Thursday, December 31, 2009
Monday, December 28, 2009
Barry Schwartz on the loss of wisdom
Source: http://www.ted.com/talks/barry_schwartz_on_our_loss_of_wisdom.html
Barry Schwartz makes a passionate call for "practical wisdom" as an antidote to a society gone mad with bureaucracy. He argues powerfully that rules often fail us, incentives often backfire, and practical, everyday wisdom will help rebuild our world.
The link between economics and psychology - Barry Schwartz on the paradox of choice
Source:
http://www.ted.com/index.php/talks/barry_schwartz_on_the_paradox_of_choice.html
Psychologist Barry Schwartz takes aim at a central tenet of western societies: freedom of choice. In Schwartz's estimation, choice has made us not freer but more paralyzed, not happier but more dissatisfied.
In his 2004 book The Paradox of Choice , Barry Schwartz tackles one of the great mysteries of modern life: Why is it that societies of great abundance — where individuals are offered more freedom and choice (personal, professional, material) than ever before — are now witnessing a near-epidemic of depression? Conventional wisdom tells us that greater choice is for the greater good, but Schwartz argues the opposite: He makes a compelling case that the abundance of choice in today's western world is actually making us miserable.
Infinite choice is paralyzing, Schwartz argues, and exhausting to the human psyche. It leads us to set unreasonably high expectations, question our choices before we even make them and blame our failures entirely on ourselves. His relatable examples, from consumer products (jeans, TVs, salad dressings) to lifestyle choices (where to live, what job to take, who and when to marry), underscore this central point: Too much choice undermines happiness.
Schwartz's previous research has addressed morality, decision-making and the varied inter-relationships between science and society. Before Paradox he published The Costs of Living, which traces the impact of free-market thinking on the explosion of consumerism -- and the effect of the new capitalism on social and cultural institutions that once operated above the market, such as medicine, sports, and the law.
Both books level serious criticism of modern western society, illuminating the under-reported psychological plagues of our time. But they also offer concrete ideas on addressing the problems, from a personal and societal level.
Wednesday, December 23, 2009
Paul A. Samuelson, Economist, Dies at 94 - NYT
Paul A. Samuelson, Economist, Dies at 94
Source: http://www.nytimes.com/2009/12/14/business/economy/14samuelson.html?_r=1
Source: http://www.nytimes.com/2009/12/14/business/economy/14samuelson.html?_r=1
Paul A. Samuelson, the first American Nobel laureate in economics and the foremost academic economist of the 20th century, died Sunday at his home in Belmont, Mass. He was 94.
His death was announced by the Massachusetts Institute of Technology, which Mr. Samuelson helped build into one of the world’s great centers of graduate education in economics.
In receiving the Nobel Prize in 1970, Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.
When economists “sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson,” said Robert M. Solow, a fellow Nobel laureate and colleague of Mr. Samuelson’s at M.I.T.
Mr. Samuelson attracted a brilliant roster of economists to teach or study at the university, among them Mr. Solow as well as others who would go on to become Nobel laureates like George A. Akerlof, Robert F. Engle III, Lawrence R. Klein, Paul Krugman, Franco Modigliani, Robert C. Merton and Joseph E. Stiglitz.
Mr. Samuelson wrote one of the most widely used college textbooks in the history of American education. The book, “Economics,” first published in 1948, was the nation’s best-selling textbook for nearly 30 years. Translated into 20 languages, it was selling 50,000 copies a year a half century after it first appeared.
“I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks,” Mr. Samuelson said.
His textbook taught college students how to think about economics. His technical work — especially his discipline-shattering Ph.D. thesis, immodestly titled “The Foundations of Economic Analysis” — taught professional economists how to ply their trade. Between the two books, Mr. Samuelson redefined modern economics.
The textbook introduced generations of students to the revolutionary ideas of John Maynard Keynes, the British economist who in the 1930s developed the theory that modern market economies could become trapped in depression and would then need a strong push from government spending or tax cuts, in addition to lenient monetary policy, to restore them. Many economics students would never again rest comfortably with the 19th-century view that private markets would cure unemployment without need of government intervention.
That lesson was reinforced in 2008, when the international economy slipped into the steepest downturn since the Great Depression, when Keynesian economics was born. When the Depression began, governments stood pat or made matters worse by trying to balance fiscal budgets and erecting trade barriers. But 80 years later, having absorbed the Keynesian teaching of Mr. Samuelson and his followers, most industrialized countries took corrective action, raising government spending, cutting taxes, keeping exports and imports flowing and driving short-term interest rates to near zero.
Lessons for Kennedy
Mr. Samuelson explained Keynesian economics to American presidents, world leaders, members of Congress and the Federal Reserve Board, not to mention other economists. He was a consultant to the United States Treasury, the Bureau of the Budget and the President’s Council of Economic Advisers.
His most influential student was John F. Kennedy, whose first 40-minute class with Mr. Samuelson, after the 1960 election, was conducted on a rock by the beach at the family compound at Hyannis Port, Mass. Before class, there was lunch with politicians and Cambridge intellectuals aboard a yacht offshore. “I had expected a scrumptious meal,” Mr. Samuelson said. “We had franks and beans.”
As a member of the Kennedy campaign brain trust, Mr. Samuelson headed an economic task force for the candidate and held several private sessions on economics with him. Many would have a bearing on decisions made during the Kennedy administration.
Though Mr. Samuelson was President Kennedy’s first choice to become chairman of the Council of Economic Advisers, he refused, on principle, to take any government office because, he said, he did not want to put himself in a position in which he could not say and write what he believed.
After the 1960 election, he told the young president-elect that the nation was heading into a recession and that Kennedy should push through a tax cut to head it off. Kennedy was shocked.
After the 1960 election, he told the young president-elect that the nation was heading into a recession and that Kennedy should push through a tax cut to head it off. Kennedy was shocked.
“I’ve just campaigned on a platform of fiscal responsibility and balanced budgets and here you are telling me that the first thing I should do in office is to cut taxes?” Mr. Samuelson recalled, quoting the president.
Kennedy eventually accepted the professor’s advice and signaled his willingness to cut taxes, but he was assassinated before he could take action. His successor, Lyndon B. Johnson, carried out the plan, however, and the economy bounced back.
Adding Bite to Academia
In the classroom, Mr. Samuelson was a lively, funny, articulate teacher. On theories that he and others had developed to show links between the performance of the stock market and the general economy, he famously said: “It is indeed true that the stock market can forecast the business cycle. The stock market has called nine of the last five recessions.”
His speeches and his voluminous writing had a lucidity and bite not usually found in academic technicians. He tried to give his economic pronouncements a “snap at the end,” he said, “like Mark Twain.” When women began complaining about career and salary inequities, for example, he said in their defense, “Women are men without money.”
Remarkably versatile, Mr. Samuelson reshaped academic thinking about nearly every economic subject, from what Marx could have meant by a labor theory of value to whether stock prices fluctuate randomly. Mathematics had already been employed by social scientists, but Mr. Samuelson brought the discipline into the mainstream of economic thinking, showing how to derive strong theoretical predictions from simple mathematical assumptions.
His early work, for example, presented a unified mathematical structure for predicting how businesses and households alike would respond to changes in economic forces, how changes in wage rates would affect employment, and how tax rate changes would affect tax collections.
His relentless application of mathematical analysis gave rise to an astonishing number of groundbreaking theorems, resolving debates that had raged among theorists for decades, if not centuries.
An Economic Theorem
Early in his career, Mr. Samuelson developed the rudimentary mathematics of business cycles with a model, called the multiplier-accelerator, that captured the inherent tendency of market economies to fluctuate.
The model showed how markets magnify the impact of outside shocks and turn, say, an initial one dollar increase in foreign investment into a several dollar increase in total domestic income, to be followed by a decline.
Mr. Samuelson provided a mathematical structure to study the impact of trade on different groups of consumers and workers. In a famous theorem, known as Stolper-Samuelson, he and a co-author showed that competition from imports of clothes and similar goods from underdeveloped countries, where producers rely on unskilled workers, could drive down the wages of low-paid workers in industrialized countries.
The theorem provided the intellectual scaffold for opponents of free trade. And late in his career, Mr. Samuelson set off an intellectual commotion by pointing out that the economy of a country like the United States could be hurt if productivity rose among the economies with which it traded.
Yet Mr. Samuelson, like most academic economists, remained an advocate of open trade. Trade, he taught, raises average living standards enough to allow the workers and consumers who benefit to compensate those who suffer, and still have some extra income left over. Protectionism would not help, but higher productivity would.
Mr. Samuelson also formulated a theory of public goods — that is, goods that can be provided effectively only through collective, or government, action. National defense is one such public good. It is nonexclusive; the Navy, for example, exists to protect every citizen. It also eliminates rivalry among its many consumers; that is, the amount of security that any one citizen derives from the Navy subtracts nothing from the amount of security that any other citizen derives.
The features of public goods, Mr. Samuelson taught, stand in direct contrast to those of ordinary goods, like apples. An apple eaten by one consumer is not available to any other. Public goods, he concluded, cannot be sold in private markets because individuals have no incentive to pay for them voluntarily. Instead they hope to get a free ride from the decisions of others to make the public goods available.
A Predictive Principle
Mr. Samuelson pushed mathematical analysis to new levels of sophistication. For example, economists routinely write mathematical models of market economies that assume consumers and producers make choices to maximize their well-being. The question arises when such economies are stable: if disturbed by, say, droughts or wars or technological change, will the economy return to appropriate levels of prices and output or, instead, fly out of control? What Mr. Samuelson’s “correspondence principle” shows is the theoretical link between the behavior of individuals and the aggregate stability of the entire economic system. Information about individual responses, Mr. Samuelson’s theorem holds, shapes predictions about overall economic stability.
He analyzed the evolution of economies with a mathematical model, called an overlapping generations model, that scholars have since used to study, for example, the functioning over time of the Social Security system and the management of public debt.
He also helped develop linear programming, a mathematical tool used by corporations and central planners in socialist countries to calculate how to produce pre-set levels of various goods and services at the least cost.
Late in his career, Mr. Samuelson laid out the mathematics of stock price movements, an analysis that became the basis for Nobel Prize-winning research by his student Mr. Merton and Myron S. Scholes. They designed formulas that Wall Street analysts use to trade options and other complicated securities known as derivatives.
But beyond his astonishing array of scientific theorems and conclusions, Mr. Samuelson wedded Keynesian thought to conventional economics. He developed what he called the Neoclassical Synthesis. The neoclassical economists in the late 19th century showed how forces of supply and demand generate equilibrium in the market for apples, shoes and all other consumer goods and services. The standard analysis had held that market economies, left to their own devices, gravitated naturally toward full employment.
Economists clung to this theory even in the wake of the Depression of the 1930s. But the need to explain the market collapse, as well as unemployment rates that soared to 25 percent, gave rise to a contrary strain of thought associated with Keynes.
Mr. Samuelson’s resulting “synthesis” amounted to the notion that economists could use the neoclassical apparatus to analyze economies operating near full employment, but switch over to Keynesian analysis when the economy turned sour.
Midwestern Roots
Paul Anthony Samuelson was born on May 15, 1915, in Gary, Ind., the son of Frank Samuelson, a pharmacist, and the former Ella Lipton. His family, he said, was “made up of upwardly mobile Jewish immigrants from Poland who had prospered considerably in World War I, because Gary was a brand new steel town when my family went there.”
But after his father lost much of his money in the years after the war, the family moved to Chicago. Young Paul attended Hyde Park High School, where as a freshman he began studying the stock market. At one point he helped his algebra teacher select stocks to buy in the boom of the 1920s.
“Hupp Motors and other losers,” he remembered in an interview in 1996. “Proof of the fallibility of systems,” he said.
