Tag: economic growth

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Economics

[2598] Growth yes, but not by all means

The traditional understanding of economic growth has its fair share of criticism.  It has been criticized as being overly materialistic and overly focused on production with disregard for its side effects. Those with esoteric worldviews would accuse such progress as spiritually empty and unfulfilling.

While it is true that such understanding of growth does not take into account our human experience comprehensively—and possibly nothing can—it is very important nonetheless.

Try living in a period when the gross domestic product and its typical variants that measure the mainstream idea of economic growth register a contraction. All the fancy criticism will take a backseat as very real economic pain hits far too many persons.

It is in that sense that the traditional idea of economic growth matters. There is something profoundly substantive about it; when economy does not growth, you will feel it, whatever your reservations about the mainstream understanding of the economy.

Yet, this piece is not a defense of the status quo, even as I do sit in the status quo camp.

Rather I write this to criticize those who pursue growth for growth’s sake. The way a society grows matters even within the current status quo framework. As a result, there is such a thing as mindless growth and mindless growth is one that focuses fully on how fast the GDP grows and not how it grows.

The clearest example happened on the days after the official GDP figures for the second quarter of 2012 were announced in the middle of August.

The Malaysian economy grew by 5.4% from a year ago in real terms. The growth rate beat market projection and forced the gloomiest of private economists to upgrade their economic projection for the whole year.

While external factors continued to exert strong negative influence on growth, the domestic economy grew strongly still. The primary reason why the domestic economy grew was due to extraordinarily strong private consumption.

It is hard to explain fully why consumption in the private economy—primarily spending of households as well as private firms—grew as strongly as it did. Troubles abroad should affect domestic sentiment despite the excitement surrounding various projects related to the Economic Transformation Program embarked by the government. But it did not affect sentiment too badly.

One explanation for the strong private consumption growth was the cash transfer program (Bantuan Rakyat 1Malaysia or BR1M) which was introduced by the federal government. The cash transfer increased household wealth for some periods. The increased wealth effect in turn encouraged households to spend more. In a big way if I might add.

The commentariat has shared its piece of mind on the matter. Some has praised the cash transfer for boosting economic growth in Malaysia. The business section of the Straits Times in Singapore is one of which have sung praises to the cash transfer for the GDP growth that it had brought.

Unfortunately, this kind of growth is not the best of all growth possible. Such cash transfer is always merely temporary and growth arising from such temporary measures is not sustainable.

While cash transfer does have its merits within wider context—for instance, cash transfer is more efficient and less wasteful that subsidy in improving individual welfare from microeconomic point of view—growth arising from cash transfer should be received with a measured nod, and not by throwing in a party. One should acknowledge the growth the cash transfer program brought but one must also understand that without it, growth would have been less fantastic.

The counterfactual is important because it describes the more sustainable growth going forward.

Consumption growth arising from freebies from the government is not nearly as good as consumption arising from returns from productive investment or simply real growth in income won from effort. Growth from the latter is the sustainable growth and it is sustainable growth that will determine the long-run or future state of the economy, but a one-off freebie.

To put it differently, one wants growth from productive enterprise and not from an effort at redistribution.

Redistribution of wealth—whatever its merits income or wealth egalitarian perspective—cannot really be created by merely redistributing wealth. At risk of committing a tautology, one has to create wealth to create wealth in the big, long-run picture.

In contrast, to put it simply, cash transfer is only an act of borrowing from the future to consume today.

This is one aspect which growth for growth’s own sake is wrong. To repeat the message, how the economy grows matters.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in Selangor Times on September 21 2012.

Categories
Economics

[2471] Decoupling, finally?

The 2008-2009 financial crisis laid to rest the idea that Asia is isolated from the troubles in the US and Europe. The idea was that the fundamentals in Asia were strong enough to support growth. Proponents of decoupling were silenced and embarrassed but the celebration on the other side did not last long. There was a recession at hand and the debate swiftly switched to how best to address the recession.

The dead is walking.

It is 2011 and the idea of decoupling is reemerging again. It has been criticized, just it has been criticized before but statistics in the past few quarters and months have been surprising. The final GDP growth for Malaysia is very likely to be healthy despite all the skepticism and bad news from abroad. The industrial production index figures came out strong for October, beating forecasts by a long shot; it beat even the highest forecast among those polled by Bloomberg. Exports meanwhile has been amazing despite Europe tumbling up and down on a roller coaster ride. The only thing that is not as great as these things is the leading indicator, which by the way, is not negative. After all that has been said and done, it is likely Malaysia will grow at least 5% for the whole year of 2011.

Contrasting these numbers and those in Europe, there appears to be a strong case for decoupling.

Decoupling does make sense, since domestic demand is strong. Just observe the GDP growth figures. It is really hard to say there is a threat of a recession by looking at the GDP numbers so far. Still, the trade exposure is still high, and it is also really hard to say Malaysia will escape whatever really bad happening in Europe unscathed. I will not stick my neck out just yet, unlike the author of Economics Malaysia who writes that Malaysian exposure to European woe is not as big as a brouhaha some has made it out to be.[1]

Standard Chartered thinks 2012 will be a two-speed world, implicitly supporting the decoupling idea in its report. Financial Times’ Beyond BRIC sarcastically, maybe, writes, “just don’t call it decoupling” while reviewing the two-speed world report.[2]

As for myself, I think I prefer to be on the safer side. I subscribed strongly to the decoupling idea because I looked at the so-called real economy and concluded, Malaysia would go through the global crisis rather smoothly. I was wrong. There was a shallow recession. So, I will sit out and watch as an observer than a proponent this time around, for now.

