Thursday, April 8, 2010

NEM: Subsidies & FTZs

How do subsidies and free trade zones fit into the New Economic Model that we are trying to create for the new Malaysian economy?

In the NEM, what we are trying to do is to create an efficient economy.


But efficiency is NOT a natural state of affairs for an economy. Efficiency is an ideal cooked up by the Enlightenment European gentlemen of the eighteenth century. It is an ideal which I share as an economist.

In other words, efficiency is an ideal that we have to work at in order to ensure its existence. Otherwise, we are likely to find the economy crumbling into chaos and anarchy. Which means free market and free enterprise are not necessarily the path to the economic prosperity that we all dream of - but they may create a world where some would be more equal than others.


Subsidies enter into the economic picture when the world is seen to be unfair to a section of society, usually the poor.

Bear in mind that the poor are the result of the prevailing economic system, and the poor are relative in terms to the rich - except for the absolute poor who are those who have not been able to gain membership into the economic mainstream that the system has evolved into, and which usually means the uneducated, the incapacitated, the single mothers burdened with young children, as well as the very young and the very old.

The social safety net that everybody talks about now should be about the absolute poor.

The huge 40% of society who are considered poor in Malaysia today are directly the result of the economic system that we have - and which could be the consequence of the inefficiency that has arisen from the deliberate attempts by policy to distort the economy in favour of a few based on claims to rights rather than efforts to add to the national output so that all could have more, so long that the output is not hoarded.

When there is a great dichotomy in society - when the parents are illiterate and the children highly educated - there will be great disparity in income and subsequently in wealth as the income is saved and invested. There will be no dichotomy when the economic foundations of society are more even, and when there is a lesser distance between the very top and the very bottom.

When the economic disparity is huge, there is a tendency for politicians to give subsidy in order to pacify the poor majority. This makes the poor less angry but it does not provide them the means to equalise themselves with the rest of the world.

This is why the policy thinking today is to go away from financial assitance to technical assistance. While providing temporary financial assistance to tide over the difficult transition period, there should be injection of technical skills for the poor to lift themselves up by the bootstrap out of poverty. Technical skills can be injected through institutional re-arrangement where every one has an opportunity to enter the training and education stream at all stages.

Removing subsidies in the economy is therefore a policy call that can only be justified at a high-level economic conceptual level. As I have said, efficiency is an ideal I share.

But the reality of removing subsidies is fraud with political difficulties, as entire governments have been brought down by it, as they hit the poor who form the majority of the voting power. The government has been circumspect in this respect in the recent Malaysian case.

Industry-wise, the national car project has been costly and I have discussed this in an earlier post. The costs are the import duty that consumers have to pay as well as the need to push some many new cars on the road which inevitably create traffic congestion and increases the cost of travelling. The resources put into the national car project could have been better used in developing a good public transport system not only in the capital city but through the nation. Instead of a good railway system, for example, we have got a good trunk road.

So instead of a second trunk road, we should now have an improved or a better second railway system.


Would we then go the other extreme and say we do not impose import duties and other taxes on all goods manufactured in the country?

If the collection of taxes greatly hinders economic efficiency, then the FTZ for the whole nation would be a good idea.

But taxes have their purpose in providing the means for the richer portion of society through its government to provide some equalisation to the disadvantaged section of society.

If the FTZ is the only means by which industries can become efficient, then the economic system must really be in an aweful state. The FTZ is an argument used for the purpose of competing with neighbours who are using the FTZ as a major weapon for attracting foreign investments when none could be hoped for from within.

The economic system is like the human body. If the body is healthy, it functions without sound. If there is too much noise coming from the system, there will be attempts to apply external band aids to reduce the noise, most likely without healing the internal injuries. We would just be waiting for the system to break down.

The economic system improves and grow healthy with exercise of its people in terms of acquring skills, earning a living, saving and investing and helping their neighbours. The job of policy and politicians is to provide the open space for the exercise to take place, while policing to ensure that there is no mugging that will spring on the hapless workers. Clearing the ground and providing some apparatus to improve the exercise routine may be interesting, but the exercise gets better only when natural obstacles do occur.

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