He left high school at age 16 to enter the University of Chicago. “I was born as an economist on Jan. 2, 1932,” he said. That was the day he heard his first college lecture, on Thomas Malthus, the 18th-century British economist who studied the relation between poverty and population growth. Hooked, he began taking economics courses.
The University of Chicago developed the century’s leading conservative economic theorists, under the later guidance of Milton Friedman. But Mr. Samuelson regarded the teaching at Chicago as “schizophrenic.” This was at the height of the Depression, and courses about the business cycle naturally talked about unemployment, he said. But in economic-theory classes, joblessness was not mentioned.
“The niceties of existence were not a matter of concern,” he recalled, “yet everything around was closed down most of the time. If you lived in a middle-class community in Chicago, children and adults came daily to the door saying, ‘We are starving, how about a potato?’ I speak from poignant memory.”
After receiving his bachelor’s degree from Chicago in 1935, he went to Harvard, where he was attracted to the ideas of the Harvard professor Alvin Hansen, the leading exponent of Keynesian theory in America.
As a student at Chicago and later at Cambridge, Mr. Samuelson had at first reacted negatively to Keynes. “What I resisted most was the notion that there could be equilibrium unemployment” — that some level of unemployment would be impossible to eliminate and have to be tolerated. “I spent four summers of my college career on the beach at Lake Michigan,” he said. “It was pointless to look for work. I didn’t even have to test the market because I had friends who would go to 350 potential employers and not be able to get any job at all.”
Eventually he was converted. “Why do I want to refuse a paradigm that enables me to understand the Roosevelt upturn from 1933 to 1937?” he asked himself.
Mr. Samuelson was perceived at the outset of his career as a brilliant mathematical economist. He shot to academic fame as a 22-year-old prodigy at Harvard when he began a boldly sweeping and highly technical doctoral dissertation, published as a book in 1947 by Harvard University Press.
At Harvard, as at Chicago, he was not shy about criticizing his professors — “respecting neither age nor rank,” according to James Tobin, a Nobel laureate of Yale University. The young Mr. Samuelson’s chief complaint against economists was that they preoccupied themselves with finer economic principles while all around them people were being thrown into bread lines.
A Bold Dissertation
His attitudes did not endear him to the austere chairman of the economics department at Harvard, Harold Hitchings Burbank, with whom he had a rocky relationship.
But the publication of his dissertation was an immediate success. It won him the John Bates Clark Medal awarded by the American Economic Association to the economist showing the most scholarly promise before the age of 40; it would eventually help him win his Nobel, and it was frequently reprinted despite the heavy resistance of Professor Burbank, selling to economists around the world for more than 20 years. (“Sweet revenge,” Mr. Samuelson said.)
Among Mr. Samuelson’s fellow students was Marion Crawford. They married in 1938. Mr. Samuelson earned his master’s degree from Harvard in 1936 and a Ph.D. in 1941. He wrote his thesis from 1937 to 1940 as a member of the prestigious Harvard Society of Junior Fellows. In 1940, Harvard offered him an instructorship, which he accepted, but a month later M.I.T. invited him to become an assistant professor.
Harvard made no attempt to keep him, even though he had by then developed an international following. Mr. Solow said of the Harvard economics department at the time: “You could be disqualified for a job if you were either smart or Jewish or Keynesian. So what chance did this smart, Jewish, Keynesian have?”
During World War II, Mr. Samuelson worked in M.I.T.’s Radiation Laboratory, developing computers for tracking aircraft, and was a consultant for the War Production Board. After the war, having resumed teaching, he and his wife started a family. When she became pregnant the fourth time, she gave birth to triplets, all boys.
Marion Samuelson died in 1978. Mr. Samuelson is survived by his second wife, Risha Clay Samuelson; six children from his first marriage: Jane Raybould, Margaret Crawford-Samuelson, William and the triplet sons, Robert, John and Paul; and 15 grandchildren. Mr. Samuelson is also survived by a brother, Robert Summers, a professor emeritus of economics at the University of Pennsylvania and father of Lawrence H. Summers, director of President Obama’s National Economic Council and former secretary of the Treasury under President Clinton and former president of Harvard.
A Keynesian Textbook
The birth of the triplets doubled the number of children in the Samuelson household, which soon found itself sending 350 diapers to the laundry each week. His friends suggested that Mr. Samuelson needed to write a book to earn more money.
He decided to write an economics textbook, but one that would not only be compelling for students but also sophisticated and comprehensive. And he wanted to center it on the still poorly understood Keynesian revolution. President Herbert Hoover, he noted, had never referred to Keynes other than as “the Marxist Keynes.”
“I never quite understood that venom,” Mr. Samuelson said.
He said he “sweated blood” writing his book, employing detailed charts, color graphics and humor. He wrote: “Economists are said to disagree too much but in ways that are too much alike: If eight sleep in the same bed, you can be sure that, like Eskimos, when they turn over, they’ll all turn over together.”
It would be difficult to overestimate the influence of “Economics.” Business Week, taking note of the textbook’s publication in Greek, Punjabi, Hebrew, Russian, Serbo-Croatian and other languages, once said that it had “gone a long way in giving the world a common economic language.” Students were attracted to its lively prose and relevance to their everyday lives. Many textbook authors began to copy its presentation.
“Economics,” together with shrewd investing, made Mr. Samuelson a millionaire many times over.
Friendship With a Rival
A historian could well tell the story of 20th-century public debate over economic policy in America through the jousting between Mr. Samuelson and Milton Friedman, who won the Nobel in 1976. Mr. Samuelson said the two had almost always disagreed with each other but had remained friends. They met in 1933 at the University of Chicago, when Mr. Samuelson was an undergraduate and Mr. Friedman a graduate student.
Unlike the liberal Mr. Samuelson, the conservative Mr. Friedman opposed active government participation in most areas of the economy except national defense and law enforcement. He thought private enterprise and competition could do better and that government controls posed risks to individual freedoms.
Both men were fluid speakers as well as writers, and they debated often in public forums, in testimony before Congressional committees, in op-ed articles and in columns each of them wrote for Newsweek magazine. But Mr. Samuelson said he always had fear in his heart when he prepared for combat with Mr. Friedman, a formidably engaging debater.
“If you looked at a transcript afterward, it might seem clear that you had won the debate on points,” he said. “But somehow, with members of the audience, you always seemed to come off as elite, and Milton seemed to have won the day.”
Mr. Samuelson said he had never regarded Keynesianism as a religion, and he criticized some of his liberal colleagues for seeming to do so, earning himself, late in life, the label “l’enfant terrible emeritus.” The experience of nations in the second half of the century, he said, had diminished his optimism about the ability of government to perform miracles.
If government gets too big, and too great a portion of the nation’s income passes through it, he said, government becomes inefficient and unresponsive to the human needs “we do-gooders extol,” and thus risks infringing on freedoms.
But, he said, no serious political or economic thinker would reject the fundamental Keynesian idea that a benevolent democratic government must do what it can to avert economic trouble in areas the free markets cannot. Neither government alone nor the markets alone, he said, could serve the public welfare without help from the other.
As nations became locked in global competition, and as the computerization of the workplace created daunting employment problems, he agreed with the economic conservatives in advocating that American corporations must stay lean and efficient and follow the general dictates of the free market.
But he warned that the harshness of the marketplace had to be tempered and that corporate downsizing and the reduction of government programs “must be done with a heart.”
Despite his celebrated accomplishments, Mr. Samuelson preached and practiced humility. The M.I.T. economics department became famous for collegiality, in no small part because no one else could play prima donna if Mr. Samuelson refused the role, and, of course, he did. Economists, he told his students, as Churchill said of political colleagues, “have much to be humble about.”
Saturday, December 12, 2009
Restoring Confidence - Tengku Razaleigh Hamzah
Source: http://razaleigh.com/2009/01/16/22/
Keynote Luncheon Speaker:- YBM Tengku Sri Razaleigh Hamzah
Former Minister of Finance & former Chairman, World Bank, Asian Development Bank, Islamic Development Bank.
A PROBLEM OF CONFIDENCE
The present financial crisis started in a speculative housing bubble in the US, inflated on greed and irrational confidence. Shady practices went mainstream under the wing of weak financial governance. When the bubble burst, gold-plated names on Wall Street were implicated. A massive loss of confidence in the financial sector has crippled credit flow worldwide. Consumption has contracted as households put off expenditure out of uncertainty. Investment has retreated. There has been a massive loss of confidence.=
2. Expectations are a central factor in macroeconomic booms and busts. If a sharp loss of confidence is an endogenous part of the problem, a restoration of confidence must be the beginning of the solution. However, if we have learned anything at all from the crisis, this cannot be hollow confidence, but confidence based on a clear appreciation of our prospects. The lesson of the global economy is that false confidence based on irrational hope leads to collapse, disillusionment and pessimism.
3. We need a sound appreciation of our reality before we can dream of changing it. We need to face harsh truths before we can believe in ourselves and inspire others to believe in us. In coming to that sound appreciation here in Malaysia we have run out of time for politically manipulated messaging and sugar coated evasions.
4. Let us just begin by acknowledging that we will not be spared the effects of the global economic crisis.
5. Our leaders only undermine the government’s credibility when they paint an alternative reality for us. I understand we don’t want to frighten markets and voters unnecessarily, but we do not live in an information bubble. Only the most resolutely ignorant can now pretend that all shall be fine while the rest of the world deals with what Jeffrey Sachs has called “a world economy teetering on the brink of unprecedented catastrophe.” Leaders who deny the seriousness of the crisis only raise the suspicion that they have no ideas for coping with it. They undermine the government’s credibility when that very credibility, that confidence, is a key issue.
6. We are a trading and exporting nation. While we were relatively shielded from the first wave of financial failures there is no escape from the sharp demand slump in the global economy. The Government and Bank Negara maintain that our growth rate this year will be 3.5%. I fear it could be well under that. The latest numbers show a plunge in industrial activity, with manufacturing output in November, down 9.4 percent from a year ago. December may well be worse. Exports are down. There has been a dramatic swing in the balance of payments to a RM31 billion deficit in the third quarter, from a surplus of RM26 billion in the second. Anyone looking at the size of the downturn and at its swiftness can only wonder if we will be sailing through. This crisis really “went global” only in the final quarter of last year, but within that single quarter manufacturing both here and in Singapore contracted by more than 10 percent on the previous year. Policymakers in Singapore appear far more alarmed than our own. After having declared a recession, they found that the effects of the crisis were far worse than they thought. We are just at the beginning, and the bottom is not yet in sight.
7. Three and a half percent growth, even if we achieve it, will not create enough jobs to employ the large number who enter the workforce each year from our young population. Given our demographic profile and the fact that we are an oil exporter, our baseline do-nothing growth figure is not 0% but closer to 4%.
8. We do have a problem. Now we need to acknowledge that we are not in good shape to deal with it. After early decades of rapid progress, it looks like that economic growth has flattened, our public delivery system calcified and our economic leadership run out of ideas.
The financial crisis in the context of our developmental path
9. Malaysia is squeezed between being the low cost manufacturer we once excelled as, and the knowledge-intensive economy we are failing to become. Our years of sustained high growth ended in 1997 with the Asian Economic Crisis. With the subsequent rise of China and India as low cost producers with giant domestic markets, the manufacturing sector which propelled that growth is being hollowed out.
10. We are in the infamous “Middle Income Trap”. No longer cheap enough to compete with low cost producers and not advanced enough to compete with more innovative ones, we find ourselves squeezed in between with no economic story. Successful economies, like successful companies, need a compelling story, and we don’t have one. With falling communications and transport costs, the skilled engineers, managers and designers of the rich countries are pairing themselves to the cheaper labour of poor countries to extract productivity and cost benefits. The global integration of labour markets favours both rich and poor countries and stagnates the wages of those in the middle that are neither smarter nor cheaper. That means us. Our working people have suffered stagnant wages and a rising cost of living.
