NOV 10 — Growth of six per cent of gross domestic product per year for the next eleven years. That, according to the prime minister, is the rate of growth that Malaysia requires in order for the country to achieve the much-coveted developed nation status. There is no doubt economic growth is important. Yet, as a measurement of success, GDP growth of six per cent per year and the application of industrial policy to achieve that are in many ways unsatisfying.
First off, the proper metric should be growth of GDP per capita. Malaysians who care for their own welfare should be more interested in improving their average standard of living rather than seeing the economy simply growing on aggregate.
While it is true that having a large economy on aggregate makes a country more influential in terms of international diplomacy, even when the wide population themselves in generally is poor – observe China and India – GDP growth alone is not particularly meaningful in measuring average wellbeing of individual Malaysians.
Consider the following simple example: Growth rate of GDP on aggregate could grow at a rate lower than the population growth rate, creating a negative change in GDP per capita. In even simpler terms, the economy could grow on aggregate but each person, on average, could be worse-off.
If aggregate GDP growth rate is the measure of success, and if I were the prime minister, my industrial policy would include encouraging Malaysians to multiply like rabbits by any means necessary and adopt a very, very liberal immigration policy; one which would solve the problem of illegal immigrants the Rudd government in Australia faces. Never mind the Malthusian scenario that may come, this policy would hit six percent growth of aggregate GDP sooner rather than later and then boldly go where no man has gone.
But I am no prime minister and I am not that crazy. I do not accept the aggregate GDP growth rate as a good metric. On top of that, I am a libertarian: I do not like industrial policy because it calls upon a central planning policy that essentially runs on the assumption that government knows best.
Notwithstanding criticism levelled at the concept of GDP itself, in the realm of growth, mainstream economic theory suggests that poorer countries can be expected to grow faster than richer countries and at some point, join the club of the rich. This phenomenon is called convergence and this is achieved largely through technological progress and capital accumulation.
This theory has its share of successes and failures. Japan, South Korea, Taiwan, Hong Kong and Singapore are proof of the validity of this theory. To some extent, Malaysia and other so-called “tiger economies” that grew at magnificent rate in the 1980s and 1990s are proof of how this growth theory may be true. Growth of China and India further lends credence to the theory.
Failure of this model comes in its incapability to explain the why the majority of African countries and some others have yet to grow as fast as predicted by the model.
A number of explanations of why the theory fails to describe the lack of further convergence and, in fact, divergence among countries, have been put forth to supplement it. The one that I think is relevant for Malaysia at the moment is the stress on public institutions as one of the factors of growth.
When looking at countries that are failing to converge with richer countries, one of the noticeable factors is the lack of trustworthy institutions. The judiciary suffers from manipulation and is powerless to ensure the application of the rule of law with equal weight to all of its citizens.
With a powerless judiciary and even meaningless enforcement system, corruption runs rampant. Individual rights, including rights to private property, are frequently violated. A system that ensures smooth and peaceful transition of political power — which typically means free and fair elections — is largely absent.
Without trustworthy institutions, technological progress and capital accumulation are likely not to happen. Furthermore, the only likely source of economic growth — on aggregate and not in terms of per capita, of course — is population growth.
None of such woefully inadequate institutions describe Malaysia, thankfully. This country certainly has much better institutions than countries that are still battling mass famine, witnessing extreme poverty and experiencing very instable political environment that includes gunfights. Yet, it is not hard to hypothesise how the imperfection that scars public institutions in Malaysia is relevant in discussions involving economic growth.
While things may have gotten slightly better, the general feeling in the past few years is that public institutions in Malaysia — be they the police, the courts or the civil service — do not command the confidence of many people.
The separation of powers between the executive and the legislative arms of government, as seen in Perak for instance, is really non-existent. The VK Lingam case suggests that the separation between the executive and the judiciary is blurry. Even if that case is considered as a case of a lawyer that sounded like somebody, looked like somebody but it is not that somebody boasting and speaking only to himself and thus, of no consequence, the issues relating to the 1988 constitutional crisis still haunt Malaysia.
The flaws in Malaysian institutions put a natural limit in how much economic growth is possible. It would take more and more effort to maintain a certain rate of GDP per capita growth as the country reaches higher levels of development, given the level of institutional capacity.
At some point, it becomes really expensive and hard to maintain that rate regardless how forceful the free market or state-run economic engine of growth, if the country’s institutions remain at a level unbefitting of a developed country.
I suspect that this is the main reason why Malaysia is stuck in the so-called middle-income trap. Institutions matter. It may be imperfect institutions that prevent Malaysia from converging with richer countries like Singapore and South Korea or even western European countries, just as how really bad institutions prevent poor countries from moving forward at all.
*Hafiz Noor Shams celebrates the fall of the Berlin Wall and the rise of better institutions at maddruid.com.
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Hafiz, you are very wrong in this instance. The PM was talking about per capita GDP growth. He was referring to growing GDP from US$7,000 to US$17,000 bu 2020. The figure of US$17,000 is the threshold for high-income countries. Those figures all refer to per capita GDP. So, much of your argument is off.