Friday, June 13, 2008

Malaysia's Biggest Long Term Economic Problem Comes Home To Roost

In macroeconomics under the reknown Solow growth model, the standard of living in a country is dependent on the productivity of her people. And productivity is dependent on how much wealth we can generate from three things: (1) people, (2) capital and (3) land.


Until today, no economist has ever come up with the true reason for people to become economically productive. However, many economists agree about what are the right conditions or environment in which people tend to perform their best. That environment is indisputably a market-driven economy where people who work hard and smart will be duly rewarded by the market place and not by the government.

In fact, the best thing the government can do (apart from helping the underpriveleged and leveling the playing field for true competition), is to enhance the effectiveness of the market economy and ensure there is trust among employers, employees and institutions. The free market system of meritocacy is a system that is set up by Adam Smith's invisible hand, not by the hand of any bureacrat or well-intentioned politician.

So Pakatan Rakyat's call to revamp the NEP, eradicate corruption at its roots and enhance transparency are all economic measures that Malaysia should have done ten years ago when China and India were not as globally powerful as today (and oil prices were still low).

The free-floating of the Ringgit to a stronger value will also help the manufacturing-dependent economy to stand on its own feet. But in the world of 2008 when oil prices are US$130-140 per barrel and rising, Malaysia's grace period of living in a sheltered castle are over.

Not only are manufacturers and transport companies going to face tougher times with higher market prices for fuel, but the services component of the economy will have to deal with higher prices and more prudent consumers.

At the end of the day, the government's micro-managing efforts to keep interest rates low and administer fixed prices and minimum wages for the lower income groups will delay the economy's ability to be more flexible and adjust to the tougher economic times ahead.

This is why I believe the long-run problems of economic productivity which Malaysia should have fixed when the Asian tigers of Chindia were just infants have now come to roost. The best remedy now is to have a complete change in the mindset of the people through a total reform of the NEP so that trust among the races is established and a race-based system of patronage is totally replaced by respect for hard work and true innovation.

Once this human capital issue is addressed, then other micro issues can be settled efficiently following on the same logic. However, if the government continues to debate whether English should be maintained in the teaching of Science and Maths, then it is obvious Malaysia does not even have the ability and the DNA to speak the same "language" as global players.

Thus, politicans from both sides of the House should cease their politicking and start discussing policies intelligently with a view of how to prosper this nation in the next ten to twenty years. Panic efforts to prevent a sharp economic slump through populist policies in the short-term may just bring the country back into the besieged fortress of protectionism.
In other words, short-term pain for long-term pain.

1 comment:

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