11. According to the World Bank, Malaysia’s share of GDP contributed by services was 46.2% in 1987. How much did you think it was twenty years later in 2007? 46.4%.
How much do you think the real wages of our workers grew between 1994 and 2007? By 2.6% in the domestic sector and by 2.8% in the export sector.
Unskilled migrant workers, documented and undocumented, make up 30-40% of our workforce. Meanwhile, alone in East Asia, the number of expatriate professionals here has decreased. Alone in East Asia, private sector wage increases follow government sector increases, not the other way around.
Did we have to learn about this from the World Bank? What has the EPU been doing? Has the cabinet pondered these numbers? Have we had a national discussion about our need to reinvent ourselves?
12. The only long term path to prosperity is increased income through increased productivity. Sustained productivity growth is the engine of China’s unbroken run of high growth. Our failure to increase productivity and working incomes has been masked by an influx of cheap labour. That cheap labour has become another crutch for us.
13. Low growth
a) The other thing masking our under-performance over the last decade is the fact that in this time the world economy has experienced its biggest expansion in recorded history. We have averaged 4 to 5 percent growth throughout a historic boom over which world economic growth has averaged 4.5 percent. Meanwhile the two most populous nations in the world have been growing at or near double digit rates, multiplying per capita incomes and lifting hundreds of millions out of poverty in the greatest expansion of human welfare in history. That boom is over and we have missed it.
b) By analogy, when we view the report cards of our own children, we set our expectations against what they have been given and what they were capable of in the past. Turning to our own country, so richly endowed with natural and cultural resources, a stable society and good institutions, we see a failing report card. Instead of educating our young to be competitive we have turned out large numbers without the skills and attitudes suited for basic work, let alone for the global economy that is not out there somewhere but on our own shores.
Each decade we have discovered new ‘peer-countries’ against whom we might look decent because we have fallen out of the league of the last set of peers. We fail to notice we have been relegated. Remember that in the 60’s we were classified with Taiwan and Korea, in the eighties with Singapore and Hong Kong. Now we are less “relevant” than Vietnam as an investment destination. I remember receiving delegations from Taiwan and Hong Kong who came to learn from us.
14. Inequality
We cannot comfort ourselves that we have sacrificed growth for social equity. Despite the strong redistributive measures the government has pursued for decades, our Gini coefficient, the standard measure of inequality, has been ballooning. In this region only Papua New Guinea is more unequal. We have the most unequal income distribution in Southeast Asia. If there is supposed to be a trade-off between growth and equity, we have not made it. We are failing on both growth and equity.
15. What does it take to make the leap from middle to high income? The countries that have done it recently, Korea, Taiwan, Hong Kong and Singapore, have one feature in common: they were able to learn from previous crises. Without a buffer of natural resources, each of these economies was more exposed than we were. In relative terms, because they are even more trade oriented than we are, each may be harder hit by this downturn than we are. But we miss the picture if we stand by and comfort ourselves that we are ’shielded’ because our capital markets have been less open. Our very problem may be that we have been shielding ourselves from learning, which requires systematic change in behaviour or knowledge informed by experience.
16. The criterion of success for making the developmental leap, the key differentiator between the leaders and the also-rans, is not immunity from economic crises (after all, if you have a Stone Age economy, you are completely immune) but the organizational capability of governments to learn and re-organize around new national economic strategies through these crises. Each major crisis is either an important opportunity to transform the economy or a major setback to our ambitions. The question is whether our policymaking and policy implementing apparatus is set up, motivated and led to learn from this crisis. It is a question of the capability of government and governance.
17. We must also retrain and re-skill those who lose their jobs because of this crisis. This cannot be done in the present ad hoc manner. It must be a coordinated program, with courses matched and tracked to learners according to a National Skills Plan which in turns supports a vision for the Economy. Those lost jobs, especially in the manufacturing sector, will not be coming back. We better have a plan and a vision.
18. What are the consequences of sailing into an economic storm in our present condition, after a decade of lackluster performance and with no plan, no vision for sustained high growth? We can look at two scenarios: breakdown or relegation.
a) Breakdown
As a developmental state, the legitimacy of our government is based on its guarantee of social peace and economic development. As Professor Clive Kessler has observed: “Social peace in Malaysia depends upon the continuation, and the continuing expectation, of economic growth and prosperity; while economic growth and prosperity depend upon the continuation and assurance of social peace.” This rceiprocal relationship between peace and growth makes us prone to a vicious feedback cycle: if either engine were to fail, the other would fail with it, and take us down a spiral of failure with a painful end. Our margin for error is slimmer than we think. Our socio-political setup implies that we don’t have a smooth glide down to complete irrelevance. Like a bicycle or an airplane we need to be running at a certain speed to avoid falling off.
b) Relegation
On a second scenario we might just coast through the downturn. However we will emerge with an economy that has failed to gear up to the demands of the global economy, fallen yet further behind along our developmental path and locked ourselves tighter into a long term pattern of low growth. Sooner or later will come that painful reckoning described in the first scenario.
19. We should view the crisis in the context of our history as a young nation. The last time the world faced a contraction of this size Malaysia did not yet exist. The crisis is has broken out at a critical point in the development paths of our economy and our political system. Put these three factors together, and we have a perfect storm: an unprecedented need for leadership at just the moment when our system for selecting and legitimizing political leadership appears to be broken.
WHERE TO NEXT
20. My reading of where we stand may seem harsh, but perhaps the world is harsher. I don’t wish to offend, but I believe we need to grasp the peril of our situation clearly before we know what to do next.
21. In the medium term we need to make a developmental leap. But a leap is not a straight-line projection of the present. It is not about doing more of what we have done. We are not going to get there putting up more highways, declaring more Growth Corridors or planting more oil palm. The way up is a complex achievement that in turn depends on transformative improvements in governance and a successful reform of our political system.
22. The world recession is a critical opportunity for us to re-gear and re-tool the Malaysian economy because it is a challenge to take bold, imaginative measures. It lights the fire under our feet to make transformative improvements in governance and politics. It also demands that the government spend boldly on the right things, in the right way, to stimulate demand.
23. Two criteria for ‘the right things” would be those public investments with the widest multiplier effects, over the short and the longer term. Over the short term, there are often tradeoffs between impact on demand and on improved economic capacity. Over the long term, the two are the same. The “long term multiplier” is nothing less than the improved capacity of the entire system.
24. So we must think carefully about what we spend the “fiscal stimulus” on. There is no such thing as a free lunch. We will be going into deficit to finance this stimulus, so it can’t be about just spreading money around. So far there has been no impact from the stimulus package announced in November, nor was it clear what the economic thinking was behind that measure.
25. We don’t need another stimulus “package” of spending here and there. What we need, and what the crisis gives us a chance to implement, is a set of bold projects with an economic story behind them to help Malaysia make the developmental leap we have been missing. We have a once in a lifetime economic challenge. We must meet this challenge with a historic sense of purpose. That means, not with a “stimulus” consisting of ad hoc pork barrel expenditures but a set of public investment projects guided by a vision, designed around a strategy and governed with bullet-proof integrity.
26. Let me suggest two programmes and an enabling set of reforms.
OIL AND GAS CENTRE
27. Oil and Gas has served us well, but we have still not tapped our strategic strength in this sector despite our unmatched natural and strategic advantages:
a) Malaysia is the leading Oil and Gas producer in the region. Our proven reserves have been augmented by major discoveries in recent years.
b) More than half the world’s annual merchant fleet tonnage passes through the Straits of Malacca, with most of it continuing into the South China Sea. Oil flows through the Straits of Malacca are three times greater than that through the Suez Canal and fifteen times greater than flow through the Panama Canal. We live alongside the most important oil shipping route in the world. Our fifteenth century ancestors may have done more to tap that advantage than we.
c) We have in Petronas one of the leading oil companies in the world.
d) We have strong trade links to Middle Eastern oil producers.
28. We could do much better. Consider that despite having no oil resources, Singapore is among the top three global players in trading, refining and manufacture of oil and gas equipment.
29. Three years ago, while Malaysia still held the OIC chairmanship, I proposed a National Strategic Plan with the vision of developing Malaysia into Asia’s Oil and Gas centre, with leading capabilities in refining, shipping, distribution, storage and downstream production.
30. We should develop offshore storage facilities for other producer nations with high country risk. Oil and gas exploration, extraction and production are increasingly technology driven, high value operations in themselves as oil becomes scarcer. There will be large payoffs for having our own R&D capability in exploration, extraction and production. We should specialize in energy technology, including alternative energy sources for a carbon-constrained future.
31. We should form partnerships along the value chain. These could include a network of agreements with Gulf producers and with major consumers to improve oil security. We could form G-to-G partnerships in ASEAN, provide tax incentives and craft innovative Production Sharing Contracts,
32. Here’s the exciting thing. For all these ventures to work we need greatly improved capabilities to finance and trade oil and gas. Given our very special geographic and strategic advantages, we should build the first spot and futures Exchange for Oil and Gas in an OIC nation.
33. Whatever the government chooses to do, it should understand that for us to get on a higher growth plane we must specialize, and we must have a government capable of providing the direction, drive and executive capability to foster that specialization. Globalization requires a relentless focus on competitive advantage. We need our own story.
HOUSING
34. Let’s start a program to bring home ownership to the whole country. The construction sector creates multiplier effects in more than a hundred other industries. It provides work in everything from insurance to advertising to materials supply. Of all the national projects we could undertake, few could have such a large social as well as an economic multiplier effect.
35. Housing builds powerful social capital and gives substance to citizenship. A national housing project allows us to design entire communities and townships with their transportation, communications, educational and recreational infrastructure with a strong set of standards and social objectives. It lets us plan the housing stock to cater to the lifecycle of home ownership, with a good mix of options for different localities and life-cycle requirements. It is a way to grow racial harmony, build integrated schools, and help the poor without creating a crutch.
36. Let’s commit ourselves to having each and every Malaysian family own their own home. This vision is a radical challenge to the nation to do better. It will require extraordinary improvements in our ability to design, construct and finance housing projects. It will require the setting up of a statutory board to oversee housing development, administration and management. As land governed by the State powers, the States will have to implement these projects. This will require, and hopefully force, improved coordination between the Federal and State governments, especially now that we might no longer expect that the same party is in power in both places.
37. Financing for this investment could come from modifications to EPF, with matched contributions from the government towards the value of the property. Because it comes out of savings, this spending would be non-inflationary. I can think of few better ways to get the economy humming again, give our citizens a focal point of hope and pride, and weave a safety net that also encourages savings and enterprise.
PUBLIC SECTOR REFORM
38. We cannot wait till the crisis blows over to tackle the public delivery system head on. This is because we will need an upgraded public service just to implement such large public programs successfully.
39. The need for improved governance is greater, not less, in challenging economic times. When Franklin Delano Roosevelt implemented the New Deal to push America out of the Great Depression, many feared that this would present a huge opportunity for graft. Confounding these expectations, the New Deal programmes were implemented with unprecedented transparency. FDR did this by building oversight into the implementation of his rescue program.
40. Similarly, the two programmes I have suggested would come to naught if they were derailed by the corrupt practices that have become the norm in this country. Instead of rescuing our economy they would become millstones around our neck. As part of the project management of these programmes we should set up powerful, independent divisions devoted to investigating complaints of fraud.
41. Today the role of the public sector is a lot more complex than anyone could have imagined even a decade ago. A “public delivery system” that was designed for the challenges of the 1950’s cannot possibly cope with the complex demands of the globalized 21st. The current crisis propagated worldwide in internet times as regulators scrambled to catch up. Government now needs to be smarter, tougher and more responsive than before to engage on equal footing with business. We need leadership to change the operating model of the civil service from last century’s centralized planning approach, driven by budgetary plans, to a model of government as facilitator, aggregator and convener of business. Government that targets economic outcomes rather than accounting quotas.
