Making large things visible to the human eye

Category Archives: economic development

Who are you and what have you done with my billion-people economy?

Pessimism on China’s continuing economic growth emerges from, among other reasons on offer, that billion-people economy’s aversion to institutional reform.  In this view, China’s governance structures remain irresponsibly distant from liberal democracy; as a result, they hobble economic and political progress. China’s current institutions of governance allow an extractive elite to benefit themselves and to thwart meritocracy, thus crushing the social good.

Shopping in Louis Vuitton store, downtown Shanghai, 07 September 2012.  Reuters/Carlos Barria

Shopping in Louis Vuitton store, downtown Shanghai, 07 September 2012. Reuters/Carlos Barria

[Personally, I like the alternative perspective given in Unz (2012) but at this point Unz’s views constitute still only exactly that, an alternative perspective criticizing conventional thinking.]

Indeed to confirm this conventional view, the popular consciousness can now recount incident after incident of the excesses of those elites.  This month alone there was the high-flying businessman Mr X killed in a confrontation involving armed guards outside a luxury house. The case involved influence over political constituencies covering hundreds of millions of people, the convergence of money and political power, corruption, meal contracts to provide for impoverished school-kids, an ex chief of police, …, and then the final lethal confrontation.

“Some businesses need BlackBerrys; some businesses need guards,” observers remarked wryly.

Mr X “was among the class of businessmen who symbolized the nexus between money and political power. He exerted influence in four regions, home to roughly 200 million people, where he had been awarded monopoly control over the wholesale liquor business and held the contract to provide millions of daily midday meals to poor schoolchildren.”

Critics would say Mr X “bought his influence with bribes, though such charges were never proved”.  A former chief of police noted, “It’s a sad reflection on the state of the nation’s politics that a man like him could wield so much clout. He used money power to great advantage.”

In February of this year, Mr X might have finally fallen from grace but although tax inspectors raided his offices, the investigation went nowhere. Finally, Saturday 17 November 2012, Mr X and his rival, accompanied by police officers from the Punjab, squared off and …

Wait.  The Punjab?  This isn’t about China, the world’s largest non-democracy.  The passages in quotes come from the New York Times. The case is that of Gurdeep Singh Chadha, a businessman from India.  The world’s largest democracy.

I cited:

Master, F. (2012). “China’s Corruption Crackdown Takes Shine Off Luxury Boom.” Reuters, September 24. http://in.reuters.com/article/2012/09/24/china-luxury-prada-burberry-idINDEE88N01O20120924.

Unz, R. (2012). China’s Rise, America’s Fall. The American Conservative, 17 April. Retrieved from http://www.theamericanconservative.com/blog/chinas-rise-americas-fall/

Yardley, J. (2012, November 18). Killing of a Top Magnate, Reportedly by His Brother, Stuns India. The New York Times. New York. Retrieved from http://www.nytimes.com/2012/11/19/world/asia/killing-of-businessman-gurdeep-singh-chadha-stuns-india.html

Take back from those even poorer

What -ism is it when you castigate your top 1%

From: Vanity Fair, May 2011

and try to aid your middle class …

How the US lost out on iPhone work
From: New York Times, 22 January 2012

… by taking back from those even poorer elsewhere in the world.

From: Asia Development Bank: Asia’s Poor. Financial Crisis? Every day.

A small proposal to rebalance the global economy: Just let China grow

Many take as fact that the current pattern of global imbalances — large and persistent trade deficits and surpluses across different parts of the world, eventually unsustainable — is due to China and the rest of East Asia consuming too little and saving too much. Since the global economy is a closed trading system, trade deficits and surpluses across all national economies must sum exactly to zero always. Therefore, that one part of the world saves too much and thereby runs trade surpluses means other parts of the world — notably the US — must be running trade deficits.

However, just because deficits and surpluses are tightly inter-connected does not mean that trade surpluses in China, say, have been responsible for US trade deficits: absent further information, causality could well have flowed in the opposite direction. Moreover, China’s high savings might be dynamically welfare-optimizing for its citizens — for instance, private enterprise in China might find self-accumulation the only way to generate investment funds — and, at the same time, only minimally if at all welfare-reducing for already-rich US citizens. Finally, it might be that global imbalances should best be viewed not as a bilateral (US-China) problem but instead a multi-lateral one.

Be all that as it may, many US policy-makers focusing on US trade deficits and China’s trade surpluses urge policy actions against China to rebalance the global economy. Those policy actions include punitive tariffs against Chinese imports and tagging China a currency-manipulator — and thus moving it yet further from official free-market status. Some observers remark that without such external pressure, China will find it domestically too difficult to shift away from its reliance on export promotion, infrastructure investment, and restrained consumption towards a more balanced growth path (e.g., Michael Pettis, Nouriel Roubini, Martin Wolf).

