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Gregore Pio Lopez, Australian National University.
The works of Angus Maddison on world economic history identifies that economic growth only took off after the British Industrial Revolution. Maddison notes that from the year 1000 – 1820, advance in per capita income was a slow crawl with per capita income rising by about 50 per cent but population increased fourfold. Since 1820 however, per capita income exceeded population growth with per capita income rising by more than eightfold and population more than fivefold. Maddison also notes that these growth rates were concentrated in Western Europe. Michael Spence, in a lecture based on his latest book, The Next Convergence: The Future of Economic Growth in a Multi-Speed World quotes the works of Maddison and points out that the higher growth rates since the British Industrial Revolution benefited approximately only 15 per cent of world population, namely the elites in Western Europe and its European offshoots. However, since World War II (WWII), far more people in far more geographical regions have benefited from this open international economic order created after WWII. Why is this so? Elhanan Helpman captures the above the phenomenon brilliantly with this quote in his book The Mystery of Economic Growth. “…What makes some countries rich and others poor? Economists have asked this question since the days of Adam Smith. Yet after more than two hundred years the mystery of economic growth has not been solved…” The growth mystery has yet to be solved but economists have after two hundred years, isolated what are the determinants of long term sustainable economic growth. Economists divide these determinants into two categories: deep and proximate determinants. In general the deep determinants are institutions, geography and trade while the proximate determinants are capital in all its forms (resources, finance, knowledge, ideas, and technology). The combination of the deep determinants when done correctly facilitates the proximate determinants which lead to productivity rising faster than wages. This leads to welfare gains to all stakeholders in the economy. However, more often than not, countries get this wrong, hence the disparity in economic performance. The role of institutions in explaining the difference in economic performance was not always explicit. It was Douglass North who first forcefully and successfully advocated the primacy of institutions in explaining the difference in cross – country performance. In summary, the ability to combine the various determinants of growth and the factors of production
In post WWII. human capital accumulation (entrepreneurship. geography. In 1993. Now IF we revisit the determinants of growth and agree with the view that proper institutions are the meta-structure that determines long term sustainable growth. capability constraints (weak human capital. then the logical response is to reform Malaysia’s institutional set-up as it must be the deepest determinant of what is hindering economic growth. The World Bank through its Malaysia Economic Monitor has also produced a series of reports identifying the same key problems that are effecting Malaysia’s growth. Malaysia achieved this spectacular performance from 1967 to 1997. ideas. East Asian economies. Mat Zin and Tham (2011). knowledge and innovation) and investment in factors of production — physical and technological — can be mitigated. Among the more prominent ones are Tiger Economies Under Threat by Yusuf and Nabeshima (2009) and Malaysia’s Development Challenges – From Middle Income to Advance Economy by Hill. This was a very brave move but a necessary one by the Prime Minister as he acknowledged publicly the failures of Malaysia’s current economic model in order to demonstrate urgency for reforms. productivity ceilings and institutional degradation and external factors such as a sluggish global economy caused by the global financial crisis (GFC) and the rise of neighbours in the region in contributing to the declining growth trajectory. Since the East Asian Financial Crisis (EAFC) of 1997/1998. entrepreneurial base and innovative capacity) . which was far better than the rates achieved since the Industrial Revolution. including Malaysia. overcome. these economic growth benefited the poorest in society. Challenges and opportunities related to trade. identified eight miracle East Asian economies – including Malaysia – that had real GDP growth of around or above four per cent from 1960 to 1990. . The East Asian Miracle: Economic Growth and Public Policy. synergised and optimised through the correct institutional structures and arrangements. The NEM – 1 identifies domestic factors such as weak investor confidence. Malaysia was also one of thirteen countries identified by the Growth Report to have recorded average growth rates of more than 7 per cent per year for twenty five years or more. There are other studies that have come to the same conclusion. Institutions function as the meta-structure within which other determinants are able to function properly. This was confirmed by Prime Minister Najib Razak himself in the publication of the New Economic Model – Part 1 (NEM – 1). appears to have got this right. the World Bank in its publication.optimally relies on the proper institutional set-up. More importantly. Malaysia’s economic performances when compared to previous decades are lacklustre and most macroeconomic indicators are trending downwards (declining rates of growth). notwithstanding the dissenting views.