42. We need to demand as much talent and organizational ability in our public service as the private sector does of its own people. Today the quality government is a core component of national competitiveness. However there is nothing strange about the expectation that the civil service should be a high performing organization led by an intellectual elite. It is how the Malayan Civil Service used to operate. Many of us remember it.
CONCLUSION
43. What I have outlined this afternoon are just my suggestions. I am sure there are many other ideas in this distinguished company.
44. Let me end where I began, with the question of confidence.
45. We need to restore confidence in our basic institutions, our leadership, the integrity of the Federation, the rule of law and our national Constitution. This is of a piece with the vital economic confidence needed to unleash credit, investment and consumption, and get everyone working. We need to restore confidence in Malaysia.
46. Real confidence is hope based on an apprehension of the truth. It is social capital and trust in society and its future. It is inspired by leaders willing to take us through an unflinching evaluation of where we are today to a vision of what we are capable of tomorrow. It means owning our own story and banking on it.
47. The country can no longer afford a political class out of touch with reality that trades on yesterday’s political insecurities and a government that has forgotten its purpose. We need a renewal of leadership as a first step to restoring true confidence.
48. The economic statistics are mere indicators of the activities and expectations of the unique national community we are trying to build, so that building an economy and building a nation, providing good governance and being truthful, are not things that can be achieved apart from one another. To reignite our confidence would be to revitalize the project of building Malaysia.
Former Minister of Finance & former Chairman, World Bank, Asian Development Bank, Islamic Development Bank.
A PROBLEM OF CONFIDENCE
The present financial crisis started in a speculative housing bubble in the US, inflated on greed and irrational confidence. Shady practices went mainstream under the wing of weak financial governance. When the bubble burst, gold-plated names on Wall Street were implicated. A massive loss of confidence in the financial sector has crippled credit flow worldwide. Consumption has contracted as households put off expenditure out of uncertainty. Investment has retreated. There has been a massive loss of confidence.=
2. Expectations are a central factor in macroeconomic booms and busts. If a sharp loss of confidence is an endogenous part of the problem, a restoration of confidence must be the beginning of the solution. However, if we have learned anything at all from the crisis, this cannot be hollow confidence, but confidence based on a clear appreciation of our prospects. The lesson of the global economy is that false confidence based on irrational hope leads to collapse, disillusionment and pessimism.
3. We need a sound appreciation of our reality before we can dream of changing it. We need to face harsh truths before we can believe in ourselves and inspire others to believe in us. In coming to that sound appreciation here in Malaysia we have run out of time for politically manipulated messaging and sugar coated evasions.
4. Let us just begin by acknowledging that we will not be spared the effects of the global economic crisis.
5. Our leaders only undermine the government’s credibility when they paint an alternative reality for us. I understand we don’t want to frighten markets and voters unnecessarily, but we do not live in an information bubble. Only the most resolutely ignorant can now pretend that all shall be fine while the rest of the world deals with what Jeffrey Sachs has called “a world economy teetering on the brink of unprecedented catastrophe.” Leaders who deny the seriousness of the crisis only raise the suspicion that they have no ideas for coping with it. They undermine the government’s credibility when that very credibility, that confidence, is a key issue.
6. We are a trading and exporting nation. While we were relatively shielded from the first wave of financial failures there is no escape from the sharp demand slump in the global economy. The Government and Bank Negara maintain that our growth rate this year will be 3.5%. I fear it could be well under that. The latest numbers show a plunge in industrial activity, with manufacturing output in November, down 9.4 percent from a year ago. December may well be worse. Exports are down. There has been a dramatic swing in the balance of payments to a RM31 billion deficit in the third quarter, from a surplus of RM26 billion in the second. Anyone looking at the size of the downturn and at its swiftness can only wonder if we will be sailing through. This crisis really “went global” only in the final quarter of last year, but within that single quarter manufacturing both here and in Singapore contracted by more than 10 percent on the previous year. Policymakers in Singapore appear far more alarmed than our own. After having declared a recession, they found that the effects of the crisis were far worse than they thought. We are just at the beginning, and the bottom is not yet in sight.
7. Three and a half percent growth, even if we achieve it, will not create enough jobs to employ the large number who enter the workforce each year from our young population. Given our demographic profile and the fact that we are an oil exporter, our baseline do-nothing growth figure is not 0% but closer to 4%.
8. We do have a problem. Now we need to acknowledge that we are not in good shape to deal with it. After early decades of rapid progress, it looks like that economic growth has flattened, our public delivery system calcified and our economic leadership run out of ideas.
The financial crisis in the context of our developmental path
9. Malaysia is squeezed between being the low cost manufacturer we once excelled as, and the knowledge-intensive economy we are failing to become. Our years of sustained high growth ended in 1997 with the Asian Economic Crisis. With the subsequent rise of China and India as low cost producers with giant domestic markets, the manufacturing sector which propelled that growth is being hollowed out.
10. We are in the infamous “Middle Income Trap”. No longer cheap enough to compete with low cost producers and not advanced enough to compete with more innovative ones, we find ourselves squeezed in between with no economic story. Successful economies, like successful companies, need a compelling story, and we don’t have one. With falling communications and transport costs, the skilled engineers, managers and designers of the rich countries are pairing themselves to the cheaper labour of poor countries to extract productivity and cost benefits. The global integration of labour markets favours both rich and poor countries and stagnates the wages of those in the middle that are neither smarter nor cheaper. That means us. Our working people have suffered stagnant wages and a rising cost of living.
11. According to the World Bank, Malaysia’s share of GDP contributed by services was 46.2% in 1987. How much did you think it was twenty years later in 2007? 46.4%.
How much do you think the real wages of our workers grew between 1994 and 2007? By 2.6% in the domestic sector and by 2.8% in the export sector.
Unskilled migrant workers, documented and undocumented, make up 30-40% of our workforce. Meanwhile, alone in East Asia, the number of expatriate professionals here has decreased. Alone in East Asia, private sector wage increases follow government sector increases, not the other way around.
Did we have to learn about this from the World Bank? What has the EPU been doing? Has the cabinet pondered these numbers? Have we had a national discussion about our need to reinvent ourselves?
12. The only long term path to prosperity is increased income through increased productivity. Sustained productivity growth is the engine of China’s unbroken run of high growth. Our failure to increase productivity and working incomes has been masked by an influx of cheap labour. That cheap labour has become another crutch for us.
13. Low growth
a) The other thing masking our under-performance over the last decade is the fact that in this time the world economy has experienced its biggest expansion in recorded history. We have averaged 4 to 5 percent growth throughout a historic boom over which world economic growth has averaged 4.5 percent. Meanwhile the two most populous nations in the world have been growing at or near double digit rates, multiplying per capita incomes and lifting hundreds of millions out of poverty in the greatest expansion of human welfare in history. That boom is over and we have missed it.
b) By analogy, when we view the report cards of our own children, we set our expectations against what they have been given and what they were capable of in the past. Turning to our own country, so richly endowed with natural and cultural resources, a stable society and good institutions, we see a failing report card. Instead of educating our young to be competitive we have turned out large numbers without the skills and attitudes suited for basic work, let alone for the global economy that is not out there somewhere but on our own shores.
Each decade we have discovered new ‘peer-countries’ against whom we might look decent because we have fallen out of the league of the last set of peers. We fail to notice we have been relegated. Remember that in the 60’s we were classified with Taiwan and Korea, in the eighties with Singapore and Hong Kong. Now we are less “relevant” than Vietnam as an investment destination. I remember receiving delegations from Taiwan and Hong Kong who came to learn from us.
14. Inequality
We cannot comfort ourselves that we have sacrificed growth for social equity. Despite the strong redistributive measures the government has pursued for decades, our Gini coefficient, the standard measure of inequality, has been ballooning. In this region only Papua New Guinea is more unequal. We have the most unequal income distribution in Southeast Asia. If there is supposed to be a trade-off between growth and equity, we have not made it. We are failing on both growth and equity.
15. What does it take to make the leap from middle to high income? The countries that have done it recently, Korea, Taiwan, Hong Kong and Singapore, have one feature in common: they were able to learn from previous crises. Without a buffer of natural resources, each of these economies was more exposed than we were. In relative terms, because they are even more trade oriented than we are, each may be harder hit by this downturn than we are. But we miss the picture if we stand by and comfort ourselves that we are ’shielded’ because our capital markets have been less open. Our very problem may be that we have been shielding ourselves from learning, which requires systematic change in behaviour or knowledge informed by experience.
16. The criterion of success for making the developmental leap, the key differentiator between the leaders and the also-rans, is not immunity from economic crises (after all, if you have a Stone Age economy, you are completely immune) but the organizational capability of governments to learn and re-organize around new national economic strategies through these crises. Each major crisis is either an important opportunity to transform the economy or a major setback to our ambitions. The question is whether our policymaking and policy implementing apparatus is set up, motivated and led to learn from this crisis. It is a question of the capability of government and governance.
17. We must also retrain and re-skill those who lose their jobs because of this crisis. This cannot be done in the present ad hoc manner. It must be a coordinated program, with courses matched and tracked to learners according to a National Skills Plan which in turns supports a vision for the Economy. Those lost jobs, especially in the manufacturing sector, will not be coming back. We better have a plan and a vision.
18. What are the consequences of sailing into an economic storm in our present condition, after a decade of lackluster performance and with no plan, no vision for sustained high growth? We can look at two scenarios: breakdown or relegation.
a) Breakdown
As a developmental state, the legitimacy of our government is based on its guarantee of social peace and economic development. As Professor Clive Kessler has observed: “Social peace in Malaysia depends upon the continuation, and the continuing expectation, of economic growth and prosperity; while economic growth and prosperity depend upon the continuation and assurance of social peace.” This rceiprocal relationship between peace and growth makes us prone to a vicious feedback cycle: if either engine were to fail, the other would fail with it, and take us down a spiral of failure with a painful end. Our margin for error is slimmer than we think. Our socio-political setup implies that we don’t have a smooth glide down to complete irrelevance. Like a bicycle or an airplane we need to be running at a certain speed to avoid falling off.
b) Relegation
On a second scenario we might just coast through the downturn. However we will emerge with an economy that has failed to gear up to the demands of the global economy, fallen yet further behind along our developmental path and locked ourselves tighter into a long term pattern of low growth. Sooner or later will come that painful reckoning described in the first scenario.
19. We should view the crisis in the context of our history as a young nation. The last time the world faced a contraction of this size Malaysia did not yet exist. The crisis is has broken out at a critical point in the development paths of our economy and our political system. Put these three factors together, and we have a perfect storm: an unprecedented need for leadership at just the moment when our system for selecting and legitimizing political leadership appears to be broken.
WHERE TO NEXT
20. My reading of where we stand may seem harsh, but perhaps the world is harsher. I don’t wish to offend, but I believe we need to grasp the peril of our situation clearly before we know what to do next.
21. In the medium term we need to make a developmental leap. But a leap is not a straight-line projection of the present. It is not about doing more of what we have done. We are not going to get there putting up more highways, declaring more Growth Corridors or planting more oil palm. The way up is a complex achievement that in turn depends on transformative improvements in governance and a successful reform of our political system.
22. The world recession is a critical opportunity for us to re-gear and re-tool the Malaysian economy because it is a challenge to take bold, imaginative measures. It lights the fire under our feet to make transformative improvements in governance and politics. It also demands that the government spend boldly on the right things, in the right way, to stimulate demand.
23. Two criteria for ‘the right things” would be those public investments with the widest multiplier effects, over the short and the longer term. Over the short term, there are often tradeoffs between impact on demand and on improved economic capacity. Over the long term, the two are the same. The “long term multiplier” is nothing less than the improved capacity of the entire system.
