect caused by China’s rise.

Abdullah cannot be blamed for China’s success. The story of China was a long-coming world-history in the making. He tried his best but the fact is, it was a tough condition for Malaysia that many would-be leaders would struggle to address. That condition was only reversed by the quantitative easing of the late-2000s/early 2010s, yet again beyond Malaysia’s control, however Najib would later like to claim.

We understand this—explicitly by those who keep a close tab on the global economy, and implicit by those who do not—and thus we forgive.

And from what we know, he had forgiven us too. Such was a gentleman.

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Books, essays and others Economics History & heritage

[2994] Reviewing How Asia Works

Even when free trade consensus was at its most influential period during the 1990s, industrial policy involving government intervention across Asia was commonplace. For Asian beneficiaries of free trade and globalization like Malaysia, South and Taiwan, they were and are at best mixed economies.

Now that that consensus is collapsing and trade barriers are rising, industrial policy is becoming more and more important as a response to contemporary challenges. The US under the former Biden administration did it. Europe is trying to follow suit. China has doubled down its initiatives. Almost everybody else of importance has moved in the same direction as they try to capture some segments of a shifting and fraying global supply chain caused by competition between China and the US. As far as the China-US competition is concerned, Malaysia has been promoting itself as safe haven for cross-border manufacturers and service providers since at least the first Pakatan Harapan government.

It was this context that convinced me to re-read Joe Studwell’s How Asia Works that hit the book market back in 2013. The book does not touch about contemporary industrial policy concerns like how Chris Miller’s The Chip War does but it provides a historical overview of post-war economic development of selected prominent economies in the Asia Pacific while outlining a general theory of which industrial policy worked and which did not.

The overall framework itself is not controversial: an economy progresses from agriculture-based towards manufacturing and later service-based. That feels like a truism when we look back from a mainstream 2020s lens. In fact, even the leading communists of the late 19th and early 20th century understood this.  So, the general idea has a very long history.

What the author proposes differently is the method which an economy carries out that shift.

For newly independent underdeveloped economies during the post-World War II era, Studwell highlights that economies needed land reforms to soak up loose labor market, boost agricultural productivity and build up national surplus. Land reforms mean redistributing land from the biggest landowners to the peasants, turning tenant-farmers into owner-farmers. This solved multiple post-war challenges: social unrest, extreme mass unemployment, production disincentives associated with rentierism, indebtedness and lack of capital surplus that is required for industrialization.

Economies that managed to commit land reforms the earliest and most comprehensively are the ones to experience robust industrialisation first. Here, Japan is the original success story going all the way back to the 19th century Meiji Restoration and again later following its defeat in the World War. Taiwan did the same after the Kuomintang government fled mainland China and implemented various reforms on the island. South Korea carried this out on the urging of the United States’s occupying authorities. China attempted land reforms and achieved successes until communist excesses led to collectivism in the 1950s. Collectivism undid earlier Chinese agricultural progress and delayed Chinese industrialisation until after the death of Mao Zedong. Thailand for the longest time was in denial about the state of its economy but belatedly (and informally) allowed new land to be opened up north. Meanwhile, Malaysia and Indonesia cheated their way out of land reforms: Malaysia by encouraging land openings through Felda (and not mentioned in the book, new villages as a response to the Communist Emergency) and Indonesia through its transmigrasi program that relocated population from Java to other Indonesian islands (the most important were Sumatra and Kalimantan). Finally, the Philippines did not bother with land reforms (as a colonial power, the US is to blame: US policy here is the direct opposite of its actions in South Korea. But it is also a story of landowning elites capturing the state), leaving the profile of the Philippine economy to that of an inefficient oligarchy.

By the 1990s, land reforms and agricultural successes had a high correlation with industrialization progress. Japan, South Korea and Taiwan were the most successful in terms of how industrialized the country had become. China came second while Malaysia and Thailand perhaps were close third and fourth before the Asian Financial Crisis knocked them off the track. Indonesia was some ways behind two these economies. And the Philippines was the Sick Man of Asia and remained so until maybe the 2010s.

Malaysia and Thailand are the odd ones here. They managed to build up surpluses to carry out industrialization despite relative failures at land reforms. The reason is that they were engaged in export-led manufacturing largely financed by foreign investment that somewhat mitigated agricultural failures (it is jarring to call these two economies as agricultural failures but failures here should be defined by the counterfactual: their agricultural output under full land reforms could have been much bigger than it was in reality, following examples from Japan, South Korea and Taiwan). The jumpstarted manufacturing sector solved some problems local agriculture did not and the most obvious of that problem was mass unemployment. In Malaysia’s case, careful natural resource management also created the surplus necessary for Malaysian industrialization.

