Tag: development

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]

Categories
Economics Liberty Society

[2192] Of embrace a more holistic view on development

There is much stress on economic freedom these days. This is clear by the fact that the New Economic Model is advocating less government in various aspects. So excited are the document authors about the idea of free market that at its rhetorical climax, they highlight the phrase ”market-friendly affirmative action”, never mind the apparent contradiction that the phrase invites. That phrase is perhaps the hallmark of contradiction of the document in terms of economic freedom. The latter part of the document suggests various government interventions that do not tally with its rhetoric. Yet, the document does begin from a liberal point and that is a good starting line. It has to begin somewhere after all.

Truthfully, the goal of the document is development and not the creation of freer market. Without strong conviction to the idea of free market in pursuing its main goal, contradiction is only natural. To criticize the authors of such contradiction is an effort unlikely to impress them and others who share the same view on development vis-à-vis free market.

They primarily believe that the government has a role in development. Such idea is hardly a controversial one. The government can indeed play a role in development even while adhering to the concepts of limited government and free market.

The issue is that the goal of development set by the New Economic Model is unsatisfactorily limited in its scope. The document limits the idea of development to merely economic progress. It ignores the larger meaning of development, just as freedom takes a larger meaning well beyond the realm of business and economics.

Development is not merely about better infrastructures or higher income levels for us all. While income levels do indicate general well-being in many ways, it is not the only factor in development that needs to be taken into account.

Development must empower individuals in a comprehensive manner. More often than not, this means enhancing economic progress as well promoting individual liberty. Indeed, economic progress and individual freedom work hand in hand. Without the other, each feels empty even if each lifts one up from the gutter by a tiny margin. Both are required to catalyze the jump out of the gutter.

Without development as confined within self-limiting definition of economic progress, individual freedom itself is redundant. Individuals living in dire economic condition will be unable to reap the dividend of liberty for they are incapable of understanding virtues of freedom. Without such comprehension, they are unable to make full use of it for their benefits. As the Malay idiom goes, what is a flower to a monkey?

There are so many elementary concerns need to tend to that whatever freedom they have is meaningless. It is the excess capacity that will never be used up. For instance, what is free speech when the stomach growls endlessly? In fact, free speech with an empty stomach can easily descend into anarchy as the hungry and famished knock rule of law essential to the preservation of liberty down to the ground to satisfy their very basic desire while robbing somebody else’s rights and liberty.

Similarly, where there is economic progress without individual liberty, what use of those shinny sedans or overly big four-wheel drives, clean and smooth roads together with tall and richly decorated towers when they are merely a posh prison to keep the prisoners happy? After all, what is economic wealth while one is repressed, living in fear?

They have the all the means but if the means are prevented from reaching the ends by traditions or prejudices, economic progress become meaningless. Life must be one cruel joke if economic progress in the end only comes to naught.

Individuals have to become richer not only in monetary terms but also in terms of themselves. The set of what can be done must be enlarged and the set of what cannot be done must shrink for development to take its holistic meaning. Choices have to expand.

Their choices have to be well informed. That is only possible through the tradition of free enquiry that embedded in it the concept of free speech and free press, among others. They must be able to express themselves and to do so is to practice freedom of expression. We talk about how young graduates lack communication and social skills in general: can we blame them when the avenues for practice are limited and guided paternalistically?

This idea is not new. Nobel Prize Laureate economist Amartya Sen is the vanguard of the idea. Although it must be said that he goes farther than a classical liberal would, he articulated similar view much earlier and wrote Development as Freedom for wider consumption.

Development must focus on both fronts for it to be meaningful. It is in this sense that the New Economic Model is insufficient. Malaysia needs more than economic freedom.

This is not to say that the authors of the document are not doing their jobs. Their terms of reference are clear: focus on the economic front. And they are doing just that. They cannot be blamed for that.

The other focus on the social front where it involves individual freedom is the job of ordinary citizens.

And the government is in the way. Hopefully, the Prime Minister and his Cabinet embraces the wider meaning of development to enable Malaysia to progress at all fronts. Hopefully, they will realize that only a liberal democratic system can bring Malaysia forward in a convincing style.

