Tuesday, September 28, 2010

How Not To Transform The Economy

I have been trying very hard not to write anything about the Economic Transformation Programme (ETP), the bare bones of which were revealed on the 22 September by the press.

It is just too easy to be cynical.

Target: To triple the Gross National Income (GNI) from RM660 billion in 2009 to RM1,700 billion by 2020 at growth of 6 per cent per annum - and I really hope they get the definition right - and create 3.3 million jobs by 2020. High income of RM46,000 per capita by 2020 from RM23,700 in 2009.

Total 131 projects worth RM670 billion proposed to 2020. 60 business opportunities to be "made available." RM115 billion to start by end-2010.

Malaysia number 1 regional hub for oil fields services, global diversity hub, revitalising the capital market, 114 km of rail lines via Mass Rapid Transit high-speed rail system to connect KL and Singapore, revitalising Klang River, and towards a duty-free haven for Malaysia for tourists.

12 National Key Economic Areas (NKEAs): (1) agriculture/palm oil, (2) oil & gas & energy, (3) electrical & electronics, (4) education, (5) wholesale & retail, (6) healthcare, (7) financial services, (8) tourism, (9) business services, (10) communications, (11) content & infrastructure, (12) Greater KL.

92% from private sector (RM1,270 billion), 8% from government (RM105.5 billion) to produce an additional GNI of RM775 billion by 2020 (presumably after taking away organic growth).

1. For one thing, this country has undergone a few significant transformations. We are therefore used to economic transformation and the only real issue I have is to see that the transform is for "good." What do I mean by that? A good transformation makes the economy more flexible than before, more capable of adjusting to external and internal challenges and, as a result, makes the economy stronger and more resilient. More resilient means the ability to take drastic corrections with the fading of the inefficient and the rising of newer and hopefully better champions of innovation and investment.

2. The Malaysian economy has turned from an export-oriented primary-commodity producing economy (under colonial rule) to (Transformation One) an inward-looking import-substituting foreign-investment-unfriendly regime (1970s resulting in a recession) and then quickly reverting back to (Transformation Two) an FDI-welcoming economy (late 1980s) followed by (Transformation Three) an explosion of supply-side infrastructure mega projects (early 1990s) which resulted in a financial crisis (inflation and bailouts) as a result of policy ignorance about the dangers of short-term capital flows followed a series of counter-cylical fiscal stimuli.

With the severe delay to a high income economy by 2020, there is now revealed in the ETP a flurry of projects to bring the economy quickly up to mark. Are we still stuck in Transformation Three?

3. This may be the place for me to say this. A lot of nonsense has been said about the importance of the services sector - 60% or 70% in advanced nations and 40% or 50% in developing nations and now the services sector can be enlarged in order to become an advanced or high-income economy.

The services sector in advanced nations are higher in proportion to the whole economy because their agriculture sector has disappeared due to high cost of production, and increasingly with the rise of China and India, so is the manufacturing sector. To survive, they have to use their wit which requires them to go in financial services (capital flows and corruption money from developing countries) and education (students from developing countries with bad education systems) and tourism (corruption money and windfall gains from the stock markets). It is foolhardy to compete head-on on these fronts with the more advanced economies which requires a fairly high degree of integrity and honesty in dealing with information.

In most economies especially developing economies, the services sector can only develop in conjunction with the agriculture and manufacturing sectors. It is therefore the most important that investments in these two sectors must be strong in order to pull along the rest of the economy. Without the real "real" sectors being developed, I am afraid that the "services" sectors that we are trying to develop will be related with crime, prostitution, drugs, financial fraud, social disintegration, and the corruption of standards.

4. With the infrastructure projects that are being laid out in the ETP, without any innovation or the adding of value to the economy, the projects are once again going to be financed by the future generations in the form of inflation which will only make their real income lower so that they will have to tighten their belts so that scarce resources which are meant for their consumption can be diverted to these projects. I am not against projects but they must be economically feasible if they cannot be financially feasible. The rush to meet unrealistic deadlines in order to "show results quickly" is not the way to go. Sometimes, a little hard time can be good for the soul and spur one to hard work.