The key concept here is exports. To be a successful economy, the country has to have export-discipline. Here, again, the most export-disciplined economies were Japan, South Korea and Taiwan (and China). In Japan and South Korea, the government forced tycoons and corporations to become involved in export-led manufacturing. Taiwan was different in that it used state-owned enterprises as its export vehicles. In places like Indonesia, Malaysia and Thailand however, the tycoons were happy to become rentiers and investing their surplus in largely less productive sector such as real estate, banking and other financial services. There were manufacturers but they were happy to confine themselves in the protected domestic economy in absence of a less-than-gentle nudge from the government. Here, the three Southeast Asian economies ran a flawed industrial policy for the longest time: import-substitution in a protectionist environment before foreign manufacturers came in to allow export-led manufacturing to flourish. What the author argues is exports-led industrialization/export discipline in a protectionist environment (but these protected exporting manufacturers competing against themselves). Again, the worst of the lot was the Philippines with its oligarchs.

The next stage of development is the shift towards service-based economy. The pitfall is to liberalize the economy before the industrialization process is complete. All Southeast Asian economies failed this test and made their economy more vulnerable to financial crisis. The most successful, again, were the three (and later four including China in the 2000s) that liberalize when their manufacturing had matured.

But the ultimate message is that a government has to intervene and try. Studwell shows that even those who tried half-baked reforms and industrialization achieved much more progress faster than those who did not try. Malaysia is a prime example of committing to half-baked reforms and industrialization and then ended up much better than most in Southeast Asia. Malaysia could have been a South Korea if the country had done it properly but then again, Malaysia is also not a bad place to be compared to a majority of economies out there in the world.

To not try at all is to be left behind. So, Yoda is wrong as far as industrialization and economic history are concerned.

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Economics History & heritage Politics & government

[2966] A short history of soft-budget constraint in Malaysia, and the challenge the Anwar administration faces

For the past few days, I have been thinking about the 2020-2022 roles reversal in the Malaysian version of soft-budget constraint, but ended up trying to trace the history of SBC in Malaysia.

First off, a short primer on SBC: soft-budget constraint is usually a problem between a government, and its state-owned enterprises. In Malaysian parlance, those enterprises are government-link companies. It is called soft-budget constraint because the budget of those enterprises is hard to be fixed; company revenue does not provide a hard limit on company expenditure. The government ends up financing those companies beyond what the latter’s revenue provides. That financing comes in the form of subsidies, loans, tax breaks and grants, and designed to meet various political, social or even economic objectives.

This problem is most prevalent in command economies, but it also exists elsewhere where the market is more open, like Malaysia.

Now, let us dive into the history of SBC in Malaysia.

From the 1970s until the 1990s: NEP and privatization

Malaysia had several influential state-owned enterprises prior to the 1980s and this made SBC a common problem, especially with the New Economic Policy running at full steam.

Luckily for Malaysia, raw material prices—petroleum, rubber, tin—were high at that time, making budget constraint problem manageable. These companies’ budget constraint was soft, but government revenue was bountiful.

Troubles came in the 1980s, when global recession depressed commodity prices. Budget constraint suddenly became very pressing, when government coffers could no longer support growing expenditure needs. Here, Mahathir Mohamad, addressed it through rapid and widespread privatization. Market discipline was instilled, and these companies found their budget constraints becoming stricter than in the past.

During the 1990s, through rapid modernization and super economic growth, along with privatization, SBC seemed like it had been consigned to history. SBC became a curiosity. The government enjoyed large growing surplus, and there were fewer companies requiring government support, save several instances where Mahathir insisted on import-substitution industrialization (Perwaja?).

When the Asian Financial Crisis hit Malaysia, all the bailouts meant the return of SBC.

SBC of the 2000s

The 2000s is significant in this telling because it was during this decade that off-budget spending took off earnestly. Government revenue did not grow fast enough to meet the country’s rising spending needs, especially so soon after the late-1990s recession. The government overcame its finance gap by devising clever methods to circumvent various accounting rules, and expand its spending capacity enormously. The methods are complex, and I will not go through it here except by sharing a post I wrote several years back, which explains various liabilities the government carried, but previously undisclosed.

Expanding off-budget obligations necessarily means growing SBC problem. Off-budget approach gave the government extra leverage, but it does not mean the government not having to fund them.