The problem: To raise China’s domestic aggregate demand, especially consumption. The difficulty: China’s consumption cannot increase quickly enough to compensate for the shortfall in aggregate demand should both investment and exports decline. The danger: a hard landing for China and the global economy.

I want to suggest that such a re-direction need not be that difficult. My proposal: Let China grow rich as quickly as possible. Why might this do the trick?

Regional incomes in China

First, consumption within China is already rising faster than both income and investment, provided that we look at those parts of China where incomes per head exceed US$8,800 (Figures 1 and 2). Of course, China’s current per capita income overall now is only US$2200, less than 6% that of the US. What this suggests, however, is as China’s income grows, its overall savings rate will naturally fall. The right policy is to encourage growth, not adopt punitive actions that might retard that growth.

China's regional consumption

Figure 2a China’s regional consumption

(I took Figures 1-3 from a term paper that Daisy Wang wrote for my course Ec204 The Global Economy at the LSE-PKU Summer School, August 2011. The underlying data are from China’s National Bureau of Statistics.)

Second, as John Ross reminds us, investment too is aggregate demand. But, third, continuing to increase China’s investment in, among other things, infrastructure and transportation can help further as it allows those western, poorer regions in China (again Figure 2) better to integrate both nationally and globally, and thus become richer through raising demand and productivity.

China’s regional investment

Figure 2b China’s regional investment

While many observers make much of China’s high investment to income ratio, it is useful to note that that ratio is high not just because its numerator is being driven up, but also because the denominator remains so low. The right state variable for dynamic analysis in a neoclassical growth model is capital per head, not capital per unit of income. And here (Figure 3):

China's  per capita investment

Figure 3 China’s per capita investment

we see how China still has a long way to go on the upside.

Finally, Figure 4:

“The Chinese led the way in the rush to the Boxing Day sales, flocking to department stores to grab designer goods”, The Times of London, 27 December 2011

Figure 4: “The Chinese led the way in the rush to the Boxing Day sales, flocking to department stores to grab designer goods”, The Times of London, 27 December 2011

However much anyone might doubt those China statistics I used above, auxiliary evidence shows that rich Chinese consumers have no difficulty increasing consumption.

The evidence I’ve described doesn’t of course say that global imbalances can be easily erased through just more economic growth in China. However, the algebraic signs of the required relations seem to me to point at least in the right direction. Careful work to quantify these effects might end up showing that their magnitudes aren’t large enough. But, as far as I know, that calibration has not been done, which makes me wonder why some observers can be so certain that China’s current growth trajectory can only exacerbate global imbalances.

When China becomes rich, that will also dramatically lower inequality in the world — globally, the difference in incomes per head across nations overwhelms that across individuals within a single country. No one I know arguing for a more egalitarian society also says that that push for equality should stop at their nation’s borders and be kept from applying seamlessly across humanity’s 7 billion.


  1. “A small proposal to rebalance the global economy:  Just let China grow” EconoMonitor, 30 December 2011
  2.  “China’s growth could address imbalance”, China.org.cn, 02 January 2012
  3.  “Just let China grow”, The Edge Malaysia, 09 January 2012, p. 64
  4. 恢复全球经济平衡的一个小建议:让中国尽快变得富有, Blog.Sina, 13 January 2012
  5. Reprinted “A small proposal to rebalance the global economy:  Just let China grow”, Global Policy Journal, 11 October 2012

The LSE Big Questions Lecture 2011: Organized Common Sense

In June 2011, I was lucky enough to deliver the inaugural LSE Big Questions Lecture. I chose to lecture on whether the East was taking over the world. I felt these changes in the world matter to everyone, and they are developments with important economic ideas surrounding them. The LSE Big Questions Lecture is targeted at 14 year-old school children in a number of London’s schools — hundreds showed up on the day. The lecture itself was televised for subsequent broadcast. The runup to this lecture involved months working with a production team at LSE: these were months of planning and rehearsing, writing and rewriting, arguing and disagreeing — on analytical content and ideas, on what 14 year-olds might find useful and understandable and memorable, on the best ways to communicate different ideas in economics and facts about the world.

Why did we do this?

As an academic economist, I study growth and distribution. I write about the shifting global economy and the rise of the East. I try to make large things visible to the human eye. I want to be considered a valuable REF contributor to my department and to the LSE.

But I also believe that these are times where economic literacy matters hugely, not least in societies that continue to hold to the ideals of liberal democracies. And there are intriguing large-scale parallels between important events now and those some time ago in history.