Institutions and the technology employed determine the transaction and transformation costs that add up to the costs of production… Geoffrey Hodgson simplifies this to: …systems of established and prevalent social rules that structure social interactions. I add ideology to these key terminologies. What are institutions and how do we go about analysing them? There is no consensus of what is meant by institutions or institutional analysis. and self imposed codes of conduct). something that Mr. Najib Razak has ironically neglected in his signature policies – 1Malaysia. regressed in some ways and is suffering from the consequences. are favourable in the case of Malaysia. Therefore. informal constraints (norms of behaviour. laws. and firms (and other organisations) are thus all institutions… The key terminology here are norms and incentives. What has changed about these countries? They have all undertaken institutional reforms: China since 1978. systems of weight and measures. institutions provide the incentives that structure human behaviour in a society. North defines institutions and its impact on economic performance as: …Institutions are the humanly devised constraints that structure human interaction. geography and trade. They are made up of formal constraints (rules. we’ve established that institutions play an important role in driving growth.g. conventions. India since 1992 and Vietnam since 1986 and are reaping the benefits while Malaysia has stalled in its institutional reforms since the 1990s. Malaysia has abundant natural resources. and their enforcement characteristics. Analysing institutions and the role it . Together they define the incentive structure of societies and specifically economies. money.This view is further strengthened as the other deep determinants. law. Language. is shielded from natural hazards and is located strategically both geopolitically and economically. The NEM – 1 also reports that regional challenges (e. constitutions). China. The above points stress the importance of institutional reforms in Malaysia. Thus far. India and Vietnam) are a cause for Malaysia’s declining economic performance. Malaysia has also benefitted tremendously from being an open economy especially in the merchandise sector. table manners. Incentives (and disincentives) I define to include psychological and material benefits and penalties. I use the most widely quoted definition on institutions. Government Transformation Programme and Economic Transformation Programme. We’ve also established what constitutes institutions broadly.
norms. states. it is attainable for developing countries with the “right mix of ingredients. they can each be analysed. reflected and elaborated further on his extensive experience working with developing countries on growth issues in his latest book by affirming the findings of the Growth Report and emphasising two important characteristics for developing countries to ensure long term sustainable growth – the role of political leadership and democratic norms. 2. rules. communities Level 3: Institutional sectors – financial system. Each component is interrelated with every other component. system of research Level 4: Organisations Level 5: Outputs and performance – statues. However. and changes in one are highly likely to have some effect in bringing about change in each of the other components. quantity and quality of industrial products. The governing group has values that cause it to try to act in the interest of the vast majority of the people (as opposed to themselves or some subgroup. the Chair of the Growth Commission. the ability to exert influence. corporate hierarchies. however defined) .plays in economic growth is a challenge when there is no consensus on what are institutions and its definition is very broad. networks. associations. Once compartmentalised. the nature. Level 1: Institutions – ideology. Hollingsworth suggests that institutions are best compartmentalised by the strength of their resistance to change and by extension. He suggests four characteristics for governments that are necessary requirements to underpin long term growth: 1.Hollingsworth provides an approach which is meaningful for our purpose. administrative decisions.” Countries need leaders who are committed to achieving growth and who can take advantage of opportunities from the global economy. They also need to know about the levels of incentives and public investments that are necessary for private investment to take off and ensure the long-term diversification of the economy and its integration in the global economy…” Michael Spence. business system. habits and values Level 2: Institutional arrangements – markets. According to the Growth Commission: “…fast sustained growth is not a miracle. conventions. systems of education. The government takes economic performance and growth seriously. Hollingsworth notes that: The five components (levels) are arranged in descending order of permanence and stability with Level 1 being the most enduring and persistent compared to all other components.