Off-budget approach, and SBC, came under intense scrutiny when 1MDB corruption came into the picture, and brought onto the government severe public demand for transparency. That demand, along with other concerns, led to collapse of the Barisan Nasional government, and the rise of Pakatan Harapan administration.

PH attempted to solve the problem by instituting greater transparency (this is part of the RM1 trillion debt and liabilities controversy), putting some off-budget spending back on budget (this partly raised the 2018 fiscal deficit ratio) and adopting accrual accounting, to make sure all financial obligations get recorded properly. But the SBC problem, intertwined with complex off-budget method, has become so big that it needs time to be addressed. And PH fell short of two years into office.

Reversal of roles during Covid-19 pandemic

The fall of PH coincided with the Covid-19 global pandemic. The new government needed to expand its spending fast to save lives and to preserve the economy’s productive capacity. But those in power were reluctant to boost government spending, possibly out of inexperience while facing a steep learning curve. With that reluctance, they looked to state-owned enterprises for solutions.

This caused a reversal of roles between the government and its companies. The government leaned on its GLCs to support its spending needs, instead of the other way round in the normal SBC problem. This made government budget to be softer than it was. GLC’s capacity became the government’s capacity.

Those financial supports from GLCs to the government come in the form of extremely long delayed payments. More specifically, the government throughout 2020, 2021 and 2022 engaged in massive subsidies and these subsidies were financed by the GLCs. The GLCs were supposed to be reimbursed immediately but that did not happen. To put it more plainly, these GLCs ended up financing the government.

For proofs, I would encourage everybody to inspect some of the largest utilities-GLCs out there. Check their growing receivables listed in their balance sheet (receivables refer to amount owned by buyers to suppliers).

There is another way to understand the roles reversal: these companies’ budget constraint becomes stricter than it was during normal times. Soft-budget constraint at the GLC level becomes really hard-budget constraint.

The problem became more complex in the post-Covid recovery, where subsidies ballooned tracking surging commodity prices.

2023 and into the future

Unlike the government, companies have troubles going over their budget constraint without outside support for too long. The cash crunch is coming.

The new Anwar Ibrahim administration will have the misfortune of having to address the roles reversal problem. It will be painful, involving large payments to be made/reimbursed by the government. Anwar Ibrahim the Finance Minister does not have much time: the cash crunch at several GLCs is coming.

That will add pressures for a broad tax hike, that Malaysia needs even before the pandemic.

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Economics History & heritage

[2910] Few lessons from post-war 1940s Malayan supply-side crisis

We are experiencing a supply-side crisis. The lockdown is inducing labor shortage, and it has the potential of exerting lasting damage on the economy if not handled properly.

It seems to me that the last time Malaysia or any of its components had a supply crisis was in the 1940s during World War II and during the immediate post-war period. Productions of various kinds were devastated, leaving many without jobs and forced into subsistence. The war not only destroyed productive capacity, but also suppressed demand.

The end of the war brought demand back up quickly. Unlike demand however, production took time to get back to speed. Wars had destroyed all the equipment, and killed off many that worked at the mines, plantations, factories and shops. Rebuilding those and reemploying the workers took time.

That meant massive unemployment in the meantime.

Massive unemployment also meant employers had great bargaining power: wage growth was weak if any. Faced with unemployment, weak wage growth and spiking prices, social discontent was prevalent. This was one of many reasons the communist movement gained sympathy among the masses: industrial sabotage became a norm which worsened efforts to restore production.

There are a few lessons to take from the economics of post-war 1940s. Disrupted supply chain in the form of business failures and labor shedding took time to recover, and could not move as fast as demand. When demand returned with supply failing to do the same, that demand went unfulfilled. This led to massive shortages and subsequently, massive inflation. Never mind the social issues and the complex 1940s political situation.

In this sense, the negative economic effects of the war lasted beyond the war.

Coming back to today, our mines, plantations, shops, offices and other facilities obviously do not suffer similar war devastation. And the social reality is different and undeniably more stable though racial tension that originated from the war continues to linger.

But our current supply-side crisis, now lengthened to 4 weeks, is heightening the risk of business failures and job loss. That means reduced potential and once the crisis is over and demand back up, that reduced potential means shortages and significantly higher inflation, and higher prolonged unemployment. Growth could be depressed for some time until the potential returns to its pre-crisis period. The negative economic effects of this supply-side crisis would last beyond the actual crisis.

This is why we need to protect the potential now. Prevent business failures. Protect jobs. This is so that once the crisis is done, we could press on the demand paddle right away without having to wait for some time to repair the supply transmission. We do not have to suffer a lasting effect of this crisis.