In 1825 Michael Faraday — perhaps the world’s greatest ever experimental scientist — initiated (but did not himself give) the first of the Royal Institution of Great Britain’s Christmas Lectures. Faraday went on to deliver 19 series altogether of these annual Lectures, his last in 1860, presenting and explaining to the British public ongoing discoveries in chemistry and electricity and magnetism.

1855 Michael Faraday - Royal Institution Christmas Lecture

The Royal Institution Christmas Lectures have continued to the present, interrupted only by World War 2. They are delivered to a general audience, notably including young people, with the aim to inform and entertain. From their beginning, these lectures proved highly popular despite the limited nature to early 19th century organised education. Since 1966 the Royal Institution Christmas Lectures have been televised. For many British households, the Christmas Lectures constitute a highlight of annual holiday family viewing. The energy and the ingenuity that go into the lectures are impressive, not least when, say, someone like Marcus du Sautoy, in his 2006 lectures, explains abstract number theory to a teenage audience.

These Royal Institution Christmas lectures provide the strongest counter-example I know to the conceit that research ideas are too difficult to explain to and too abstruse to excite the general public. Most of us just don’t work hard enough at it. So getting to deliver something the LSE Big Questions Lecture would be a challenge. But there was more.

In 1825, London had just become the world’s leading city by overtaking Beijing — vividly demonstrating the steady ongoing shift then of the world’s economic centre east to west. That year, the first modern economic crisis in history occurred — modern in the sense of not having been caused by a war. The stock market crash of 1825 took out in England alone six London banks and sixty country banks, with the badly-overextended Bank of England having to be rescued by an injection of gold from France. For students of central banking, this event became enshrined afterwards in Walter Bagehot’s Lombard Street principles for the lender-of-last-resort role in central banking.

In 1825, Faraday’s scientific discoveries were not centre-stage for the Industrial Revolution swirling about him at the time. That first Industrial Revolution — perhaps the most important event in the history of humanity — was driven by iron-making, mechanisation, and steam power, more than by electrification and chemical processing. But chemistry and electricity and magnetism — where Faraday’s contributions were manifold and central — pointed to the then-future. These would go on to provide the more enduring engine of growth for modern economic progress, not least down to what today still powers all digital technologies, significant among them cellphones and the Internet.

The Royal Institution Christmas Lectures matter in British science for providing the public knowledge into the most important exciting intellectual developments of the time. They gave the British public insight into what was new. Historians who study why a 14th-century Chinese Industrial Revolution did not occur, despite China’s more advanced science centuries prior to that in 1780 Britain, point to how science in England had always immediately connected to commercial application and public interest. This is exactly the same kind of connection that the Royal Institution Christmas Lectures make. By contrast, in China, science and technology were tightly controlled by a scholarly elite, who saw no reason to disseminate their discoveries. During the 18th-century Industrial Revolution, James Watt and Matthew Boulton had announced the English public “steam-mad”, whereas in Sung Dynasty China, time itself was considered the sole property of the Emperor.

Inaugural LSE Big Questions Lecture

The Inaugural LSE Big Questions Lecture begins

I am under no mad illusion that what I do as an academic is even remotely comparable to the achievements by these giants of scientific and technical progress from 1825. But I don’t think I’m half-bad as a lecturer. I don’t shuffle my lecture notes and lose my place in them [I don’t use lecture notes]. I don’t mumble into my beard so that the audience has no idea what I just said [I’m ethnic Chinese and we don’t grow beards easily]. I don’t put up Powerpoint slides crammed full with text and then just read them out word-for-word [almost all my slides are just colourful pictures].

I believe, as first told to me by my PhD advisor, economics is just “organized common sense”. I’m passionate about explaining ideas in economic policy to any audience that might remotely be able to influence our national and global conversations on improving the state of the world.

So, when asked, I gave the LSE Big Questions Lecture a go.

Guest Post – The Inaugural LSE Big Questions Lecture – by Emily May

(The original host service for this post is no longer available, but its author Emily May kindly agreed that her writeup might appear on this blog.)
5 July 2011
Inaugural LSE Big Questions Lecture

The Inaugural LSE Big Questions Lecture begins

LSE Global Governance co-director Professor Danny Quah gave a special Big Questions lecture to Year 9 students on how the world’s economy is shifting eastwards, with countries such as India and China becoming wealthier and more powerful than ever before.

With Who Wants to be a Millionaire?-style voting clickers, tug of war, jumbo pound coins and in-jokes about video games, this was never going to be your usual LSE lecture. Following a lively warm-up and introductions from a rather bashful film crew, Professor Quah took us on a whirlwind tour of the global economy – how trade works, the benefits of economic development for a country, and how economics provides a useful way to interpret the world.

