Tag: The Myth of the Lazy Native

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[2816] A short history of capital accumulation

Capital accumulation as an idea sits close to the center of modern economic growth theory. Any introduction into the field will begin with physical capital accumulation, before population growth, technological progress, human capital and even institutions are progressively thrown into the mix to explain the real world.

As far as modern macroeconomics is concerned, I think I can trace the idea of accumulation as the key to growth right up to Harrod-Domar as formulated in the 1940s. The model has a naive mechanics. William Easterly lays out the world of Harrod-Domar within the context of international aid and points out the model’s weaknesses in his 2001 book The Elusive Quest for Growth. Those same criticisms led to the articulation of the famed Solow-Swan growth model in the 1950s, which in turn was improved in the 1960s through the Ramsey-Cass-Koopmans model. About twenty years later, the so-called new growth theory with its endogenous models dominated mainstream macroeconomics.

Harrod-Domar is the earliest modern growth theory with capital accumulation at its heart that I can think of. If I try really hard, I think I could cite Karl Marx in the 1850s-1860s and even Adam Smith in 1770s although both of them did not produce a model while I do not think Marx’s idea of accumulation is directly related to growth as we understand it today. I struggle to trace the evolution of the idea beyond Marx and Smith, although a quick search on the internet points towards St. Aquinas and Ibn Khaldun, and possibly right up to Greek philosophers.

But the tracing of these models and works only describes the evolution of the idea. It is not the history of accumulation per se.

Jurgen Kocka recounts the history of physical capital accumulation in Capitalism, a nifty book on the history of capitalism. First published in German in 2014, the English translation came out this year. It is only available in hardcover currently with a price tag of MYR142. I bought a copy from Kinokuniya in Kuala Lumpur. Kocka is a German historian focusing on German and eastern European labor history.

Kocka writes consumption pattern gradually switched from a period of instant gratification when personal accumulation was hard if not impossible for the majority to a time when where they began to care for the next generation and were able to gather private wealth and transfer it to their children as inheritance. Although Kocka does not use the term, this is the intergenerational capital accumulation.

The intergenerational accumulation happened in a limited fashion in the middle age be it in Europe, Arabia or Asia. Even among the merchant class, the accumulation and transfers were limited among a few families before the Industrial Revolution. Wealth produced by a person was generally consumed within his or her lifetime, with limited opportunity for intergenerational transfer. This happened as feudalism worked in the background, the great institution that prevented the majority who were serfs from accumulating capital. The personal wealth of the serfs generally belonged to or easily extracted by to feudal lords. What is the incentive for work when the fruits could be appropriated freely by the local lords?[1]

Private wealth accumulation in Europe began only during the Industrial Revolution in the 1800s. Rapid economic pace in the cities suddenly made accumulation faster than ever in history for most. That attracted serfs from the rural areas to the town and cities which led to the crumbling of feudalism as there were fewer and fewer pairs of serf hands to work for the feudal lord. Now freed from serfdom, common workers were able to accumulate private wealth and participate in intergenerational accumulation. It was a slow process and never a straightforward one judging from the various labor unrests and even revolutions during the industrial age but it did start the process of capital accumulation among the masses nonetheless.

But even before the Industrial Revolution, early companies in the 1100s in Venice played a role in intergenerational capital accumulation. A company, a product of various traders and merchants coming together to pool resources and diversify risk extended the accumulation horizon beyond the lifetime of a person. The application of the new social technology — along with the creation of double-entry accounting to keep track of the company’s resources — means the endowment got bigger and bigger, which encouraged bigger accumulation that was possible if wealth was restricted within one’s lifetime.

Some of these traders and merchants went on to form their own banks (as company) to finance their and others’ various business requirements. Jurgen in his book points to the 1300s as the turning point, when rich trading families first established banks in northern Italy. This made the financial market more efficient, which in turn aided them and other banking consumers to manage and amass their wealth better.

The evolution of companies continued in London and Amsterdam, capitals of the trading nations England and the Netherlands. The joint-stock companies were developed and more and more individuals and entities got together to pool their resources to finance, among others, the British East India Company and the Dutch East India Company, the first true multinationals in the world.

But the greatest enabler of capital accumulation was, of course, technological progress, as stressed in the Solow-Swan model. Indeed, wealth per capita soared during the 1800s Industrial Revolution after thousands of years of largely stagnation that began in northwestern Europe.

Gregory Clark in his 2008 book A Farewell to Alms claims it happened in England and the Netherlands because they had the institutions that enabled the Industrial Revolution to take place in exactly those countries first. He goes on to suggest, controversially, that these institutions which were absent in other places led to a deep cultural change that made the industrial age possible.