24. So we must think carefully about what we spend the “fiscal stimulus” on. There is no such thing as a free lunch. We will be going into deficit to finance this stimulus, so it can’t be about just spreading money around. So far there has been no impact from the stimulus package announced in November, nor was it clear what the economic thinking was behind that measure.
25. We don’t need another stimulus “package” of spending here and there. What we need, and what the crisis gives us a chance to implement, is a set of bold projects with an economic story behind them to help Malaysia make the developmental leap we have been missing. We have a once in a lifetime economic challenge. We must meet this challenge with a historic sense of purpose. That means, not with a “stimulus” consisting of ad hoc pork barrel expenditures but a set of public investment projects guided by a vision, designed around a strategy and governed with bullet-proof integrity.
26. Let me suggest two programmes and an enabling set of reforms.
OIL AND GAS CENTRE
27. Oil and Gas has served us well, but we have still not tapped our strategic strength in this sector despite our unmatched natural and strategic advantages:
a) Malaysia is the leading Oil and Gas producer in the region. Our proven reserves have been augmented by major discoveries in recent years.
b) More than half the world’s annual merchant fleet tonnage passes through the Straits of Malacca, with most of it continuing into the South China Sea. Oil flows through the Straits of Malacca are three times greater than that through the Suez Canal and fifteen times greater than flow through the Panama Canal. We live alongside the most important oil shipping route in the world. Our fifteenth century ancestors may have done more to tap that advantage than we.
c) We have in Petronas one of the leading oil companies in the world.
d) We have strong trade links to Middle Eastern oil producers.
28. We could do much better. Consider that despite having no oil resources, Singapore is among the top three global players in trading, refining and manufacture of oil and gas equipment.
29. Three years ago, while Malaysia still held the OIC chairmanship, I proposed a National Strategic Plan with the vision of developing Malaysia into Asia’s Oil and Gas centre, with leading capabilities in refining, shipping, distribution, storage and downstream production.
30. We should develop offshore storage facilities for other producer nations with high country risk. Oil and gas exploration, extraction and production are increasingly technology driven, high value operations in themselves as oil becomes scarcer. There will be large payoffs for having our own R&D capability in exploration, extraction and production. We should specialize in energy technology, including alternative energy sources for a carbon-constrained future.
31. We should form partnerships along the value chain. These could include a network of agreements with Gulf producers and with major consumers to improve oil security. We could form G-to-G partnerships in ASEAN, provide tax incentives and craft innovative Production Sharing Contracts,
32. Here’s the exciting thing. For all these ventures to work we need greatly improved capabilities to finance and trade oil and gas. Given our very special geographic and strategic advantages, we should build the first spot and futures Exchange for Oil and Gas in an OIC nation.
33. Whatever the government chooses to do, it should understand that for us to get on a higher growth plane we must specialize, and we must have a government capable of providing the direction, drive and executive capability to foster that specialization. Globalization requires a relentless focus on competitive advantage. We need our own story.
HOUSING
34. Let’s start a program to bring home ownership to the whole country. The construction sector creates multiplier effects in more than a hundred other industries. It provides work in everything from insurance to advertising to materials supply. Of all the national projects we could undertake, few could have such a large social as well as an economic multiplier effect.
35. Housing builds powerful social capital and gives substance to citizenship. A national housing project allows us to design entire communities and townships with their transportation, communications, educational and recreational infrastructure with a strong set of standards and social objectives. It lets us plan the housing stock to cater to the lifecycle of home ownership, with a good mix of options for different localities and life-cycle requirements. It is a way to grow racial harmony, build integrated schools, and help the poor without creating a crutch.
36. Let’s commit ourselves to having each and every Malaysian family own their own home. This vision is a radical challenge to the nation to do better. It will require extraordinary improvements in our ability to design, construct and finance housing projects. It will require the setting up of a statutory board to oversee housing development, administration and management. As land governed by the State powers, the States will have to implement these projects. This will require, and hopefully force, improved coordination between the Federal and State governments, especially now that we might no longer expect that the same party is in power in both places.
37. Financing for this investment could come from modifications to EPF, with matched contributions from the government towards the value of the property. Because it comes out of savings, this spending would be non-inflationary. I can think of few better ways to get the economy humming again, give our citizens a focal point of hope and pride, and weave a safety net that also encourages savings and enterprise.
PUBLIC SECTOR REFORM
38. We cannot wait till the crisis blows over to tackle the public delivery system head on. This is because we will need an upgraded public service just to implement such large public programs successfully.
39. The need for improved governance is greater, not less, in challenging economic times. When Franklin Delano Roosevelt implemented the New Deal to push America out of the Great Depression, many feared that this would present a huge opportunity for graft. Confounding these expectations, the New Deal programmes were implemented with unprecedented transparency. FDR did this by building oversight into the implementation of his rescue program.
40. Similarly, the two programmes I have suggested would come to naught if they were derailed by the corrupt practices that have become the norm in this country. Instead of rescuing our economy they would become millstones around our neck. As part of the project management of these programmes we should set up powerful, independent divisions devoted to investigating complaints of fraud.
41. Today the role of the public sector is a lot more complex than anyone could have imagined even a decade ago. A “public delivery system” that was designed for the challenges of the 1950’s cannot possibly cope with the complex demands of the globalized 21st. The current crisis propagated worldwide in internet times as regulators scrambled to catch up. Government now needs to be smarter, tougher and more responsive than before to engage on equal footing with business. We need leadership to change the operating model of the civil service from last century’s centralized planning approach, driven by budgetary plans, to a model of government as facilitator, aggregator and convener of business. Government that targets economic outcomes rather than accounting quotas.
42. We need to demand as much talent and organizational ability in our public service as the private sector does of its own people. Today the quality government is a core component of national competitiveness. However there is nothing strange about the expectation that the civil service should be a high performing organization led by an intellectual elite. It is how the Malayan Civil Service used to operate. Many of us remember it.
CONCLUSION
43. What I have outlined this afternoon are just my suggestions. I am sure there are many other ideas in this distinguished company.
44. Let me end where I began, with the question of confidence.
45. We need to restore confidence in our basic institutions, our leadership, the integrity of the Federation, the rule of law and our national Constitution. This is of a piece with the vital economic confidence needed to unleash credit, investment and consumption, and get everyone working. We need to restore confidence in Malaysia.
46. Real confidence is hope based on an apprehension of the truth. It is social capital and trust in society and its future. It is inspired by leaders willing to take us through an unflinching evaluation of where we are today to a vision of what we are capable of tomorrow. It means owning our own story and banking on it.
47. The country can no longer afford a political class out of touch with reality that trades on yesterday’s political insecurities and a government that has forgotten its purpose. We need a renewal of leadership as a first step to restoring true confidence.
48. The economic statistics are mere indicators of the activities and expectations of the unique national community we are trying to build, so that building an economy and building a nation, providing good governance and being truthful, are not things that can be achieved apart from one another. To reignite our confidence would be to revitalize the project of building Malaysia.
A blessing become a curse - Tengku Razaleigh Hamzah
Source:
http://razaleigh.com/2009/12/12/a-blessing-become-a-curse/
Revisiting the middle income trap
I would like to revisit the argument of that speech to develop it further.
We are stagnating. The signs of a low growth economy are all around us. Wages are stagnant and the cost of living is rising.
We have not made much progress in becoming a knowledge and services based economy.
According to the World Bank, Malaysia’s share of GDP contributed by services was 46.2% in 1987. Ten years later, that share had grown by a mere 0.2%
Between 1994 and 2007, real wages grew by 2.6% in the domestic sector and by 2.8% in the export sector, which is to say, they were flat over that thirteen year period.
Meanwhile our talent scenario is an example of perverse selection at its most ruinous. We are failing to retain our own young talent, people like yourselves, let alone attract international talent to relocate here, while we have had a massive influx of unskilled foreign labour. They now make up 30-40% of our workforce. Meanwhile, alone in East Asia, the number of expatriate professionals here has decreased. Alone in East Asia, private sector wage increases follow government sector increases, instead of the other way around. We are losing doctors and scientists and have become Southeast Asia’s haven for low cost labour.
I said that we are in a middle income trap, stuck in the pattern of easy growth from low-value-added manufacture and component assembly and unable to make the leap to a knowledge-intensive economy. Regional competitors with larger, cheaper and dare I say, hungrier labour forces have emerged. China and India have risen as both lower cost and higher technology producers, and with giant domestic markets.The manufacturing sector which propelled the growth we enjoyed in the nineties is being hollowed out. There is no going back, there is no staying where we are, and we do not have a map for the way forward.
I am glad that the characterisation of Malaysia as being in a ‘middle-income-trap’ has been taken up by the government, and that the need for an economic story, or strategy, for Malaysia is now recognized. We stand in particular need of such a model because we are a smallish economy. We cannot be good at everything, and we don’t have to be.
We need only make some reasonable bets in identifying and developing a focussed set of growth drivers. It is not difficult to see what the elements of such a growth strategy might be. Whatever we come up with should build on our natural strengths, and our strengths include the following:
We are located at the crossroads of Asia, geographically and culturally, sitting alongside the most important oil route in the world.
a) We have large muslim, Chinese and Indian populations that connect us to the three fastest growing places in the world today.
b) We have some of the largest and oldest rainforests in the world, a treasure house of bio-diversity when the greatest threat facing mankind as a whole now is ecological destruction and the greatest technological advances are likely to come from bioscience.
c) We have the English language, a common law system, parliamentary democracy, good schools, an independent civil service and good infrastructure.
These advantages, however, are declining ones. Our cultural diversity is in danger of coming apart in bigotry, our rainforests are being logged out and planted over, our social and political institutions are decaying.
I have spoken at length on different occasions about the causes and consequences of institutional decline. The decline in our society and indeed in our natural environment, originates in a decline in our basic institutions. The link between these is corruption. The destruction of our ecosystem for example, is made possible by corrupt officials and business-people. The uncontrolled influx of unskilled labour is a direct result of corruption.
Dependencies and the young
These are problems we need to be aware of before we speak glibly about coming up with new strategies and new economic models. We need to understand where we are, and how we have gone wrong, before we can set things right.
You are young, well educated Malaysians. Many among you have left for other shores. Record numbers of Malaysians, of all races, work abroad or have migrated. Among these are some of our best people. They sense the stagnation I described. There is a certain lack of energy, ingenuity and “hunger” in the climate of this country that young people are most sensitive to. In the globalized job market, young people instinctively leave the less simulating and creative environments for those that have a spark to them.
How did we lose our spark as a nation?
We have a political economy marked by dependence on easy options and easy wealth. Like personal dependencies, these bad habits provide temporary comfort but discourage the growth of creativity and resilience.
I mentioned our dependence on low cost foreign labour.
The other dependence is something I played a part in making possible. This is a story I want to leave you with to ponder in your deliberations today.
Blessing and curse
Our nation is blessed with a modest quantity of oil reserves. As a young nation coming to terms with this natural bounty in the early 1970’s, our primary thought was to conserve that oil. That is why, when Petronas was formed, we instituted the Petroleum Development Council. Its function was to advise the PM on how to conserve that oil and use it judicially for national development. We knew our reserves would not last long.
We saw our oil reserves as an unearned bounty that would provide the money for modernization and technology. We saw our oil within a developmental perspective. Our struggle then, was to make the leap from an economy based on commodities and low cost assembly and manufacture to a more diverse, economy based on high income jobs.
Aware that we had an insufficient tax base to make the capital investments needed to make the leap, we planned to apply oil royalties to what you would call today strategic investments in human capital. whatever money left after making cash payments, allocations for development funds, etc, was to be placed in a Heritage Fund for the future. The Heritage Fund was for education and social enrichment.