Part of the audience at the Inaugural LSE Big Questions Lecture

“Did he actually just say ‘Spartans respawning - the mathematics are determinate’?”

Enlisting the help of some brave youngsters plucked from the audience, Professor Quah engagingly demonstrated how the East’s economic power is accelerating and what this means for the West. ‘The Chinese economy is growing at a rate of 10 per cent every year,’ he said, ‘which means it’s doubling in size every seven years. At this rate, our volunteer here would be 10ft tall by the time he enrols at LSE.’

We witnessed, via a striking world map on the big screen (plus a game of tug of war, just for good measure), how the emergence of the East in the last 30 years has pulled the world’s economic centre of gravity nearly 5000km from its 1980 mid-Atlantic location towards India and China.

But what does that mean for us? Well, we get an awful lot of ‘cheap stuff’. We watched a time-lapse video of a day in the life of a teenager called Charlie, who sped between his X-box (£220), PC (£330), and kicking his football (£10). All of these products were made in China. Then we learned just how much more expensive they would cost if they had been made in the UK: a whopping £3,200 for a PC, £1,760 for an Xbox, and £80 for a football.

So, the East might be making a lot more ‘cheap stuff’ than the UK, but we are getting pretty good at using innovation expertise and global collaboration to create our own products. To prove this point, award-winning entrepreneur Michael George took to the stage to describe how his new product – ‘the first ecological designer light bulb’ – was designed by his company in the UK but manufactured in China with US technology.

Despite the East’s rapid growth, its vast population – there are 50 people in East Asia for each person in the UK – means it has some catching up to do in respect of personal prosperity, as the average individual income remains at the same level as Namibia and Azerbaijan, with many people living on just 70p a day. Nevertheless, Professor Quah concluded that asking  ‘East beats West?’ is the wrong question, as the rise of the East has led to ‘the world being immeasurably better off. We need economics to help improve the lot of humanity. That is what economics is about.’

Read Professor Quah’s article ‘The Great Shift East‘.

How can hundreds of millions of something – anything – be scarce?

I sat next to Jim Rogers on a panel once (so you don’t think I’m just making this up), and he told me that right up there with all the other unstoppable so-unbelievably-massive-you-don’t-think-it’s-possible changes sweeping the world is how China’s gender imbalance will soon make young Chinese women among the world’s rarest commodities. Yes, all hundreds of millions of young Chinese women will be relatively scarce.

[Today I read about quality on top of the quantity effect. To be clear, this is a parody of Amy Chua – so this part in brackets at least is in jest).]

Hand in hand with this increase in the market’s shadow price – economic power – will be a steep escalation in the real power of women, both personal and political. This is not to deny the harrowing experiences documented in Leslie Chang’s Factory Girls but there is, at the same time, no question that there has been a dramatic upgrading of the position of women throughout Asian society, and therefore of women worldwide.

No legislation was involved. No protest movement occupied a city square. All this occurred simply through the power of economic growth, the balance between demand and supply, and the force of market equilibration. If you don’t yet see this, just come take a look at the confidence, poise, and ambition of the tens of thousands of young Mainland Chinese women studying in secondary schools, junior colleges, and universities in Singapore, elsewhere in Southeast Asia, or in the West. Come take a look at LSE, for that matter.

Perhaps once again China’s headlong rush for economic growth and the staggering power of markets adjusting to demand and supply in the hundreds of millions will quietly, brilliantly do what the rest of the world has found so difficult. China lifted over 600 million people out of extreme poverty over the last quarter of a century, when no one else was looking – and therefore when no one was giving China foreign aid or telling it how to run its schools.

This time, for elevating yet another disadvantaged community will China, once again, quietly using just growth and markets achieve more than all other efforts micro-managing around the edges of global poverty?

PS Many readers, of course, quickly link in their mind this gender imbalance to the many horrific tales one hears emerging from China’s one-child policy. If 119 boys are born for every 100 girls – as usually reported for China – then that works out to 840 girls to 1000 boys. Given China’s population of 1.3 billion, this means 24 million Chinese men of marrying age without spouses by 2020.

It is instructive if grim to note this gender bias is seen as well in the very differently-governed India where the 0-6 age group now has 914 girls to 1000 boys (down from 927/1000 in 2001), confirming how the country has become “a terrifyingly hostile place to be conceived or born a girl“, pointed out to me by Vinayak @kayaniv.

The global economy’s shift. Follow-ups all over

In January 2011 Martin Wolf wrote an introduction to my article The global economy’s shifting centre of gravity in Global Policy but decided not to follow it up himself.

Recently, the article has seen some coverage in the international media.

I’m not lazy, not really. But if I divert all these writeups into just this blog, reader comments are lost as they remain on the original website. And those comments are, well, some of the most interesting things I get to read regularly.