Kocka does not challenge that in his book. While explaining the connection between industrialization and capitalism, he writes:

One the one hand, when industrialization began, capitalism already had a long history to look on. Not even in its proto-industrially expanded form did merchant capitalism, which was widespread throughout the world, lead inescapably to full-fledged industrialization. There are many cases illustrating this point. Conversely, the case of the Soviet Union substantiates how it is also possible for industrialization to exist in a noncapitalist form. The concepts of capitalism and industrialization are defined by different features, and it is advisable to make a sharp distinction between the two of them.

On the other hand, preindustrial-commercial traditions of capitalism, whenever they persisted, significantly promoted the breakthrough to industrialization, whenever that happened in the nineteenth and twentieth century. In the nineteenth century, industrialization took place within capitalist structures everywhere. Alternative models of a centrally administered economy were tried out under Communist auspices between 1917 and 1991. They proved to be inferior. China’s rapid industrialization also began to take off only when the country’s party leadership decided to loosen political controls step by step and make room for capitalist principles. There obviously was (and is) a pronounced affinity between capitalism and industrialization: for both, investments are of decisive importance. An inherent part of industrialization is the permanent search for new projects, as is constant engagement in new configurations; to this end, pointers and feedback from markets were and are irreplaceable. A decentralized structure that disperses decision-making among many different enterprises has proven indispensable. So far, any effort at industrialization expecting to be successful over the long run has presupposed capitalism. [Page 99-100. Capitalism: A Short History. Jurgen Kocka. 2016]

But accumulation did not always happen peacefully through hard work, production or technological progress. In the middle age, pillages, plunders and wars were a common way to accumulate wealth. There were a lot of cases in Europe and elsewhere as well. This continued into the 1800s during the colonial age where European mercantilism helped European powers accumulate more wealth.

Such mercantilism meant accumulation for European was the dis-accumulation for the rest of the world.

Kocka does not go into the dis-accumulation as he is focusing on European capitalism mostly. But he does mention the slave trades between Europe, Africa and America, where African slaves were used to man the plantations and fulfil European demand. It does appear to me the slave trade and European colonial policy decimated Africa.

In Asia, especially Malaya, colonialism seems to have the opposite effect. Although European powers, the British in Malaya especially, were still accumulating wealth, the colonialism did have an accelerating effect on domestic growth in the 1800s and the early 1900s. Perhaps the reason for that was that the colonial administrators in Malaya was importing European advancement along with various institutions from the Industrial Revolution, hence boosting technological growth in this part of the world.

So, was colonialism good or bad for Malaya in terms of capital accumulation? I guess the only way to answer it is to address the counterfactual: how would capital accumulation have progressed if Malacca was not defeated by the Portuguese war fleet? How would the area now called Malaysia have fared if it had never been colonized by the British and the Dutch?

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

[1] — Let me digress slightly. Anthony Milner in The Malays believes the feudalist structure explains the lack of the Malay merchant class during the 1700s-1800s. The sultan as the feudal lord owned everything and the idea of private wealth among the masses did not exist. Everything within the realm ruled by the sultan belonged to him. Milner, if I recall correctly, cited Munshi Abdullah who lamented in his writing about the lack of security to self and property of the masses due to tyranny of the sultans in the 19th century Pahang, Terengganu and Kelantan.

While this sounds like a rival explanation to Syed Hussein Alatas’ as outlined in The Myth of the Lazy Native where he postulated that European colonialists killed the Malay merchant class by regulating trade in a way that granted monopoly to European traders, I feel both arguments can be true. Milner is describing the effect of the sultans’ influence on the masses while Syed Hussein focusing specifically on the merchant class. Indeed, Milner’s point is more general and hence, the effect of European monopoly could well happen within Milner’s explanation. So, it was a double-whammy for Malay traders.

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Books & printed materials Economics

[2757] Reviewing The Colour of Inequality

With only about 200 pages , finishing The Colour of Inequality was easy. Written by Muhammad Abdul Khalid, the book is priced at MYR40, which is much more affordable and easier to read than the thick Capital in the 21st Century by Thomas Piketty. Just for the fun of it, I calculated that the Gini coefficient between the two is 30.7. For books discussing inequality, they are off to a good start. Capital, by the way, cost MYR167.

But more seriously, The Colour of Inequality has attracted the eyes of both sides of the political divide in Malaysia quite positively. Both Anwar Ibrahim in the Parliament and perhaps more ominously by Muhyiddin Yasin during the recent UMNO general assembly as a slow poke against Najib, gave the book a mention. I think in some ways this book will provide the ammunition to force Najib to make a u-turn from his more open policy in the past. Pemandu, which I take as the symbol of that openness drive despite whatever its flaws are, is already taking a backseat in local politics. I do hear less and less of Pemandu these days and furthermore, it is already branching outside of Malaysia to Tanzania, South Africa and India, in what appears to me a search for relevance and independence.

