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]
Tag: economic growth
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.
The fourth quarter of 2009 saw Malaysian economy recorded strong recovery on year-on-year basis.[1] So strong it was that the monetary authority of Malaysia went for a rate hike, making Malaysia the second country after Australia to adopt a hawkish monetary policy.[2] The question that should be asked now is, did we need the big stimulus?
The question is particularly relevant because the main driver of recovery has been external demand. This is something I have been stressing from the very beginning and it is the thrust of my opposition to economic stimulus, especially in the fashion of fiscal expansion, given the effect of the expansion on fiscal deficit, effect on future taxpayers as well as its potential adverse effect on private borrowers and therefore the economy sans the public sector.
Growth for external demand for domestic goods almost doubled the growth of domestic demand for goods.[3][4] Add the fact that external demand makes up a very large part of Malaysian GDP, in fact approximately 100% in terms of exports-to-GDP ratio,[5] the stimulus seems unnecessary.
Without the stimulus, recovery might have been less impressive than what was registered recently; it would be a recovery nonetheless. This however assumes that the government spending has no affect on interest rate and thus, the exchange rate. This is possible if the monetary authority, which is the Bank Negara, colludes with the executive branch of the government.
But expansion of fiscal policy does affect interest rate and the exchange rate assuming independence of the monetary authority, at least within the typical IS-LM model under open economy.
With that model with that particular settings, recovery without stimulus could have been just as impressive. If the extraordinary fiscal expansion were absent — the factor inhibiting exports that is higher exchange rate due to fiscal expansion would be absent — external demand for domestic goods could have increased much more than the already impressive level we saw at the end of 2009.
Remember, a lot of people were pleasantly surprised by the fourth quarter growth.
[1] — Malaysia’s economy expanded 4.5 percent in the final three months of 2009 from a year earlier, Prime Minister Najib Razak said yesterday. Economists expected a 3.2 percent expansion, a Bloomberg survey showed. Gross domestic product fell in the preceding three quarters as exports slumped amid the global financial crisis. [Malaysia May Beat Korea, India to Asia Rate Increase. David Yong. Bloomberg. February 25 2010]
[2] — March 3 (Bloomberg) — Malaysia may be the next Asian country to pull back monetary stimulus as its recovery strengthens, moving to raise borrowing costs or reduce excess cash in the economy ahead of neighboring Indonesia. [Malaysia May Pull Monetary Stimulus Before Indonesia . Shamim. David Yong. Bloomberg. March 3 2010]
[3] — The external sector performed favourably with both Exports and Imports turned over by 7.3 per cent and 6.9 per cent respectively. The improved demand for the products of Electrical & Electronics, Animal & Vegetables Oils & Fats and Chemicals have contributed to the increase in Exports. Meanwhile, the growth in Imports was due to the higher demand for intermediate goods and capital goods. [National Product and Expenditure Accounts Fourth Quarter 2009. Department of Statistics of Malaysia. February 24 2010]
[4] — Malaysia’s real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%. [A tale of two recoveries: Malaysia vs. Germany. Rebecca Wilder. News N Economics. February 25 2010]
[5] — See trade profile of Malaysia at World Trade Organization. Accessed March 5 2010.
KULA LUMPUR: Three sites in the city have been identified for the development of iconic structures to spur growth in the economy.
Sources say they are Dataran Perdana in Jalan Davis, the area surrounding Stadium Merdeka and the vicinity of the Matrade Centre in Jalan Duta.
All the plots of land are privately owned. Two belong to government-linked companies — Pelaburan Hartanah Bumiputera Bhd and Permodalan Nasional Bhd (PNB) — while the Naza group owns 25ha in the vicinity of the Matrade Centre.
Economists were recently briefed by the Economic Planning Unit in the Prime Minister’s Department on the implementation of the iconic projects, as part of efforts to boost the country’s gross domestic product (GDP). [100-storey skyscrapers planned for Kuala Lumpur. Vasantha Ganesan. Presenna Nambiar. New Straits Times. December 7 2009]
Urm, yeah, okay…
p/s — I cannot resist this. What a bull!
We can definitely thank Keynesian thinking for this. Do you want greater aggregate demand? Build away!