High levels of income inequality in Malaysia in general but more so within the Malay community proves this. producing a culture of risk aversion and a lack of creativity. From the literature we can infer that the ideology of Malay/Muslim supremacy has provided the perverse incentives that has manifested itself in many ways. There is consensus that Malaysia needs extensive economic. Malaysians accepted this trade-off – restricted freedom for economic growth. Astute observers of Malaysia know the reasons why the present administration and the ones before were unable to make fundamental reforms in Malaysia. This is also affirmed in academic circles. political and social reforms.Crony capitalism: Affirmative action in the name of Malays have become a smokescreen for crony capitalism.Institutional degradation: The deterioration in the quality of Malaysia’s institutions. During the boom years. This is all the more evident IF we agree that institutions are key to long term growth. this has changed as expected. 4. . high levels of investment. Economic freedom is present and is supported by the legal system and regulatory policy Manifestations of Malay/Muslim Supremacy Malaysia is classified as a non – democratic state by all international index measuring quality of democracies. and a strong future orientation. . therefore the natural demand for reforms and by extension freedom. these reforms must come from a government with the four characteristics identified above. and the expansion of the non-transparent Government Linked Corporations (GLCs).3. Also. the politicisation of the civil service. The government is competent and effective and selects a viable sustained-growth strategy that includes openness to the global economy. particularly during Mahathir’s years such as the lack of independence between the branches of government. The government has not delivered on growth. The more critical ones are: . IF we agree with Spence. This has much to do with the ideology of Malay/Muslim Supremacy as defined by United Malays National Organisation’s (UMNO) and accepted by large swaths of Malaysians. Since 1997/98. not only Malays) corruption. Muslims and non-Muslims alike. Affirmative action is the instrument for rampant elite-based (elites from all races.
There are not only problems on the supply side of the market for skills. openness . the quality of the human capital base in Malaysia is suspect. Internal competition works well when there is good governance. where firms may not be competitive enough to offer higher wages. Malaysia’s focus on the ex-post equalisation of outcomes across ethnicities rather than ensuring effective ex-ante equalisation of access to opportunities has had important direct efficiency implications. . capital. Fiscal relationships between federal-state-local also demonstrates institutional failure.. This is quite distinct from external competitiveness. This is a key disconnect in the reform rethoric in the ETP and GTP. on which front Malaysia has scored relatively well in the merchandise sector given its stage of development and the nature of its manufacturing processes which is still dominated by competitiveness identified by low cost rather than high value. To strengthen public service delivery. A bigger and more important challenge than competency is internal competition. The need to remove UMNO to create a new “people based ideology” First let me put forward what I think are the two most critical issue affecting Malaysia: competency and competition. local communities need to be empowered. Internal competition refers to the process of allocation in factor (labour.Excessive centralisation: An interesting institutional feature is the lack of decentralisation in the country which is nominally a Federation and the top-down approach in public policymaking. This is due to the quality of education from pre-school through tertiary and on-the-job.Race based affirmative action: Race-based affirmative action in itself is recognised as one of the important reasons for Malaysia’s declining economic performance. The obsession with centralising policy making is also evident in lack of information sharing both within government and with the public.Feedback mechanisms: Related to Malaysia’s top-down approaches is an almost complete disregard of the monitoring and evaluation function. affecting growth by distorting incentives and thereby the competitive process. but also on the demand side. . As a result there is little feedback from outcomes into policy design. land) and product markets. In relation to competency. It is linked with ethnicity issues and is exacerbated by the outflow of high-skilled individuals and affected by the inflow of low-skilled labour. The market for skills itself is also problematic in that the price mechanism does not work adequately and this is were wage setting issues play a role.
However. There are many examples to illustrate Malay/Muslim Supremacy but I use one that is cited most often as holding back Malaysia’s economic reforms – affirmative action. All of these are also needed to produce effective competition for good ideas and good policies as well as competition in the political arena. habits and values is the “ideology” of Malay/Muslim Supremacy. since it is deeply embedded. Malaysia’s present institutional equilibrium is a reflection of the strength of the adherents of Malay/Muslim supremacy. More importantly. rules. conventions. Hence this ideology resides in Level 1 and is more important than all other elements of Level 1. This definitely means undoing the manifestations of Malay/Muslim supremacy as discussed earlier. the Malay/Muslim ideology provides psychological and material benefits to its adherents. It relates to the need for deregulation. This makes its a potent force for groups that rely on this ideology. As the Prime Minister of Malaysia always comes from UMNO it will be impossible for him/her to undo the cornerstone ‘ideology’ of his/her political party and its adherents in Barisan Nasional (which includes Malays and non – Malays. Can UMNO implement these reforms? My hypothesis is that the present leadership in Malaysia within the Barisan Nasional framework is incapable of institutionalising reforms as the present leadership does not meet the criteria set out by Spence. it is also extremely difficult to counter when needed.) The logic above is discussed extensively in the political science literature. This of course challenges the basic idea of meritocracy and affirmative action in Malaysia. Affirmative . To reform these will ostensibly mean changing the embedded incentives and thereby institutions in Malaysia. it is unable to meet these four criteria for a simple reason – its “ideology” .and transparency. I use the institutional analysis tool as suggested by Hollingsworth to provide a different method to demonstrate this point. This ideology that overrides and at the same time influences all other norms. To summarise. liberalisation and competition policies especially in key areas such as government procurement and the activities of GLCs in the domestic economy.