Coming back to the book, the extremely good part is the data shared especially those pertaining income and wealth ownership during colonial and early post-independence period in Malaya and Malaysia. The stress on the difference between income and wealth inequality is gold because whenever there is public discussion on inequality, not too many understand the difference and then mix the two up. As the book goes the mass market, hopefully it will help address the confusion that exists.

I would guess from the relatively heavy footnotes, these data are those you can find only by reading local academic papers, which can be tedious. The first chapters are full of these and the first half acts an overview or a summary of early labor, income and wealth studies in pre-1970s Malaya/Malaysia. There is a heavy focus on Malay ownership and so, I should really put it Malaya/Peninsular Malaysia instead. Sabah and Sarawak are largely, if ever, on the periphery of the author’s concerns.

Khalid puts a lot of blames on the British colonialists for creating inequality in Malaya. He zeroes in on the importation of foreign labors from China and India who worked on the most productive sectors in the economy while the Malays was left focused on the least productive ones, mostly agriculture.

He also blames the colonial government for focusing on developing urban areas populated mostly by non-Malays while ignoring the rural areas where the Malays (and Bumiputras) were. With all the facilities built in the cities, the infrastructure facilitated income and wealth growth, rocketing the well being of urban populations above their rural counterparts.

While the two factors (productive sectors and urban development) did contribute to the Malay/non-Malay gap, I am unprepared to blame the British for focusing on urban development. Even today, agglomeration remains a powerful drive for development. It is far more economical to build an MRT line in a city of more than 5 million than in a town of 100,000, for instance. The logic should hold 100 or 200 years ago while the British were developing Ipoh, Kuala Lumpur, Penang or Singapore instead of Pekan or Rantau Panjang, as it holds now.

From time to time, the thesis of The Myth of the Lazy Natives by Syed Hussein Al-Alatas appears, just to give you how strongly the author thinks of colonialism as the cause of inequality then. The thesis was the Malays refused to be manipulated by the colonial capitalist machines and thus remained rural, and largely outside the development of the modern Malayan economy. Regardless of the truth of Syed Hussein’s thesis, with the Malays remaining a rural society with a still agrarian economy that is less productive compared to other sectors (mining and cash crop like rubber) as Khalid mentioned, it contributed to the gap. Khalid also showed that the British prevented the Malays from participating in cash crop sector to protect the colonialists’ monopoly. There is a hint of Syed Hussein’s argument that the colonialists came and destroyed the Malay capitalist class by force and thus contributing to the Malays’ inability to compete in highly productive sectors.

For those who have never heard of The Myth of the Lazy Natives by Syed Hussein Alatas, it is one of those books you have to read if you want to understand Malaysian politics, Malay politics especially, better. I would think that particular Syed Hussein’s book is the Malaysian version of Edward Said’s Orientalism. I even think you should read Orientalism and The Myth side by side. That would make Syed Hussein’s criticism much sharper than you would realize rather than reading it alone. One particular idea I gathered reading The Myth and Orientalism together was that UMNO under Mahathir times (The Malay Dilemma and Revolusi Mental come to mind) imported various Orientalist caricature of the Orientals and specifically the Malays — laziness is one — and then used that generalization as the basis of UMNO’s policy to ”modernize” the Malays. I do not necessarily agree with all written in The Myth and sometimes, it does appear Syed Hussein was just making capitalism a scapegoat for far too many things beyond reasons, but he did make powerful criticism against colonialism and bringing in context into modern Malaysian politics.

Now, back to The Colour, the chapter on pre-independent Malaya-early Malaysia sets the stage for the New Economic Policy era. After a largely uncontroversial overview of history, the next chapters have a few to offer.

The author clearly sees the NEP as a success. He criticizes several works critical of the NEP along the way. Some criticisms make sense. By the end of it, the author laments what essentially the end of the NEP and advocates for a new one, in some fashion.

In supporting the NEP, Khalid makes a few points which I find hard to swallow.

One is how NEP has no negative impact on growth. This is a big assertion because he refuses to admit there is a trade-off between redistribution policy and economic growth. He argues despite the redistributive NEP, Malaysia continued to registered high growth together with its neighbors among others right up to the 1990s (if you have the book by your side, this happens on page 107). But the fact that Malaysia grew as fast as its neighbors says nothing about the efficacy of the NEP. In fact, it raises the question on the commonality between Southeast Asian countries and you can bet that not too many countries have their own NEP.

The no negative impact on growth story is also problematic because it does not consider the counter-factual. The counter-factual is that without the NEP, Malaysia could have grown faster and that the NEP caused Malaysia to grow only as fast as experienced. This counter-factual is as valid as his conclusion without further investigation. What Khalid did here is merely arguing by assertion. So, I do not think Khalid can write when he wrote with too much confidence. It requires more investigation at the very least.