Just weeks ago, former Prime Minister Mahathir Mohamad contrasted the development of China and India. As reported, he praised the single-mindedness of the Chinese government in developing the country and ridiculed the Indian government for being far too democratic and not focusing enough on development. He went on to state that freedom hurts the economy.[1]
Art Harun, a columnist at The Malaysian Insider replied to this in his column[2] stating examples where democracies have been successful, contrary to the former Prime Minister’s assertion.[3] Zaidel Baharuddin, yet another The Malaysian Insider columnist jumped into the debate at his blog by defending the former Prime Minister, stating that “starving hard working farmers in India who has to fight drought and fertilizer prices don’t give a damn about freedom of speech or expression.”[4] Art Harun took the chance to reply to the point and various other comments too diverse to cite here[5] by arguing that economic prosperity does not have to be mutually exclusive with respect to freedom as well as adding that they are other factors that need to be considered in the determination of economic development, like leadership.[6]
Indeed but all those discussions are gradually veering off course from the point the former Prime Minister made, about how democracies perform poorly against less democratic states in terms of economic development.
This point is not necessarily true. If one wants to make that point, one cannot choose two data points and make a conclusion out of it. That is the logical fallacy of hasty generalization. A better way is to take all of democracies and all of authoritarian states and compare them.
There are prominent studies on this. One important study states that while the existence of democracy or dictatorship does not affect the mean growth rate of economic development, it does affect its variance. That means there are less consistency in economic growth under authoritarian regime compared to democracies. Adam Przeworski wrote an important paper on the issue:
Political regimes have no impact on the growth of total income when countries are observed across the entire spectrum of conditions. Contrary to widespread concerns, democracies do not reduce the rate of investment even in poor countries. It appears that when countries are poor there is little governments can do, so that it makes little difference for economic growth whether rulers are elected or hold power by force. In wealthier countries, patterns of growth are no longer the same. Dictatorships rely on the growth of labor force and on keeping wages low, while democracies pay higher wages, use labor more effectively, and benefit more from technical progress. But while growth under wealthier dictatorships is more labor-extensive and labor-exploitative than under wealthier democracies, so that functional distributions of income are different, the average rates of growth of total income are about the same.
Thus, we did not find a shred of evidence that democracy need be sacrificed on the altar of development. The few countries that developed spectacularly during the past fifty years were as likely to achieve this feat under democracy as under dictatorship. On the average, total incomes grew at almost identical rates under the two regimes. Moreover, per capita incomes grow faster in democracies. The reason is that democracies have lower rates of population growth. In spite of rapid diffusion of medical advances, death rates remain somewhat higher under dictatorship and life expectancies are much shorter. Population grows faster under dictatorships because they have higher birth rates, and the difference in birth rates is due to higher fertility, not to age structures of the population. [Democracy and Economic Development. Adam Przeworski. New York University. Retrieved on November 30 2009]
Almeida and Ferreira in 2002 probably made a more direct case:
Less-democratic countries do seem to have variable growth rates and policies than more democratic ones. This corroborates the conjecture of Sah (1991). Possible explanatoins for this fact can be found in Rodrik (1999a) and in Sah and Stiglitz (1991).
The evidence presented in this paper strongly supports Sah’s conjecture. The empirical results are unaffected by many robustness and specification checks. The results are not sensitive to specific time periods, to different democracy indicies, to different econometric procedures, or to model specification. The results hold even after controlling for many plausible determinants of growth rates and democracy indicies, including the usual variables from the empirical growth literature, time dummies and country-fixed effects, GDP, natural resource dependence, and OECD membership.
The greater stability of growth rates and policy measures among democratic countries adds to the existing list of desirable features of democracies, such as the positive correlations between democracy and per capita GDP levels, between democracy and primary schooling (Barro, 1999) and between wages and democracy indices (Rodrik, 1999b). Our evidence also corroborates the common view that some autocratic countries have had the most impressive growth experiences. However, since the worst experiences are also associated with autocratic countries, in an ex-ante sense, autocracy is no prescription for growth. [Democracy and the variability of economic performance. Heictor Almeida. Daniel Ferreira. Economics and Politics. Volume 14. November 2002]
Of note is the relationship between wages and democracy indices as reported by Rodrik. People in the Najib administration may well take that into account.