So WSJ’s Chris Shea The pull of economic gravity 2011.03.19, CNN’s Global Public Square 2011.04.07, NYT’s Catherine Rampell 2011.03.24, FT’s Alphaville 2011.03.23, and even FT’s John Gapper 2011.03.24, who calls me “Mr Shah” (Damn you, Autocorrect), are best left in their native domains. There are items to aid teaching (econlife 2011.03.27), posts in languages I don’t completely understand (Javier Andres’s East Wind, West Wind 2011.04.14), versions souped-up into colorful alternate projections (Anders Sandberg’s 2011.04.15), interpretations from different parts of the world and therefore providing, literally, different perspectives (2.6 billion 2011.03.25), and, not least, reactions from friends like Bill Easterly, as in his Should the West get hysterical?2011.03.23.

Of the many different comments, I found particularly memorable:

By the way, it’s intriguing to find people saying that what you write are things they already know, and when you ask them how they know it, they say, Everyone has been saying these things for a while now. In my experience, just as many people say the opposite. Either way, whatever you find with hard work on real data, you can’t win.

I’m not complaining. Just saying.

The global economy’s shifting centre of gravity

Define the global economy’s centre of gravity to be the average location of economic activity across geographies on Earth. If you go grab incomes and geographical location data across nearly 700 identifiable places on the planet (World Development Indicators Online, Asian Development Bank, Google Earth, Brinkhoff; Grether and Mathys) you will see that in 1980 the global economy’s centre of gravity was mid-Atlantic. You will also see that by 2008, from the continuing rise of China and the rest of East Asia, that centre of gravity has drifted to a location east of Helsinki and Bucharest. Extrapolating growth in almost 700 locations across Earth, gives you the world’s economic centre of gravity shifting by 2050 to literally between India and China. Observed from Earth’s surface, that economic centre of gravity will move from its 1980 location 9300 km or 1.5 times the radius of the planet.

A graphic illustration of this is given in the Figure. The dots in black are 1980-2007; those dots reduced and in red are for 2010-2049 in an extrapolation. The center of gravity calculations are performed in 3-dimensional space and then projected onto the normal cylinder tangent to the planet at the equator.
My paper with the same name as this post describes more fully the ideas here.
(Thanks to Google Earth for help with this. To transform a 3-dimensional sphere into an unfolded 2-dimensional flat plane, the mapping is not a Hilbert space projection. For one, the tangent normal cylinder is only locally linear; it is therefore not a linear space. I calculated the dynamics using R; I generated the sequence of world maps in python; and I then used gimp and ImageMagick batch-processing to produce the final animation.)

Malaysia’s New Economic Model: Making choices

In June 2009, Malaysia’s Prime Minister Datuk Seri Najib Razak asked if I would serve on his council of economic advisors, the National Economic Advisory Council (NEAC). This Council was to come up with a New Economic Model for the country. It would not be a group that got together every month to finetune the economy. This Council was not to sift through the entrails of inventory reports, and propose economic policies to lean against the wind.
1. Background

No, the task assigned the NEAC was to put Malaysia back on a high-growth path, reinstating Vision 2020 that Malaysia would within these next 10 years achieve the status of a developed nation. Council was to do this against a post-1997 background of annual economic growth having nearly halved; investment as a fraction of GDP having plummeted to 50% what it used to be (private investment, to one third); with the economy relying on a workforce of which four-fifths were educated only up high-school level while over one quarter of local public university graduates remained unemployed 6 months after graduation, and with the human capital brain-drain becoming freshly re-energized (350,000 Malaysians in 2008 lived and worked abroad, half of them with university education).

By 2007, Malaysia seemed as far from the World Bank’s notion of a high-income economy as a decade earlier, in contrast to economies such as Slovakia, the Czech Republic, and Poland, all of whom had by 2008 broken through that high-income boundary but had earlier been roughly level with Malaysia.

Yet, Malaysia had been previously identified by the Spence Commission on Growth and Development as one of only 13 countries in the world that had for more than 25 years grown at rates exceeding 7% annually. At different times since the 1960s, despite having a population not even one-third the UK’s, Malaysia had been the world’s largest producer of tin, of rubber, and of palm oil.
Today, forty percent of Malaysia’s households earn less than US$15 a day (RM1500 a month), two thirds the World Bank’s low-income threshold. With Malaysia’s domestic income distribution what it is, only one million people pay income tax at the highest rate of 26%; there is no goods and services tax. Oil and gas revenues have, on occasion, provided up to nearly half the government’s total revenues, although by 2014 Malaysia is expected to become a net importer of oil. As much as 20% of the nation’s public expenditures routinely get spent on subsidies that keep prices of basic goods low but distort reality for Malaysia’s citizens.
Certain policy questions – for instance, monetary control and inflation; financial markets oversight, regulation, and development – are outside the NEAC’s remit, and rightly so. In Malaysia, all those issues were taken care of by others, and already attain world-class standards of performance.