In working out the distribution of oil between the states, who had sovereign rights over it, and the Federal government, we were guided by concerns for equity between all Malaysians, a concern to develop the poorer states (who also happened to be the oil rich states) and a concern for inter-generational equity. That oil was for special development purposes and it was not just meant for our generation.
Sabah and Sarawak joined Malaya to form Malaysia because of the promise of development funds. Yet today, despite being their massive resources, they are some of our poorest states.
Instead of being our ace up the sleeve, however, our oil wealth became in effect a swag of money used to fund the government’s operational expenditure, to bail out failing companies, buy arms, build grandiose cities in the middle of nowehere. Instead of helping eradicate poverty in the poorest states, our oil wealth came to be channeled into our political and politically linked class. Instead of being the patrimony of all Malaysians, and for our children, it is used as a giant slush fund that has propped up authoritarian rule, eroded constitutional democracy and corrupted our entire political and business class.
Our oil receipts, instead of being applied in the manner we planned upon the formation of Petronas, that is, according to its original developmental purpose, became a fund for the whims and fancy of whoever ran the country, without any accountability.
The oil that was meant to spur our transition to a more humane, educated society has instead become a narcotic that provides economic quick fixes and hollow symbols such as the Petronas Towers. Our oil wealth was meant to help us foster Malaysians capable of building the Twin Towers than hire foreigners to build them, a practice in which we preceded Dubai. I would rather have good government than grand government buildings filled with a demoralized civil service.
It is no wonder that we are no longer productive, no longer using our ingenuity to devise ways to improve ourselves and leap forward.
Malaysia is now an “oil curse” country.**
When I started Petronas in 1974, I did not realize I would see the day when I would wish we had not uncovered such bounty.
The story I have told is a reminder of the scale of the challenge of development. My generation of young people faced this challenge in the 1960’s and 70’s. You face it now. The story tells us that development is about far more than picking strategies out of a box.
You have kindly invited me to address a seminar on strategies for reinventing and liberalizing Malaysia’s economy. But the story of our squandered oil wealth reminds us that it was not for want of resources or strategies that we floundered. Our failure has been political and moral. We have allowed greed and resentment to drive our politics and looked the other way or even gone along while public assets have been stolen in broad daylight.
I encourage you to take up the cause of national development with the ingenuity that earlier generations of Malaysians brought to this task, but the beginning of our journey must be a return to the basics of public life: the rule of law, honesty, truth-telling and the keeping of promises.
The Malaysia we need to recover is one that was founded on laws and led with integrity. With the hindsight of history we know such things are fragile and can be overturned in one generation, forgotten the next. Without a living foundation in the basics you might sense an air of unreality around our talk of reinventing ourselves, coming up with a new economic model, and liberalizing our economy.
So before we can reinvent ourselves we need to recover our nation. That larger community, bound by laws, democratic and constitutional, is the context of economic progress, it is the context in which young people find hope, think generous thoughts and create tomorrow.
–
*Opening speech at
THE 1ST YOUNG CORPORATE MALAYSIANS SUMMIT
“Reinventing and liberalising malaysia’s economy:strategy and directions”
Saturday, December 12, 2009
—-
**The resource curse thesis
The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. In this light, the term resource curse thesis was first used by Richard Auty in 1993 to describe how countries rich in natural resources were unable to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources. Numerous studies, including one by Jeffrey Sachs and Andrew Warner, have shown a link between natural resource abundance and poor economic growth. This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the petroleum-producing countries. From 1965-1998, in the OPEC countries, gross national product per capita growth decreased on average by 1.3%, while in the rest of the developing world, per capita growth was on average 2.2%. Some argue that financial flows from foreign aid can provoke effects that are similar to the resource curse.
(Wikipedia: “Resource curse“)
Revisiting the middle income trap
I would like to revisit the argument of that speech to develop it further.
We are stagnating. The signs of a low growth economy are all around us. Wages are stagnant and the cost of living is rising.
We have not made much progress in becoming a knowledge and services based economy.
According to the World Bank, Malaysia’s share of GDP contributed by services was 46.2% in 1987. Ten years later, that share had grown by a mere 0.2%
Between 1994 and 2007, real wages grew by 2.6% in the domestic sector and by 2.8% in the export sector, which is to say, they were flat over that thirteen year period.
Meanwhile our talent scenario is an example of perverse selection at its most ruinous. We are failing to retain our own young talent, people like yourselves, let alone attract international talent to relocate here, while we have had a massive influx of unskilled foreign labour. They now make up 30-40% of our workforce. Meanwhile, alone in East Asia, the number of expatriate professionals here has decreased. Alone in East Asia, private sector wage increases follow government sector increases, instead of the other way around. We are losing doctors and scientists and have become Southeast Asia’s haven for low cost labour.
I said that we are in a middle income trap, stuck in the pattern of easy growth from low-value-added manufacture and component assembly and unable to make the leap to a knowledge-intensive economy. Regional competitors with larger, cheaper and dare I say, hungrier labour forces have emerged. China and India have risen as both lower cost and higher technology producers, and with giant domestic markets.The manufacturing sector which propelled the growth we enjoyed in the nineties is being hollowed out. There is no going back, there is no staying where we are, and we do not have a map for the way forward.
I am glad that the characterisation of Malaysia as being in a ‘middle-income-trap’ has been taken up by the government, and that the need for an economic story, or strategy, for Malaysia is now recognized. We stand in particular need of such a model because we are a smallish economy. We cannot be good at everything, and we don’t have to be.
We need only make some reasonable bets in identifying and developing a focussed set of growth drivers. It is not difficult to see what the elements of such a growth strategy might be. Whatever we come up with should build on our natural strengths, and our strengths include the following:
We are located at the crossroads of Asia, geographically and culturally, sitting alongside the most important oil route in the world.
a) We have large muslim, Chinese and Indian populations that connect us to the three fastest growing places in the world today.
b) We have some of the largest and oldest rainforests in the world, a treasure house of bio-diversity when the greatest threat facing mankind as a whole now is ecological destruction and the greatest technological advances are likely to come from bioscience.
c) We have the English language, a common law system, parliamentary democracy, good schools, an independent civil service and good infrastructure.
These advantages, however, are declining ones. Our cultural diversity is in danger of coming apart in bigotry, our rainforests are being logged out and planted over, our social and political institutions are decaying.
I have spoken at length on different occasions about the causes and consequences of institutional decline. The decline in our society and indeed in our natural environment, originates in a decline in our basic institutions. The link between these is corruption. The destruction of our ecosystem for example, is made possible by corrupt officials and business-people. The uncontrolled influx of unskilled labour is a direct result of corruption.
Dependencies and the young
These are problems we need to be aware of before we speak glibly about coming up with new strategies and new economic models. We need to understand where we are, and how we have gone wrong, before we can set things right.
You are young, well educated Malaysians. Many among you have left for other shores. Record numbers of Malaysians, of all races, work abroad or have migrated. Among these are some of our best people. They sense the stagnation I described. There is a certain lack of energy, ingenuity and “hunger” in the climate of this country that young people are most sensitive to. In the globalized job market, young people instinctively leave the less simulating and creative environments for those that have a spark to them.
How did we lose our spark as a nation?
We have a political economy marked by dependence on easy options and easy wealth. Like personal dependencies, these bad habits provide temporary comfort but discourage the growth of creativity and resilience.
I mentioned our dependence on low cost foreign labour.
The other dependence is something I played a part in making possible. This is a story I want to leave you with to ponder in your deliberations today.
Blessing and curse
Our nation is blessed with a modest quantity of oil reserves. As a young nation coming to terms with this natural bounty in the early 1970’s, our primary thought was to conserve that oil. That is why, when Petronas was formed, we instituted the Petroleum Development Council. Its function was to advise the PM on how to conserve that oil and use it judicially for national development. We knew our reserves would not last long.
We saw our oil reserves as an unearned bounty that would provide the money for modernization and technology. We saw our oil within a developmental perspective. Our struggle then, was to make the leap from an economy based on commodities and low cost assembly and manufacture to a more diverse, economy based on high income jobs.
Aware that we had an insufficient tax base to make the capital investments needed to make the leap, we planned to apply oil royalties to what you would call today strategic investments in human capital. whatever money left after making cash payments, allocations for development funds, etc, was to be placed in a Heritage Fund for the future. The Heritage Fund was for education and social enrichment.
In working out the distribution of oil between the states, who had sovereign rights over it, and the Federal government, we were guided by concerns for equity between all Malaysians, a concern to develop the poorer states (who also happened to be the oil rich states) and a concern for inter-generational equity. That oil was for special development purposes and it was not just meant for our generation.
Sabah and Sarawak joined Malaya to form Malaysia because of the promise of development funds. Yet today, despite being their massive resources, they are some of our poorest states.
Instead of being our ace up the sleeve, however, our oil wealth became in effect a swag of money used to fund the government’s operational expenditure, to bail out failing companies, buy arms, build grandiose cities in the middle of nowehere. Instead of helping eradicate poverty in the poorest states, our oil wealth came to be channeled into our political and politically linked class. Instead of being the patrimony of all Malaysians, and for our children, it is used as a giant slush fund that has propped up authoritarian rule, eroded constitutional democracy and corrupted our entire political and business class.
Our oil receipts, instead of being applied in the manner we planned upon the formation of Petronas, that is, according to its original developmental purpose, became a fund for the whims and fancy of whoever ran the country, without any accountability.
The oil that was meant to spur our transition to a more humane, educated society has instead become a narcotic that provides economic quick fixes and hollow symbols such as the Petronas Towers. Our oil wealth was meant to help us foster Malaysians capable of building the Twin Towers than hire foreigners to build them, a practice in which we preceded Dubai. I would rather have good government than grand government buildings filled with a demoralized civil service.
It is no wonder that we are no longer productive, no longer using our ingenuity to devise ways to improve ourselves and leap forward.
Malaysia is now an “oil curse” country.**
When I started Petronas in 1974, I did not realize I would see the day when I would wish we had not uncovered such bounty.
The story I have told is a reminder of the scale of the challenge of development. My generation of young people faced this challenge in the 1960’s and 70’s. You face it now. The story tells us that development is about far more than picking strategies out of a box.
You have kindly invited me to address a seminar on strategies for reinventing and liberalizing Malaysia’s economy. But the story of our squandered oil wealth reminds us that it was not for want of resources or strategies that we floundered. Our failure has been political and moral. We have allowed greed and resentment to drive our politics and looked the other way or even gone along while public assets have been stolen in broad daylight.
I encourage you to take up the cause of national development with the ingenuity that earlier generations of Malaysians brought to this task, but the beginning of our journey must be a return to the basics of public life: the rule of law, honesty, truth-telling and the keeping of promises.
The Malaysia we need to recover is one that was founded on laws and led with integrity. With the hindsight of history we know such things are fragile and can be overturned in one generation, forgotten the next. Without a living foundation in the basics you might sense an air of unreality around our talk of reinventing ourselves, coming up with a new economic model, and liberalizing our economy.
So before we can reinvent ourselves we need to recover our nation. That larger community, bound by laws, democratic and constitutional, is the context of economic progress, it is the context in which young people find hope, think generous thoughts and create tomorrow.
–
*Opening speech at
THE 1ST YOUNG CORPORATE MALAYSIANS SUMMIT
“Reinventing and liberalising malaysia’s economy:strategy and directions”
Saturday, December 12, 2009
—-
**The resource curse thesis
The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. In this light, the term resource curse thesis was first used by Richard Auty in 1993 to describe how countries rich in natural resources were unable to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources. Numerous studies, including one by Jeffrey Sachs and Andrew Warner, have shown a link between natural resource abundance and poor economic growth. This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the petroleum-producing countries. From 1965-1998, in the OPEC countries, gross national product per capita growth decreased on average by 1.3%, while in the rest of the developing world, per capita growth was on average 2.2%. Some argue that financial flows from foreign aid can provoke effects that are similar to the resource curse.