Anyway, at the Library of Economic and Liberty, economist Byran Caplan, who introduces Almeida and Ferreira, reproduces the following diagram to drive the point home:[7]
Autocracies are represented on the left side and democracies on the right side. Note the variances and the means.
Bottom line is, there is more risk to having an authoritarian regime than a democratic one, in terms of economic development. If one wants to be more certain about achieving success, democracy is one of the ingredients one must consider.
[1] — Dr Mahathir singled out India as an Asian country that “made the mistake of being too democratic” and compared it unfavourably with China’s authoritarian regime.
“India, of course, will grow, but more slowly than China. It has the numbers but is not making use of them well.”
He expanded on the theme at a press conference later, saying that people “don’t understand the limits of democracy”.
“Democracy can be a hindrance to progress because you spend so much time politicking that you don’t have time to develop your country.
“In China, there’s not much politics. So, they can spend more time developing their country.
“In a democracy, everybody has a voice, everybody has a vote. But, in Malaysia, they sell their votes, which is not good at all.” [Dr M: A lot to learn from China. New Straits Times. November 17 2009]
[2] —[Enemies of the State. Art Harun. The Malaysian Insider. November 19 2009]
[3] — Yes. According to DrM, the Westerners are wrong for making democracy and freedom the cornerstone of progress. The British are so free they go on strike every other day. Well, who sent people to the moon in 1969? Which part of the world had an industrial revolution? Why have Russia, East Germany, Romania et al embraced democracy and freedom? From whom did we buy our Scorpene? Why Glasnost and Perestroika? So the people know the limits of freedom and how to behave themselves properly and in accordance with the Government’s code of behavioural acceptance?
And finally, according to Dr M, apart from China, Japan, South Korea and Taiwan will lead the Asian charge.
Which made me thinking, were Japan, South Korea and Taiwan governed by a benevolent absolutist government? Do the people in these countries know the limits of democracy? If so, to what extent? And who impose and define these limits on them? [Enemies of the State. Art Harun. November 19 2009]
[4] — I’m pretty sure, those starving hard working farmers in India who has to fight drought and fertilizer prices don’t give a damn about freedom of speech or expression. It is those comfortably well paid lawyers with some extra time on their hands who are more concerned about these things and write about it.
Meaning, [b]efore you talk about democracy perhaps it is wise to first elevate the people’s (rakyat) quality of living, because like the maslow’s hierarchy of needs there are more important things to fulfill before they get to the self actualization level. [Sinatra_Z – An Answer. Zaidel Baharuddin. November 20 2009]
[5] — Ahiruddin Attan for instance compared the more democratic Malaysia, which is behind the economic development curve with the less democratic Singapore, which is ahead:
I don’t think the Malaysian Insider would publish such a piece. Good try, though, Z. I do agree with you (and Dr M). We don’t need to look so far, just across the Causeway. We are way more democratic than Singapore, and look at how many of us idolize the Republic for its progress and wealth. Given the choice, however, I’d stay put here, Z. [Art Harun vs The Lipas Man. Ahiruddin Attan. November 20 2009]
[6] — My question is, why can’t we have them all? Especially in a democracy, where we elect our so called leaders to look after our well being as members of a State?
I think in this day and age, it is downright insulting — and not to mention, pathetic — for any leader to say to the people that I will give you food on your table in abundance but you would have to shut up, toe the line and do as I say, all the time and under all circumstances.
For a leader to lay the blame on the people which he or she ruled — for not understanding the limits of democracy — as a reason for his or her failure to achieve development and progress does not speak much of his or her leadership.
A comparison was made with Singapore in one of the comments. It was pointed out Singapore did not have much of a democracy and they progress well. But that does not prove that Singapore progressed well because it was less democratic.
Hasn’t it occurred to any of us that Singapore progressed because of the mentality and work ethics of its leaders? [Freedom lifts us up to where we belong. Art Harun. The Malaysian Insider. November 24 2009]
[7] —[Democracy, Dictatorship, and the Variance of Growth. Byran Caplan. Library of Economics and Liberty. October 2 2009]