Still, if the European crisis materializes, if the worst materializes, it will be worse than that experienced in 2008 and 2009.

Add that to the fact that the Chinese economy is slowing down (slowing down is relative because the growth rate is still high), I at least am expecting 2012 to be a rougher ride than 2011. But it does not take a genius to say that; I dare say it is the general feeling within the profession.

The more important thing is that we will see whether the decoupling hypothesis will survive 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Malaysia’s European Sensitivity. Economics Malaysia. December 12 2011]

[2] — [Standard Chartered sees a resilient Asia, Mideast and Africa in 2012. Standard Chartered. December 12 2011]

Categories
Economics

[2425] I don’t think the second half will be stellar

There is an expectation that the second half of the year will boost the annual GDP growth for Malaysia to make up for the relatively weak first half. That was a reasonable expectation to have in the first half of the year but with only less than four weeks to go before the final quarter of 2011 is here, it is becoming increasingly untenable.

The basis for the optimistic second half expectation has been the planned construction boom as a result from the Najib administration’s Economic Transformation Program. A friend told me that it is to rival the construction boom of the 1990s.

From casual observation, there is a slow start to the boom. If the casual observation proves correct, the boom may yet pick up full steam in the fourth quarter but I doubt the fourth quarter alone will be sufficient to bring respectability to the whole year growth number, at which I define respectability as at least meeting the minimum target of 5% set by the Najib administration.

When the boom actually begins, there will be a question of lag. The economic expansion arising from multiplier effect will be even slower to hasten growth, adding to the issue of lag. Even if the boom had actually begun, the length of the lag is unclear and it is possible that the lag is still ongoing. It is hard to know this conclusively before November, when the actual third quarter result of the Malaysian real GDP will be released.

There are question marks on both domestic and foreign demands. Foreign demand on domestic goods is substantial. It is so substantial that I have made the case that the Malaysian recession and the subsequent recovery has been primarily caused by the global economy before.

The global economy is not doing so well at the moment. If there was a global central planner, then that planner had yet to make up his mind whether to grow or contract the world’s economy. There have been renewed talks of a double dip but truly without projecting the future, I think current statistics are giving confusing signal at the moment. Some statistics are performing worse than before and expectation. Others are doing better.

I myself have done some rudimentary forecasts for the Malaysian real GDP. It ranges from 4.60% to 5.15%. Okay, those are the only two rough forecasts that I have calculated through two slightly different but still simple methods. There is much work to be done to improve the model and I am not very satisfied with it. It does give me a general view nevertheless.

Categories
Economics

[2411] Malaysia’s long-run growth, 1955-2010

There is a famous graph depicting how real growth of the economy of the United States of America has been remarkably constant over time. It is remarkable in a sense that history deviates little from such constant growth rate. I was reminded of this after reading a post by Karl Smith at Modeled Behavior.

I had not seen the Malaysian version before and so, I decided to draw it myself.

It does not exactly replicate what the famed US graph replicates. Rather, this is the natural log of the Malaysian nominal GDP instead.

As you can see, the long-run growth rate is pretty much constant. The straight line that cuts through the series is the approximated long-run nominal growth rate (specifically, from 1955 to 2010. Why did I choose that particular period? The data at the IFS of the IMF goes only as far back as 1955. I could draw the real GDP but since real GDP growth will not deviate much from nominal GDP in terms of natural logarithm, I thought nominal values are good enough).

Smith suggests that government policy does not matter in the long-run. I do not share that view but certainly, the tendency for growth to revert to a certain long-run growth rate is remarkable. Perhaps, what is more interesting are the deviations from the long-run growth.

More relevantly, growth from 2008 to 2010 were lower than the long-run trend. That was caused by the global financial crisis.

It is worth noting that the economy might be still operating below its potential, if the black line is a potential output growth to start with. In other words, there is an output gap. Yes, this is despite the great PEMANDU says and whatever their plans are.

For those who claim the growth post-recession is all thanks to the Najib administration — let us pretend a little that their narrative is the right one right now — this is something they can chew on. Even with the base effect producing what seemed to be spectacular growth, the Malaysian economy is possibly still operating below potential.

With the possibility of a double dip coming, we could see a lot of excuses from Putrajaya soon. Claim the credit but cut the blame.

Another interesting point is that the economic condition in the 1960s might have been Malaysia’s worst within the 55 years period when compared to the long-run trend. It also reaffirms that the 1990s were among the best years.

What is mind boggling is that the Asian Financial Crisis does not register. I tend to believe that the crisis of the late 1990s was more severe than the recession of the late 2000s. I may need to check my premise.

Categories
Economics

[2384] Innovation is not for African countries

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.

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

[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]