(Wikipedia: “Resource curse“)
Thursday, December 10, 2009
Friday, December 4, 2009
Thursday, November 26, 2009
Sieg Heil Economics-1 by Sakmongkol AK47
After 1969, the answer to Malay economic problem is solvable it was thought through command center economics and centralized planning. A variant to this command centre economics and centralized economic planning is we get to play god in choosing who we want to advance. What developed is not only siege mentality but could be more appropriately termed the bunker mentality. The high seats once occupied by the money changers are now seating officious and benevolent G Men. They are the public sector money changers in the temple of the New Deal for Bumiputeras. Once you are ensconced inside the bunker, comforted by the impenetrable walls, asking these people residing there to dismantle that edifice will not be a walk through the park. You are going to get stiff opposition and outright denunciations.
This led to an economics which I termed as Sieg Heil economics. You actually choose people who you want to succeed. They then become salutary examples of the Malay can-do-anything spirit if given the license, quota, monopoly chance.
Hence we saw the emergence of handpicked and anointed super Bumiputeras who were given quotas, exclusive licenses, protection and so forth. To this very day, this kind of sieg heil economics- where the chosen one is expected to raise his hands saluting Malay-can-do anything spirit is still happening. Witness for example the license given to Naza Group to build a RM600 million Matrade Centre in exchange for land valued to be worth RM15 billion. To me, we must add a new definition to the concept of usury in the Islamic Lexicon.
Groups of benevolent public officials huddled together to plan the industry and improvement of the Malays. Of course we didn't see the extreme form of centralized planning such as the Mahalanobis gigantic input output tables in Nehru's India planning every minutiae of economic life of the Malays. That kind of planning wasn't sustainable because that kind of planning was discovered to be not so successful. The more potent reason for its disavowal was because it conflicted with the idea of freedom.
Unfortunately, the failure of omnipotent economic planning hasn't stopped the expanded role of government. The expanded role of government took different forms such as nationalization by other means as in the formation of GLCs and even direct ownership of the means of production. It also took the form of regulatory activities.
Just like Roosevelt's New Deal, the new approach to solving the Malay economic problem was accepted by the public as successful because it did achieve successes for the Malays to shout in triumph. From a share of around 2% in corporate equity, by the end of 1990, the share of Bumiputera equity in corporate wealth was around 19%. Though short of the targeted 30%, it was hailed as a qualified success better than nothing. Out of the whole thing, emerged the acceptance that enlarged government participation in the economy is justifiable as a means to remedy the economic problem.
The idea of a caring benevolent government resonated well with the consuming public especially the Malays and definitely with policy makers and politicians. It gave them an added source of omnipotent powers. Hardly anyone would argue for example with the government's agenda to care for the Malays from the cradle to the grave. Indeed as is the customary practice, policy makers in almost all the Dewan Undangan Negeri will justify expanded government involvement and outright ownership of the means of production and therefore budget deficits as necessary to carry out welfare programs for the poor. Who would want to oppose such noble intention if it's meant for the poor?
Have the programs succeeded? That is another issue. Each year, the number asking for welfare assistance in the form of cash disbursements seemed to increase rather than decrease. Dissatisfaction over the actual disbursements has aggravated rather than subsided. The number partaking in the welfare disbursements in the PM's own parliamentary constituency is growing each year indicating that the number of poor people is increasing as the magnitude of the disbursements increases. Or the increasing number indicates, more are joining the cue to get free gravy from the gravy train.
It means that this expanded role of the government hasn't worked well. It worked well for those in the bunker who happen to be the very ones bitterly opposed to the dismantling of the Sieg Heil economics.
The Idea of Justice by Amartya Sen
Polymathic brilliance among scholars is now generally agreed to be a thing of the past. The advance of knowledge means that providing intellectual leadership in economics, political theory and philosophy, as John Stuart Mill did, is not possible. Academics need to pick a subject and burrow into it as deeply as possible. But someone forgot to tell all this to Amartya Sen.
An accomplished mathematician, a brilliant economist (he won the Nobel prize in 1998) and now a giant of contemporary philosophy, Sen has also worked for the UN on human development. As a young man, he kicked off by reshaping welfare economics. One of his earliest and most famous claims was that famines do not occur in properly functioning democracies with a free press, because the pressure of public opinion forces the fairer distribution of food. As so often with great public philosophers, a childhood experience profoundly shaped his outlook. As a nine-year-old, Sen witnessed first-hand the 1943 Bengal famine, when hundreds of thousands died in the British colony under the cover of a news blackout.
Democracy, especially in the shape of public argument and debate, plays a key role in Sen’s latest work. Public reasoning is the “primary hero” of The Idea of Justice. It is up to individuals to determine their own course through life, based on their own reasoning and reflection — in this sense Sen is an indefatigable liberal — but the tackling of injustice and the shaping of progress rely on a constant, engaged public conversation. For Sen, democracy is not, at heart, a set of institutions and rules. “The working of democratic institutions, like that of all other institutions,” he writes, “depends on the activities of human agents.”
It is clear that this volume is intended to be the “Essential Sen”. All the primary themes of his previous five and half decades of work are here, in synthesis. For those who know Sen’s work well, there is a strong sense of déjà vu about many of the chapters. But anybody sufficiently motivated to have read Inequality Re-examined or the doorstop treatise Rationality and Freedom will probably not mind.
The Idea of Justice, though, wouldn’t be a book from Sen if it did not also provide something fresh. And the most important new intellectual notion here is a working through of the fundamental distinction between two competing approaches to justice.
Most modern political philosophers are concerned with finding the right rules, institutions and social contracts for a just society. This school of thought — dubbed “transcendental institutionalism” by Sen — found its greatest 20th-century exponent in John Rawls, who built on foundations laid by Kant and Rousseau.
Sen characterises the institutionalists as engaged in a “long-range search for perfectly just institutions”, and a hunt for “spotless justice”.
For Sen, these philosophies are ultimately regressive, because societies full of actual human beings will never agree on a final, perfect set of institutions and rules. He quotes his old friend Bernard Williams, who wrote that “disagreement does not necessarily have to be overcome”. More immediately, the search for a perfect set of arrangements for society can distract us from tackling real-life, immediate injustices such as access to education for women in the developing world or action on climate change. The perfect becomes the enemy of the good.
The competing vision of justice Sen prefers is a “comparative” one, which examines “what kind of lives people can actually lead”. The heroes of the comparative pantheon are Condorcet, Wollstonecraft and Mill. For them, as for Sen, abolishing slavery or giving women the vote would free people to lead lives of their own choosing, even without creating a perfectly just society. The keystone of judging the lives people can actually lead is an assessment of what Sen has labelled their “capabilities” — or, as he explains, “the power to do something”.
Freedom, in Sen’s eyes, does not consist merely of being left to our own devices. It also requires that people have the necessary resources to lead lives that they themselves consider to be good ones. The focus on the individual has led some critics to accuse Sen of “methodological individualism” — not a compliment. Communitarian opponents, in particular, think that Sen pays insufficient regard to the broader social group. In response, Sen — usually an unfailingly courteous writer — becomes a bit cross. He points out that “people who think, choose and act” are simply “a manifest reality in the world”. Of course communities influence people, “but ultimately it is individual valuation on which we have to draw, while recognising the profound interdependence of the valuations of people who interact with each other”.
Nor is Sen easily caricatured as an egalitarian: “capabilities”, for example, do not have to be entirely equal. Sen is a pluralist, and recognises that even capabilities cannot always trump other values. Liberty has priority, Sen insists, but not in an absurdly purist fashion that would dictate “treating the slightest gain of liberty — no matter how small — as enough reason to make huge sacrifices in other amenities of a good life — no matter how large”.
Throughout, Sen remains true to his Indian roots. One of the joys of the volume is the rich use of Indian classical thought — the debate between 3rd-century emperor Ashoka, a liberal optimist, and Kautilya, a downbeat institutionalist, is much more enlightening than, say, a tired contrast between Hobbes and Hume.
Despite these diverting stories, the volume cannot be said to fall into the category of a “beach read”: subtitles such as “The Plurality of Non-Rejectability” provide plenty of warning. But for those who like their summer dinner tables to be filled with intelligent, dissenting discourse, the book is worth the weight. There’s plenty here to argue with. Sen wouldn’t have it any other way.
Wednesday, November 25, 2009
In pursuit of the greatest happiness
In pursuit of the greatest happiness
GDP is not the be-all and end-all of our existence; it talks of value added to economies but has little to say about anything else
GDP is not the be-all and end-all of our existence; it talks of value added to economies but has little to say about anything else
Richard Layard and Joseph Stiglitz (one a Nobel Laureate, the other one of those who tried to jam some economic understanding into my brain) rightly tell us that gross domestic product isn't in fact the be-all and end-all of how we should be measuring life, the economy and everything. They also, again correctly, point to various alternative ways in which we might measure, thus set as our target, things which are more important than merely the value added in an economy.
What is always interesting is to take such suggestions and follow them to see where they lead: so let's do exactly that with the proposal from the professor at the old alma mater, my Lord Layard.
So I propose a campaign for the Principle of the Greatest Happiness. This says I should aim to produce the most happiness I can in the world and, above all, the least misery. And my rulers should do the same.
Sounds like a plan, so, using only the professor's own work, where will this lead? Specifically, where will this lead us if we try to design a tax system which accords with this principle (that's the "rulers should do the same" bit)?
Vital clues can be found in his book Happiness, something which if you haven't read you probably ought to. There are two major points made about the taxation of incomes in it and we'll add just one commonplace observation from the world around us to reach what we must assume will be the taxation system that will produce the maximal amount of happiness: the top fluffy kitten count, if you will.
The first point is that happiness does indeed rise with income – but only to a certain point. That point varies a little, dependent on where you are and with exchange rates and so on, but a reasonable estimate is about £15,000 a year. Less than that and earning more money makes you happier simply because you're earning more money. More than that and you might be happier or not, but it's not the extra money that's making you so.
Excellent. So the first and most obvious principle of our high kitten-cuteness tax system is going to be that we're not going to tax incomes below £15,000. This would clearly make people less happy, as it would take them below that number where higher incomes make them happier.
The second point is a little more complex. The contention is that when we earn more than £15,000 we create a kind of pollution. It's never quite really nailed down: one way of describing it would be jealousy, the green-eyed god, over the fact that others have more than we do. Layard's description is more gentle, in that others having more impels us to emulate them; we try to keep up with the Joneses. In doing so we strive for higher incomes, despite the way that these will make us no happier, at the expense of the many other things that will make us happier – time with family, with friends and so on.
Thus those earning more than £15,000 are imposing an externality of unhappiness on those around them: and we all know what happens to such negative externalities in welfare economics. We tax them! This is exactly the same economic argument behind carbon taxes, the congestion charge and air passenger duty. The polluter must pay the social cost of their pollution. Turning the argument around the other way, that positive externalities should be subsidised is exactly the economic argument used for tax contributions to basic science and such things as universal primary schooling. There's nothing odd or strange about the economics here, only the aspect of life to which it is being applied.
Layard's estimate is that the unhappiness caused by those on higher than £15,000 incomes is some 30% of the amount of those higher incomes. Someone on £1,015,000 a year is causing £300,000 of unhappiness elsewhere while someone on £45,000 is causing £10,000s' worth (umm, OK, I'm using one third not 30%, but you get the picture). We should thus tax the two, respectively, £300,000 and £10,000 for the externality of the non-fluffy kitten time they are imposing on those around them.