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 April 12 2010.

Categories
Economics

[1976] Of it is just as crowded over there

Read the mainstream press and it is hard to miss that the Economic Planning Unit and the Ministry of Finance are trying to market a new economic model to replace old ones. I fear that this new model is misguided and will lead Malaysia down the wrong path.

Read the mainstream press and one will find that it is popular these days to state that Malaysia needs to go up the economic value chain. Almost always accompanying that is rhetoric calling for Malaysia to graduate from its addiction to low-wage, low-skilled workers which, by and large, refers to dependency on cheap foreign labor.

Policy-wise, this has been translated into restriction on recruitment of cheap foreign labor. As proof, an astronomical levy on recruitment of foreign workers was imposed as part of the second stimulus package.

In time of economic slowdown, that particular action does not make sense and luckily, the Najib administration understands this and has decided to postpone it indefinitely. But even without a slowdown, that is no way to move forward due to uncertainty of any country’s development path.

Nonetheless, it is true that Malaysia needs to move up the value chain. We have been benefiting massively from early adoption of a liberal economy but other recently liberalized economies like India and China are finally catching up with Malaysia, and at an amazing pace.

Rapid reduction of poverty and continuous registration of high economic growth are testaments of how fast these countries are catching up after abandoning flawed economic models that ignore the importance of private property as a basis of a society.

Not only are they catching up rapidly thanks to liberalization, with their overwhelmingly larger and cheaper supply of labor, they are crowding out Malaysia and its peers like Thailand and the Philippines from the low-wage, low-skilled and labor-intensive niche. Penang, for instance, is already seeing multinational corporations migrating out from the state to Vietnam and China. This trend occurs because, among other reasons, of the availability of cheaper and larger supply of labor.

From this perspective, Malaysia is indeed losing its competitiveness; Malaysia is unable to compete in a low-wage model. If Malaysia fails to react, challenges from these low-cost countries have the potential to wreak havoc on the Malaysian economy. Fearing being pushed to the margin in the global market, Malaysia seems to be left with nowhere to go but up in the value chain.

Going up does not automatically mean actively restricting recruitment of cheap foreign labor, though. Cheap foreign labor still has roles in the Malaysian economy, even as its importance continue to diminish and even as other countries are able to excel at low-wage, low-skilled industry better than Malaysia.

This point is all the more tenable since in the long run, price equalization will happen to bring some kind of equilibrium between Malaysia and other competing countries.

The new equilibrium for low-wage, low skilled industry — perhaps especially for manufacturing — for Malaysia may be below its current level but the requirement for such industry will still exist since it provides goods or services which are hard if not impossible to trade. Somebody will have to do it.

Restriction on recruitment of cheap foreign labor is doubly unhelpful if the locals themselves refuse to take up low-wage low-skilled jobs. The restriction will create upward pressure on prices which include wages, pushing up the cost of living unnecessarily high when access to a large source of cheap labor to stabilize prices is available in the region.

In an open economy, that pressure will attract cheap supply of labor to act as a counterbalance. If that source is unavailable locally at the right prices, it will come from abroad.

That is already happening in Malaysia and the same trend is observable in the United Kingdom, where Eastern Europeans are taking up low paying jobs which the locals are reluctant to do as cheaply as the immigrants are willing. The same is true in the United States but instead of Eastern Europeans, they are from Mexico or other parts of Latin America.

A restriction on foreign labor will prevent that from happening, forcing prices and wages to go up. I feel this point must be stressed and hence, I repeat, that will inevitably cause the cost of doing business to increase.

The upward pressure on wages has been suggested as a tool to attract talents into Malaysia as an effort to take Malaysia forward beyond low-wage low-skilled economy into the realm of new economy.

This, however, confuses an increase in nominal wealth with an increase in real wealth. What is the point of being paid higher wages when the cost of living goes up accordingly, or higher?

In other words, the restriction which drives nominal wages up really makes no difference in real terms.

