Monday, September 1, 2008

The Economic Push For Political Change in Malaysia

Malaysians are more rational than we normally give them credit for. There is a new wave of political change that is sweeping through this country and this change is driven by forces that go beyond the mere frustrations of citizens with corruption and poor governance.

If there is just one powerful idea that has strong economic and social benefits for Malaysia and which has been the key to the electoral success of Pakatan Rakyat, it is the idea of removing racial discrimination in employment and business opportunities for all citizens, regardless of race.

Why is this solution to Malaysia's economic and social problems so powerful, rational and academically justified?

For many Malaysians (see a recent government-commissioned poll), it is almost intuitive and common sense to accept that equal opportunities and market incentives for all will bring more economic prosperity for the country than the costs of carrying out this liberalised policy.

The difference between the situation 5 years ago and today in 2008 is that more and more citizens across the racial and class divides are becoming convinced of this solution. The voting outcomes of the GE of 8 March and the by-election of 26 August in Permatang Pauh testify to this wave of public opinion that is in favour of economic and political change. Intelligent voters have made their voices loud and clear that they want a drastic change in vision for the nation!

With Malaysia becoming a net oil importer by 2014 and the coming global economic storm, how can an outdated economic model like ours continue to thrive? I suppose we can still depend on oil export revenues before it runs out and low value-added manufacturing exports for the next five years. But honestly, what can Malaysia offer to the global economy dominated by new giants such as China, India and Russia? Palm oil and biodiesel?

Rational Racism

For me, as a practising offshore economist, I have found further confirmation of the urgent need for Malaysia to change its race-based politics and race-based economics policies. It was found when I read Tim Harford's book "The Logic of Life." Chapter 6, The Dangers of Rational Racism, in particular, talks about rational racism as found in America.

Supported by class room experiments and statistics, Harford explains that racism practised by American employers in their recuitment process against African Americans is quite rational because it saves employers time and trouble to treat African Americans as "part of a group that's known to be educationally struggling, rather than taking a closer look at their individual qualities."

The interesting part of the chapter that resonates on Malaysia is when he cites the work of University Chicago economist and Nobel laureate Gary Becker, who wrote The Economics of Discrimination. Becker found that while discrimination hurt the incomes of both the employer and unemployed, the extent of economic damage for the country as a whole depended on the size of the minority group relative to the majority group.
In America, 12% of the population consists of African Americans or blacks while the rest are mostly white. Even a moderate amount of discrimination against blacks by white employers diminishes the economic well-being of the blacks while the white majority do not suffer much economic collateral. Competitive pressures could take a long time to favour white employers who are colour blind in their employment practices.
However, Becker points out that in a different racial structure such as South Africa, where the blacks who formed 80% of the population, were ruthlessly discriminated against under the Apartheid regime, the practice of race-based economic policies caused major economic underperformance for the country as a whole.

Now coming back to Malaysia, where the minority group forms a whopping 40% of the population, it is clear that the impact of the removal of race-based economic policies will have tremendous economic benefits for the whole country. Currently, employment policies that maintain certain race-based quotas have interfered with the efficient system of market incentives. Moreover, this inefficiency (or misallocation of human capital) is magnified in non- profit maximising organisations like the civil service and most government-linked companies where the racial profile of employees are disproportionately represented.

Prognosis: There are two types of economic leakages in the Malaysian labour market arising from the current race-based economic policies. First, there is a brain drain of professionals (both non-Malays and Malays) who have left the country to earn higher salaries overseas. Many of these people have either migrated or are permanent residents in their host countries.

Second, there is the economic leakage caused by low morale in the workforce as workers are not motivated to compete with the best and the brightest peers (locally and globally). It also does not help that foreign multinational companies perceive Malaysian workers to have generally suppressed their own productivity through low self-confidence.

Conclusion: Given the challenging economic environment that Malaysia finds itself, I think the time is already overdue for race-based economic policies to be dismantled so that the labour force gets a breath of fresh air and free market incentives are provided for each and everyone to compete with the best brains and the most hard-working peers. (In fact, Becker's hypothesis was that free markets, through the profit maximizing incentive, are the best way to combat racism and bigotry).

Rational racism is no longer rational when the minority group is 40% of the population. The economic wealth generated from meritocratic labour and capital policies will be large enough for all Malaysians to share for many years to come. Not least because foreign investment capital (which seeks the highest returns at the lowest costs) will come to invest in a more vigorous and motivated Malaysian workforce.

P.S. The problem with labour economics is that changes in policies take time to reap positive results in terms of higher productivity and wages. This is why Pakatan Rakyat, which has a mandate to change labour laws, should continue to be a viable alternative government. This will put political pressure on the incumbent policy makers to push through economic reforms or else be replaced by a more efficient government. However, the real pressure for reform is not political but economic as higher inflation of 5-6% in 2009 will reduce the purchasing power of wage earners.

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