His point about NEP has no negative impact on growth is complicated by his criticism against Tony Pua’s belief that the NEP discouraged foreign direct investment into Malaysia. Khalid replies on page 105 by highlighting that in the manufacturing sector, the government does not impose any Bumiputra equity requirement and allows 100% foreign ownership. This does blunts Tony’s point and the FDI did come in but it complicates Khalid’s own point on how the NEP does not impact growth. If he believes that the redistributive policy does not have any impact on growth, I would think it is unnecessary to raise this point. If there is no trade-off, there would have been no need for the exemption. The exemption did encourage manufacturing investment in Malaysia. It contributed immensely to Malaysian industrialization, which, was quite successful.

Perhaps I misunderstood his point, with his point being that the NEP is not as expansive as a lot of people thought it was and there were exemptions that avoided the NEP from becoming too much a barrier. If this is the case, then, yes, that would be a fair point. But he does not spend enough time and space in exploring these issues.

The point on manufacturing is relevant in other part of the book, which I think works against one of Khalid. And that point is about NEP’s success in cutting poverty down. I do believe the NEP did cut poverty down but my issue is that the author attributes the entire drop in Malaysia’s poverty rate to the NEP (page 92 and others) while ignoring other factors that might be as big as the NEP: the industrialization of Malaysia (remember the exemption of Bumiputra equity ownership in manufacturing) and Southeast Asia (this returns to my point that cross-sectional comparison of Southeast Asian national growth says nothing about the efficacy of NEP by itself).

Since manufacturing was exempted from the NEP, I am interested to know how much of the drop was due to the NEP and how much from industrialization that has little to do with the NEP since it was exempted. The industrialization aspect is particularly important because there were at least two events in Asia that contributed to Malaysian growth. One was China’s disastrous Great Leap Forward and Cultural Revolution that pushed capital and people out of China to Southeast Asia (and elsewhere), along with the appreciation of the Japanese yen in the 1980s that encouraged Japanese corporations to go out and establish bases in Southeast Asia, especially in Malaysia and Thailand, to cut cost and become more competitive. As a side point, Singapore gained tremendously from the events in China and that contributed to the rise of Singapore; it is not all about Lee Kuan Yew (or Mahathir). There was great transformation in Asia at that time yet, I think the book is giving the NEP all the credit for poverty reduction and essentially implicitly leading lay readers to believe that the Malaysian economy worked in vacuum when clearly, Malaysia has been a beneficiary of globalization.

Talking about poverty, there is also room for counter-factual which the author does not address. On page 111 and 112 among others, Khalid showed that the economic growth for the Bumiputras, Chinese and Indian communities were high and used that as an argument that the NEP does not hurt growth for other communities. But like how the NEP affected GDP growth, how did he know that the NEP did not lower non-Bumiputra growth to its recorded level? If there was no NEP then, what the growth would be? He cannot make his conclusion without answering those questions.

As you can see, I am quite skeptical of his argument that redistributive policy has no impact on growth. I think Malaysia can afford to commit to some redistributive policy but there is always some cost. The Colour is written in a way redistributive policy — the NEP — was cost-free and will be cost-free.

Because of these points, I feel the middle part of the book is an apologist work for the NEP rather than a critical evaluation. This of course does not negate the value of the first and the last parts of the book. The first part raises the value of history to provide context to the current situation and the latter about wealth gap and Khalid’s proposals to address it.

What I think the book does more convincingly is explaining the current wealth gap in Malaysia. The roles of inheritance, labor market discrimination, failure in the education system and the tax structure are pretty much uncontroversial and deserve the attention of the government. There is an econometric model at the end which results are in line with my expectations and other models that I have seen before. The model gives a sense of each factor contribution to income and wealth of a person and becomes the concrete basis of various proposals that the book has.

I have my own thoughts about the proposals but I figure I will write about that later.

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Books & printed materials

[1790] Of The Myth of the Lazy Native is on sale

I spotted three paperback copies of The Myth of the Lazy Native at Kinokuniya, Suria KLCC yesterday and it astoundingly cost approximately RM388, a price enough for the acquisition of two hard copies of any contemporary publication. The price is all the more shocking given the thickness of the book. But then again, maybe it is just economies of scale at work with too little copies printed to make it affordable for the larger masses.

This famed work of Syed Hussein Alatas had been out of print for the longest time.

Since I have a voucher which is only valid for the month of September, I plan to get it today. And sigh, I cannot believe that I am falling for Kinokuniya’s ploy to increase their sales.

And oh, damn. That spaghetti last night burned my tongue.