It must be noted that any increase in real wealth is largely due to productivity. This is not a mere opinion. Rather, it is an economic fact.

If one is less willing to believe mainstream economic theory due to the unfavorable popular reputation that economists currently suffer, then do refer to any econometric model on the matter; the correlation is strong and the causal relationship is enticing. Any effort at moving up the value chain must take this into account.

By moving up the value chain, it inevitably means greater application of science and innovation to increase productivity. A highly educated workforce will be required if the economy is to enjoy higher productivity.

In light of this, the question is not whether our addiction to cheap labor is a barrier to take the economy to a higher plane.

Instead, the questions that demand answers are: does Malaysia have a highly educated workforce; does Malaysia have the talents to fulfill the prerequisite of a high-value economy?

With a minority of its population holding a graduate degree and with an education system that seeks to brainwash its students rather than encourage critical thinking, it is a stretch to answer the questions in the positive.

That, by no means, is a reason to throw in the towel but it can help to refocus our energy from wrongfully vilifying low-skilled foreign labor to educating Malaysians better.

What is needed is an education system that demands the biggest effort from all. Schools, colleges and universities need to be liberalized to encourage development of competitive, thinking and open minded workforce, not yet more groups to be goaded for political purposes.

While these workforce is being developed, foreign talents should be welcomed and even offered citizenship.

Furthermore, just as the argument that low-cost giants are crowding Malaysia out from the low-wage, low-skilled niche, what actually guarantees that Malaysia can break into the high-value, high-skilled niche already filled with countries that with highly educated workforce?

Somehow, the rhetoric and the central planning action by the government which lead to curbs on foreign labor seems to suggest there is heavy competition in low-skilled industry but not in high-skilled industry.

”It’s crowded here, let’s move over there. Simple.” Well, it is not. While the pay off from a high-value economy is huge, it is naïve to think that there will be no competition.

Just imagine how much resources will be required to reverse the serious brain drain Malaysia has been experiencing for so long. Malaysia is way behind the curve in competition for talents. Compounding the issue is unfair practices by the government that make certain groups of Malaysia unappreciated.

If restriction of employment of cheap foreign labor is used as a stick to force Malaysia up the value chain, the danger is that Malaysia might fail to break into the high-skill niche and then finding itself with a largely dismantled low-skill industry.

With a serious lack of talent in the local economy, Malaysia might not only find itself entrenched in the middle-income trap, it might fall behind in comparison with its peers.

Unnecessary hostile position against cheap foreign labor might cause Malaysia to not have a fallback position if there is an error of judgment.

It is therefore, in my humble opinion, imperative that we ensure the ledge on the other side of the gully is properly secured before we make the jump across rather than chipping off the ledge we are still on. If we find ourselves in mid air only to realize that the ledge on the other side cannot support us, the next place we will be is at the bottom of the gully.

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 May 4 2009.

Categories
Books & printed materials Economics History & heritage

[1473] Of a farewell to alms, and 2007

This is the last book for the year 2007 for me.

Fair use. Princeton University Press.

This book created quite a buzz in the economic realm. I have actually cheated my way through and read its reviews. Still, that fails to satisfy my curiosity. Thus, the purchase.

The odd thing is, an almost the same point that is central to this book is touched by Beinhocker briefly in The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics. And I think, this book should be read together with Douglass North’s Understanding the Process of Economic Change. I have yet to read North myself but I have read enough reviews to suspect that the two authors may be offering competing intriguing explanations to economic development. Or, in fact, complementary since no one theory typically explains everything away at ease in economics. I will invest effort to make North’s work as my first book for 2008.

Anyway, apparently, the book is quite hard to come by in Malaysia; I had to wait for a month or so for this book. Once, I asked for the book at Kinokuniya, and they gave me A Farewell to Arms by Ernest Hemingway instead. That was a “WTF?” moment there then but no matter. All is well now for I am a proud owner of the hardcover edition!

And oh, boy. There are too many books unread and most of them fall under the economics section. Maybe, just maybe, I should stop buying books for awhile.