The large facts I’ve just described seemed to me (and many other observers) precisely the ones raising the critical, first-order challenges for economic policy in Malaysia. The problem was how to organize them coherently and understand their resolution. But there is, further, the other critical, first-order challenge unmentioned so far: namely, Malaysia’s 40-year-old program of affirmative action.
I say unmentioned but of course that is not how the outside world viewed this. The international press emphasized most of all this dimension to Malaysia’s policy framework; I will bring this out further in the discussion that follows. For now, however, I just note that some foreign financial houses I spoke to about NEAC work downplayed the significance of all the other problems I have mentioned. They said to me, “Malaysia needs to fix its affirmative-action program; everything else follows.”
That proposition, by itself, is almost surely demonstrably false. On the other hand, the perception is obviously one that colors the views of many market participants who actually shift significant financial resources.
Article 153 of Malaysia’s Constitution, ratified in 1957, requires that the King protect the special position in Malaysia of the Bumiputras (ethnic Malays and a small number of other indigenous groups). The Article allows the federal government to protect Bumiputra interests by establishing quotas for public scholarships, public education, and the civil service.
In 1971, following racial riots, declaration of a state of national emergency, and suspension of Parliament, the then-Prime Minister Tun Abdul Razak—father of the current Prime Minister—introduced the New Economic Policy (NEP). This policy sought to eradicate poverty regardless of race and to eliminate the identification of ethnicity with economic function. The enabler for both these goals would be rapid economic growth, the speedy expansion of the economic pie to divide across all Malaysians, so that no subgroup would feel absolutely disadvantaged. A key feature of the NEP was its effort to raise Bumiputra equity ownership from 2.4% in 1971 up to 30% within two decades.
What has NEP progress been? At a fixed absolute income threshold (its exact value holding no significance as long as it’s fixed and applies across the board), poverty rates for Bumiputras declined from 65% in 1970 to 5% in 2007, while that for Malaysians overall, from 49% to 4%; Chinese, 26% to 1%; Indians, 39% to 2% (Table 4, p. 57, NEM). Wealth figures are widely disputed but most sources give Bumiputra equity ownership of 2–4% in 1971; official KL Stock Exchange statistics suggest Bumiputra shares of 29% by 1990 and 37% by 1996.
That was the background when in August 2009 PM Najib Razak delivered his keynote speech at the NEAC’s inaugural meeting, asking Council for ideas and direction to transform Malaysia into a developed nation by 2020. Malaysia, having successfully drawn foreign investment as low-cost producer was populated with businesses that, at the margin, had neither incentive nor vision to climb the quality ladder. Infrastructure and expertise in key areas remained under-developed. For Malaysia as small open economy, the global trading environment has already shown time and again how it could change suddenly, as it had just done during the 2008 global financial crisis, and further looked set to change even more dramatically but less suddenly from longer-term global carbon considerations. Reforms already begun in Malaysia by the Central Bank, the Securities Commission, and others were already liberalizing capital markets and taking forwards expertise and comparative advantage in Islamic Finance. Government transformation work had already begun to introduce meritocracy and performance measurement in the public sector itself.
What could Council do to help Malaysia re-locate its strategic position in the global economy?
2. The New Economic Model

In the ensuing six months, Council met 4 times in Kuala Lumpur. At these meetings, Council members listened to presentations, mapped strategic visions, and debated subtle differences in emphases. Now and then, we would as a group take such a big-picture perspective that we would form a collective blindspot over the single largest difficulty in whatever we were discussing, completely missing the key concern. Now and then, we would micro-drill down and heatedly argue over whether the appropriate punctuation should be a comma or a semi-colon. But all of us remained energetic and enthusiastic and committed, and sometime during the 15 hours of meeting each day, or in seemingly interminable rounds of email 24/7, we would correct course and converge on the right balance.
We agreed our report had to be in two steps: First, to identify, propose, and persuade on the over-arching framework and strategic vision; second, to steer from that vision its delivery to be led by the executive branch and implemented by the civil service. Without successfuly convincing on the first, the second would never be executed. Without successfully executing the second, the first would have been in vain.
The single big-picture vision was that Malaysia had to become an advanced economy by 2020. Sure that included the Malaysian economy generating sufficiently high income. But that vision also included a subtext of inclusiveness – so that the poorest and most vulnerable in society would be taken care of – and one of sustainability, so that higher economic growth would continue into the future, not at the expense of degrading the environment for generations to follow.