administrative decisions. Article 153 is subject to Article 40 and Article 40 states that the Yang diPertuan Agung must act on the advice of the Cabinet. Malaysia is a constitutional monarchy where the monarch reigns but do not rule. scholarships and permits and licences for Bumiputras and only if necessary and in a reasonable manner by the Prime Minister who advises the Yang diPertuan Agung. Supporters of affirmative action argue that Article 153 of the Federal Constitution provides the Bumiputeras the right to this extensive affirmative action and thus makes it a Level 1 category and therefore most difficult. quantity and quality of support for the Bumiputera community. the Federal Constitution limits affirmative action to placement in the civil service at the Federal level. Does the Prime Minister have the power to revoke or reform affirmative action policies? Yes. In more simple words. the Yang di-Pertuan Agong shall exercise his functions under this Constitutions and federal law in such manner as may be necessary to safeguard the special position of the Malays and natives of any of the States of Sabah and Sarawak and to ensure the reservation for Malays and natives of any of the States of Sabah and Sarawak of such proportion as he may deem reasonable of positions in the public service (other than the public service of a State) and of scholarships. of such permits and licenses. the nature. Utilising Hollingsworth multi-level institutional analysis. What operationalise affirmative action is categorised as Level 5 as it constitutes statues. It has by inference been touted as the one of the key reasons for Malaysia’s declining economic performance although causality has not been explicitly demonstrated. then. when any permit or license for the operation of any trade or business is required by federal law. exhibitions and other similar educational or training privileges or special facilities given or accorded by the Federal Government and. theoretically. subject to the provisions of that law and this Article. Article 153 of the Malaysian Federal Constitution states that: 153. However this is factually incorrect. . (2) Notwithstanding anything in this Constitution. but subject to the provisions of Article 40 and of this Article. these reforms should be the least problematic among the five.action in Malaysia is the most comprehensive in the world. he does. (1) It shall be the responsibility of the Yang di-Pertuan Agong to safeguard the special position of the Malays and natives of any of the States of Sabah and Sarawak and the legitimate interests of other communities in accordance with the provisions of this Article.
Hence the Prime Minister may have de jure power to reform. except as otherwise provided by this Constitution. but shall be entitled. This power resides among the Malays and non – Malays who support Malay/Muslim Supremacy and the current institutional set-up. and legitimised by the Constitution (Article 40). With power centralised in the Executive (Cabinet). The decision to continue or reform affirmative action policies and the attendant institutions in Malaysia lies solely at the prerogative of the Prime Minister along with his colleagues in Cabinet as stated in Article 40. be able to implement these Level 5 reforms without much difficulty. Yet. . The supreme power/ideology is the primacy of Malays/Muslims as defined by UMNO – at the pinnacle of Level 1. at his request. the Prime Minister should on all counts. Until and unless this supreme ideology of Malay/Muslim supremacy is removed. and with the Prime Minister himself holding two portfolios (Prime Minister and Finance Minister I). to any information concerning the government of the Federation which is available to the Cabinet.40. and with the Prime Minister already having six Ministers out of 31 from the Prime Minister’s Department – which the Prime Minister heads – in the Cabinet. (1) In the exercise of his functions under this Constitution or federal law the Yang diPertuan Agong shall act in accordance with the advice of the Cabinet or of a Minister acting under the general authority of the Cabinet. Malaysian politicians will be constrained in making the necessary institutional reforms to move Malaysia towards long term sustainable growth. but he does not have de facto power to reform. he has been unable to implement these reforms for the simple reason that the Federal Constitution may be the law of the land but it is clearly not the supreme power/ideology in Malaysia.
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