A masterplan or roadmap or a project-implementation programme always smells to me a command-type militaristic economic operation. I do not know whether management consultants make good economists. The key role of a good economist is always to promote confidence and some clarity of the rules of the operating environment so that timid risk-adverse investors can be drawn out from the murky corners of their hideaways in the hope of making supernormal profits from a situation which they think no other persons have seen before. The enticement of profit from an opportunities is the trick that economists use to stimulate investments. Alas, we have to be content with a directed chess game whether the end game has probably already been decided - if they know the nature of the game that everybody is supposed to play.

I keep my fingers crossed, and wish the ETP luck for all our sakes.


semuanya OK kot said...

It is an important point that much of the advantage of the "developed" world is due to corruption they practice elsewhere. Ask yourself how some of them close to us, e.g. Australia, benefit by being extra hospitable to certain leaders and the wealth they bring in.

An eminent columnist (maybe Krugman) pointed out why emphasizing agri. and manufacturing over services is a fallacy. If efficiency leads to lower weightage for the traditional sectors, so much the better, especially for drudgery and pollution.

Having said that, we here in Bolehland are certainly living in fatasy wrt. food security. One blogger alluded recently that when money is worthless, globalisation collapses and food is is short supply for any reason, the clever overlords will not be able to hide from those seeking to feed their children.

etheorist said...

semuanya OK kot

Thank you very much for your comments to this post and blog.

Certainly, economic efficiency consideration dictates that we should move towards services, manufacturing and agriculture in that order. But this is only by way of the economy moving along the efficiency path.

It is quite another thing, though, to ignore the traditional sectors and rely on the services sector per se.

Even so, advanced nations struggle to keep their traditional sectors alive in order to maintain some form of a balance, not least, for food sufficiency purposes.

I agree with you.

hishamh said...

"The services sector in advanced nations are higher in proportion to the whole economy because their agriculture sector has disappeared due to high cost of production, and increasingly with the rise of China and India, so is the manufacturing sector."

I'm not sure I agree with this. I think the relative decline of agriculture and manufacturing in the West is primarily due to improvements in productivity per worker.

For agriculture, it's because of the "green" revolution - higher yielding seedlings, improved irrigation techniques, and the general "industrilisation" of agriculture.

For the latter, much the same thing happened - increasing automation, improvements in inventory management and factory workflow. Despite the emergence of China and India, industrial production has continued to rise in the US for example (right now about double the level it was in the 1980s).

But these improvements in efficiency have brought about structural economic changes, since increasing productivity implies that you can do with less labour at a given level of output (while also supressing wage increases and thus the return to labour). Hence the emergence of the "rust belt" in the US for example.

This fits the available data better, as globally labour incomes have stagnated in the last thirty years, while output and returns to capital have continued to increase.

Meanwhile, these workers have to go somewhere, and in Malaysia's transformation, that's the challenge that the ETP has to meet.

I don't expect it to be fully successful on that score, and I fully expect structural unemployment to rise over the next ten years. We need to rethink our approach to welfare, access to opportunities and poverty in that case.

Apart from the minimum wage proposal (which I don't think will be effective in helping raise incomes), I don't see this being discussed anywhere.

etheorist said...

Of course, we are talking in relative terms.

Even as agriculture productivity has increased in recent decades, that productivity increase is less than for manufacturing which is less than for the services sector.

The equilibrium state (before prices start collapsing) is lower in agriculture than in manufacturing and services respectively.

You are right that in the end, (unemployed) surplus labour is thrown into the market. If labour is untrained or uneducated, we will get the destitute (urban poor) which may be alleviated through social welfare support.

With proper education, they can become the talents in the creative arts and blossoms the entertainment industry (which is counted among services).

Still, I maintain that we must have proper development for agriculture and industries which will have their own requirements for the services sector. The residual will form the creative arts cloud.

hishamh said...

Oh, I'm not disagreeing with your main point - we need a balanced economy, not a an all or nothing strategy. Case in point is that the ETP actually does envisage big changes in the way we approach agriculture as a business rather than a political soup bowl.

But I remain pessimistic regarding the redeployment of labour. If for instance we improve plantation productivity via mechanisation and improved work practices, can you imagine retraining low-paid, low skilled planation workers for something else? They're not going into creative arts, that's for sure. Same argument for factory workers.

The research I've seen indicate that education intervention gets more expensive and less effective as a person ages. I don't think retraining/reskilling will be very effective.

In this instance I'm less worried about those within or about to leave the education system, but more about those in existing jobs which will fall by the wayside. We could end up marginalising a whole generation of workers who don't have the skills, and don't have the aptitude to pick up new ones.