Council concluded many of Malaysia’s malperforming situations were inter-linked. Underperformance in one setting was the rational response to underperformance in the next: Why work hard in school if you’re convinced it doesn’t benefit you afterwards? Why work hard in your job if your productivity is held back by so many unskilled around you? In these circumstances, what is needed is a big push to break out of that vicious circle of under-performance. But disruption would be needed not just in your own circle of school-mates and colleagues, but everywhere in the economy. Hence, we emphasized the big push of economic transformation needed to break the logjam of entrenched, special interests. We sought to build momentum and confidence in the mindset of citizens that more positive changes would continue to emerge but all of us needed to keep pushing.
This economic transformation would come with reform along eight strategic initiatives – slightly more concrete but only slightly:

  1. Re-energize the private sector so it could lead the process of economic growth;
  2. Develop a high-quality workforce;
  3. Create a competitive domestic economy;
  4. Streamline and make efficient the public sector as facilitator for private enterprise, when in the past large government-linked corporations (GLCs) had been viewed as competitors instead;
  5. Move to affirmative action that is (a) transparent, (b) market-friendly, (c) merit-based, and (d) conditioned on need ;
  6. Build infrastructure for a knowledge base;
  7. Enhance the sources of growth;
  8. Ensure the sustainability of growth.
Early on, Council decided it couldn’t be swayed by arguments about whether it was doing something truly novel or new or different. The only thing that mattered should be whether a proposal for implementation was likely to succeed and whether it would bring the highest benefits to the greatest number. Good ideas are hard enough to come by generally; why straitjacket oneself to not look at certain of them? This isn’t an exam: why not copy good ideas however and wherever you find them?
Nonetheless, having come to the end of putting in place the over-arching vision, we could see several ways where our approach differed from earlier ones.
First, we focused on growth through enhancements in productivity, not the sheer brute force of capital accumulation. It’s not that we ignored the latter – if we had, we wouldn’t have expressed concern about the sharp fall off in Malaysia’s investment. Instead, it is that we figured it would be innovative processes and cutting-edge technologies that would provide the surest platform for Malaysia’s producing high value-added goods and services in the future.
Second, we envisioned economic growth being private sector-led and market-driven, no longer dominated by large public investment through GLCs in selected economic sectors.
Third, we described the benefits of the government moving towards local autonomy in decision-making. State and local authorities needed to be empowered to develop and support more of their own growth initiatives – without unnecessarily duplicating function or project. While flat-out competition to produce identical public goods, over and over, would be obviously wasteful, a little competition between local authorities is healthy.
Fourth, we wanted to encourage local geographies to emerge – whether in clusters or corridors – as long as they exploited economies of scale and concentration, and thus raised productivity over the long term.
Fifth, we saw the need for continuing government support of private industry, as long as that support was geared towards innovation, entrepreneurial risk-taking, and high value-added goods and services. It would be those general principles that guided support, not past principles of picking winners.
Sixth, we welcomed talent and skills from everywhere: as long as anyone, local or foreign, is able to contribute to Malaysia’s transformation to an innovative, high-value added economy, they would be accepted and welcomed.
Finally, we emphasized how the global economy was changing, and we figured Malaysia’s strategic position within it needed to re-orient as well. For the entire 20th century, the world’s strongest economic powers have been the US, Western Europe, and Japan. Malaysia, like many others, tuned production and supply networks to service those markets. While we weren’t arguing that policy should be based on the economic centre of the world suddenly shifting tens of thousands of kilometers east, we felt that it was reasonable to acknowledge the change in that global landscape, and to develop further new regional networks centred on the fast-growing, Asia-focused emerging economies.
In a nutshell, that’s it. That’s the New Economic Model (NEM).
3. After, for now

For a relatively technocratic problem and solution, the NEM announcement on 30 March by PM Najib attracted unexpectedly heavy attention from the international press. All the major world press worked in discussion of Malaysia’s affirmative action program, both historical and prospective. The New York Times (30 March 2010) described the revision of Malaysia’s policy to focus on need, not race.