Our third point is simply the commonplace that people do not like to pay taxes. Yes, yes, I know, there are endless screeds here at Comment is free insisting that no, really, offering up the sweat of our brow to the state is such a pleasurable experience that we'd all do it willingly, without the compulsion of law. Actually, this seems not to be the case. Last time I got the figures from the Treasury (for the tax year 2005), it turned out that only five people across the entire nation had voluntarily paid more than was their legally demanded due – and four of those were dead. So if we adopt the entirely uncontroversial economic idea of revealed preferences (don't look at what people say but what they do) we can be sure that for the vast majority of the population taxes are not something paid for the joy of them. They are, in fact, something which make us unhappy.
This now gives us the details which we need to build our tax structure for optimal happiness. We can and should tax those who cause unhappiness in others by the value of the unhappiness they create through their higher incomes. We should not tax more than this for we will be creating unhappiness by doing so. Finally, we should not be taxing incomes below £15,000 a year because taking money below that sum will again increase unhappiness.
So our tax system with the highest fluffy-kitten count, the one that will "produce the most happiness" as our rulers should strive to do, just as we ourselves should, is a flat-tax system of 30% with a high personal allowance of £15,000 a year.
While this is, of course, very different from our current tax system, it is still progressive (yes, it is: work out the maths for yourselves – as incomes rise so do the portions of those incomes paid in tax) and it ticks all the boxes that will lead to maximal happiness.
In the UK, the US and Germany, happiness has been stagnating for decades. A civilisation based on the Greatest Happiness Principle would be a great improvement. Yes, indeed it will, as long as we actually accept the implications of that Great Happiness Principle as laid out for us by one of the great researchers into that principle, Richard Layard himself.
The only conundrum left is that there are only two organisations that I know of (that I am a member of both of them is entirely coincidence) which actually have as suggested policy anything close to this top cute-kitten system: Ukip and the Adam Smith Institute. But then the reason that I am a member of both is because they are both well ahead of the progressive crowd, in so many important ways.
Sunday, November 22, 2009
The Malaysian Resource Curse - William Leong Jee Keen
Source:
The Malaysian Resource Curse
Pump priming : Wrong Diagnosis
Prime Minister Najib Tun Razak announced that the government will prime the economy with an additional RM1 billion monthly till the end of 2010 in a bid to bolster the country’s economy. Unfortunately, allocating RM200 billion under the 2010 budget or pump priming the economy will not return Malaysia to economic competitiveness. Malaysia’s economy was ill long before the sub-prime implosion and the consequent global financial crisis. Najib Tun Razak will not be able to redress Malaysia’s economic woes unless and until he and the Barisan Nasional Government has the honesty and courage to deal with the Malaysian Resource Curse and have the political will to carry out the necessary fundamental structural reforms.
The Dutch Disease
Malaysia has exhibited the classical symptoms of the “Dutch Disease” or “the Resource Curse”. The term “Dutch Disease” was coined in 1977 by the Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959, culminating in the world’s biggest public-private partnership, N.V. Nederlandse Gasunie between Esso (now ExxonMobil) Shell and the Dutch government in 1963 only to see the rest of its economy shrinking. It refers to the paradox that countries with an abundance of natural resources specifically resources like minerals and fuels, tend to have less economic growth and worse development than countries with fewer natural resources. The Dutch Resource Curse is an economic concept to explain the relationship between the exploitation of natural resources and a decline in the manufacturing sector combined with moral fallout. The concept explains that an increase in revenues from natural resources will de-industrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive. It also leads to the public administrators getting entangled with business interests.
Political Corruption
One of the negative effects of the Dutch Disease is that it is often easier for a natural resource rich government to maintain authority through allocating resources to favoured constituents than through growth-oriented economic policies and a level, well regulated playing field. Huge flows of money from natural resources fuel this political corruption. The government has less need to build up the institutional infrastructure to regulate and tax a productive economy so the economy remains undeveloped.
Rent Seeking Behavior
Another negative effect is the creation of rent seeking behavior. “Rent seeking” in this sense does not mean the usual payment of a lease but stems from Adam Smith’s division of income into profit, wage and rent. Rent seeking behavior is distinguished from profit seeking behavior in that in profit seeking behavior, entities seek to extract value by engaging in mutually beneficial transaction. On the other hand, in rent seeking behavior, entities seek to extract uncompensated value from others without making any contribution to productivity through manipulation and exploitation such as by gaining control of land and other pre-existing natural resource or by imposing burdensome regulations or other governmental decisions that may affect consumers or businesses.
Loss of Entrepreneurial Skills
The rationale for identifying rent seeking as the problem in economies suffering from the Dutch Resource Curse is that resource revenues constitutes vast wealth and when individuals or groups of individuals attempt to take control over it, they become less entrepreneurial. Rent seeking activity involves several detrimental aspects. First the attempts themselves are time consuming and draw valuable labour hours from productive, innovative activities. Talent is wasted in the pursuit of existing wealth instead of being employed at producing new growth. Second when the activities are successful, the wealth may be disposed of in ways that are not conductive to growth. If the wealth is spent for personal consumption abroad for the successful rent seeker and it is not invested in domestic technological progress and human capital, growth suffers. Few individuals acquire wealth to act for the common good. The country’s resource rent is converted to luxury items, not research and development. So growth stagnates. Rent seeking degenerates into corruption which discourages investment and limits growth.
Rich become Richer
Think of Ghana and Zambia, countries abundantly endowed with minerals or oil and gas has swung from booms to busts and back again. Their politics are hopelessly corrupt. The central government, far from being an effective regulator, serves as the handmaiden to a group of powerful oligarchs, making it easier for the rich to become richer while the poor become poorer. Now think of Malaysia.
The Malaysian Resource Curse
Malaysia’s economic growth is a three legged growth model based on:-
Manufacturing trade
Commodity trade
Public sector economy
Petroleum and natural resources provides 40% of the Malaysian government’s revenues. This in turn supports the largest public sector economy in Asia with 27% of the GDP. Malaysian manufacturing exports are under structural pressures and are losing competitiveness. The real effective exchange rate (REER) appreciated 11% between 2005 and 2008. This has led to competitiveness erosion of the manufacturing sector. The natural resources sector provided the revenues to allow the Government to sustain economic growth through government spending. This has reduced the urgency to increase productivity and allowed marked inefficiencies to set in; the erosion of education standards, distortion and suppression of the labour market and sustaining unprofitable and ineffective affirmative action policy projects. The end result is the erosion of manufacturing exports and a fall in inward FDI that will undermine the economy.
Underperformance in Education Standards
The oil and gas revenue driven economic growth lulled UMNO and the Barisan Nasional Government to misconstrue the importance of maintaining excellence in our education system. This allowed misguided and mismanaged policies to turn our schools and universities into factories churning out unemployed and unemployable graduates. This has resulted in our nation suffering a severe underperformance of our education standards. Malaysia tertiary enrolment and completion ratio has lagged that of some of our Asian counterparts. At 28.6% and 15%, Malaysia’s gross tertiary enroll ratio and completion ratio are 7% and 6% lower than the average expected of economies with similar level of GDP per capital. This means Malaysia is having a tertiary skills shortage. This point to Malaysia lacking the necessary skills and knowledge human capital essential to move the Malaysian economy up the value added chain.
Skills Mismatch
With the labour force growing, unemployment rate has stayed range bound at around 3% and with the skills shortage, graduates surprisingly continues to make up an increasing proportion of the unemployed group from 15.2% in 2000 to 25.1% in 2007. The Government in answer to a question I posed in Parliament gave the following breakdown of unemployed graduates:-
· In 2004, there were 4,594 unemployed graduates of which 163 were Chinese, 207 were Indians and 4,060 were Malays;
· In 2005, there were 2,413 unemployed graduates of which 31 were Chinese, 70 were Indians and 2,186 were Malays;
· In 2006, there were 56,750 unemployed graduates of which 1,110 were Chinese, 1,346 were Indians and 50,594 were Malays.
· In 2007, there were 56,322 unemployed graduates of which 1,348 were Chinese, 1,401 were Indians and 49,075 were Malays.
· In 2008 (as of June) there were 47,910 unemployed graduates of which 1,403 Chinese, 1,569 Indians and 49,075 were Malays.
This suggests that we have a problem of graduate skills mismatch.
Singapore in comparison has its universities design their curriculum in collaboration with the industry players. The majority of the students are offered jobs before they graduate and 82% are employed within 3 months of their graduation.
Labour force a key business constrain
The education gaps have led to skills shortage and skills mismatch. 42% of Malaysian businesses rate the unavailability of a skilled labour force as the most severe business constraint compared to 37% in East Asia and 35% globally. The shortage of skilled labour is compounded by shortsighted and misconceived immigration policies. These policies instead of attracting the talented and the best and the brightest, discourages and prevents them from working in the country. The rejection of Vijay Singh’s citizenship application and the resulting loss to the nation of a world golf champion is one example. The thousands of tertiary graduate and professional foreign spouses of Malaysians being consigned by these immigration policies to become housewives is another. These same policies are the causes for the severe brain drain suffered by our nation. Due to the skills shortage, we will be unable to move the economy up the value added chain.
Falling FDI
The net inward FDI in Malaysia has been in decline. As net FDI in the region (China, India, Singapore and Thailand) continues to climb, Malaysia has experienced a downward trend from the peak in the early 1990s and is now in negative territory. The net FDI stood at -3.8% of GDP in June 2009 from +2.4% of GDP in June 2004. Malaysia has fallen from 67th in the Inward FDI Index in 2006 to 71st in 2008. The outward FDI has exceeded the inward FDI for the past 3 years and this trend is expected to continue and increase in the future.
Loss of Manufacturing Trade Surplus
Malaysia manufacturing trade surplus of machinery and transport equipment fell from USD 10.5 Billion in 2000 (11.2% of GDP) to USD 9 Billion in 2008 (4.1% of GDP). In comparison China had a trade surplus for the same period from USD 9.3 Billion to USD 231.3 Billion, Korea USD41.2 Billion to USD 119.1 Billion, Taiwan USD 19 Billion to USD 45.1 Billion and Singapore from US 11.2 Billion to US 22.9 Billion.
Suffering in Silence
We are in the throes of the Malaysian Resource Curse. The rent seekers have privatized and created monopolies of every conceivable resource and amenity in the country from roads, to bridges, water, electricity, disposal of rubbish and sewerage. Petronas revenues have been used to pay for mega personal enhancing projects such as the Petronas Twin Towers where US 1.6 Billion (RM5.6 Billion) was spent to enjoy the brief moment of fame in owning the tallest building in the world. Petronas money was again used through 40% equity in Putrajaya Holdings to pay the total costs of building the new Federal administrative capital of Putrajaya amounting to RM11.831 Billion. There many more of such project in the past decade. The public have been suffering in silence as the Malaysian Resource Curse takes its toll.
Prescription
Malaysia no doubt is affected by the global financial crisis but its problems have a deeper underlying cause. It is this underlying cause that has to be addressed. The Malaysia Resource Curse must be exorcised. There are many resource rich countries that have escaped and avoided the disease.
The key is governance. Well governed countries find ways to insulate their economies from the down side of commodities and natural resources trade. Resource rich countries such as Norway has shown that this can be done by adopting straight forward economic fundamentals, sound monetary policies, and having open trading and investment regimes. The enforcement of laws against corruption is a basic requirement. The strengthening of political and economic institutions by giving effect to the democratic institutions and constitutional guaranteed fundamental liberties is another. Investing in education and infrastructure will increase competitiveness of the manufacturing sector. Sadly these have been ignored by the Prime Minister in his push for pump priming.
A global investor said that if Najib and Barisan Nasional do not recognize the Malaysian Resource Curse and do not have the political will to address it, neither he nor any other investor is going to put money into Malaysia. Without the structural reforms, pouring RM 1 billion a month into the rent seeking economy is just pouring good money down the drain. How long can the Malaysian public continue to suffer in silence?
William Leong Jee Keen
Member of Parliament Selayang
7th October 2009
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