The Wall Street Journal ran articles on two successive days (30 March, 01 April 2010), talking about the recalibration of Malaysia’s decades-old affirmative action and asserting how “the New Economic Policy has hindered Malaysia’s competitiveness in recent years. The U.S. and European Union have singled out Malaysia’s insistence on maintaining preferences for ethnic-Malay owned businesses in government procurement contracts for stalling the development of free-trade pacts”. The Journal’s Opinion Asia column (01 April 2010) contextualized PM Najib’s speech by observing how ‘A few years ago it was inconceivable that a Malaysian premier would express dissatisfaction with the “rent-seeking and patronage” inherent in the country’s four-decade-old affirmative action policies and call for a more “transparent” system based on merit and need. Former strongman Mahathir Mohamad used to label people with such ideas “extremists.”‘
Great cynicism continues to be expressed by some of my friends, Malaysian and otherwise, who say they have seen over the years many politician promises made only to be broken subsequently. Personally, however, I see great optimism instead. Why? I contrast PM Najib’s 30 March speech with what I imagine someone wanting an easy ride through life might have said, in light of both the general skepticism and fervent fear-mongering in the runup to the event.
Two days before the NEM announcement, Kevin Brown wrote in the Financial Times (28 March 2010) how there was “widespread doubt” that PM Najib would take any political risk at all of dismantling Bumiputra special privileges, not least in a new economic model that might greatly dilute that historical affirmative action. James Hookway’s Wall Street Journal article of 22 March 2010 gave considerable space to Ibrahim Ali, a right-wing extremist Malay MP, and to Perkasa, the NGO that Ibrahim Ali founded devoted to defending Malay rights, reporting how “Mr. Ibrahim reckons Mr. Najib is misreading the depth of anger many Malays feel toward any change in a policy that has given many a leg up and helped to build a large middle class.” The Economist newspaper (11 March 2010) extrapolated from their interview with Najib and with others to sub-lead their article, “Najib wavers over undoing affirmative-action policies”.

Not least, of course, there is the now-infamous interview Ibrahim Ali granted Al-Jazeera on 29 March 2010, the eve of the launch of the NEM, where Ibrahim Ali gets bleeped three times speaking, with some vitriol, on the position of other races in Malaysia.

Domestic reporting too emphasized the emerging political tensions (e.g., Malaysian Insider, 04 March 2010; 28 February 2010; and many others). And the Malaysian blogosphere – sometimes thoughtful and insightful; sometimes not; always vicious – don’t even go there.
Now, contrast what PM Najib actually said with what all these observers predicted he would say. Think of the political onslaught, the wavering, the self-protection going on around him. If Najib had wanted an easy way out, he could have taken it and no one would have been surprised. He didn’t. He continues along that difficult but worthwhile path.
One final comment. In this international reporting, by far the greatest attention has gone towards Malaysia’s New Economic Policy and its possible adjustment. In Council’s work, we knew this was important, but so too were all other seven strategic initiatives. Affirmative action matters. No significant advanced country in the world gets by without affirmative action programs of some kind – it is in human nature to take care of the weakest and most vulnerable in our society. So too for the members of Council, where that bottom 40% of the Malaysian population is targetted to receive significant help and attention. But fixing all the other problems matters too: it’s one big push for all of them.
Council has now finished Step 1. Step 2 starts. Everyone likes to say, Now the hard work begins – as if I’ve never heard that one before. But I am energized. I continue to do this work (and, for the record, for practically no pay compared to outside options) because I think things actually are looking up in Malaysia.
(This appeared also on Wednesday 14 April 2010 Business Times, New Straits Times Malaysia B4ff and, in Chinese, in Sinchew Daily, again 14 April 2010.)

Economics is a martial art

A scream for help from the alleyway; what do you do? Move in cautiously but quickly? Or hold back because you worry that the whole thing might get messy?

Do you fret that you haven’t yet published the perfect model of these kinds of social dynamics and that until you do, you might do more harm than good? Or that you won’t have the credibility? Credibility for what, for standing up to street hoodlums?

Do you let someone else look into this? Who, people not as well-trained and not as physically fit as you? People without your punching and kicking abilities and your instincts honed from years of practice in a safe training environment?

Do you stand on the sidelines and criticize those trying to help for not dispatching the hoodlums faster?

What if you realize the scream is your mom or your kids or anyone else who looks to you to protect them? What do you do?

They’re not asking for perfect certainty and total rigor. They just want to be safe again. You can’t tell them this isn’t really what you were trained for, that you are much more a kicker whereas these hoodlums will likely be better dealt with by grappling or boxing. You are there, you are physically fit, you have a reaction time faster than those of others around you. That’s all they expect of you. That’s all that should matter.

So too in economics.

You don’t have to be the world’s top martial artist street fighter. Or the world’s deepest thinker on economic policy. You don’t have to expect to come out of every street situation or every economic policy encounter unscathed, whether physically or in reputation.

You just have to do a bit of good in the world. And the more of you there are, the more the bad guys lose.

(Photo credit: Cung LE is a Vietnamese-American kickboxer and mixed martial artist. Following the fall of Vietnam, he came to the US where bullying forced him to learn to fight. In March 2008 he became Strikeforce Middleweight champion by TKO when a sequence of powerful kicks ended up breaking his opponent’s right arm.)

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