Wednesday, May 2, 2012

In Desperate Need For Competition

Modern economics introduces the idea of competition as a route to fairness, so long as the judgement of the masses is free and informed with no one dominating opinion. Likewise, the idea of the Olympics where, instead of fighting in battle fields, the energies of the young are pitted one against the other in fair and open competition - provided that no external unnatural artifacts or substances are used to provide unfair advantage. This ideal is extended to politics where the views of all are aired and heard and then a consensus is arrived at, hopefully in as amiable and acceptable a position as can be hoped for.

In reality, the tendency is for a few to dominate. Domination is the harsh reality. It is the ability to hold domination by a few in check that is the hallmark of a fair society. The obverse is domination by the majority which in itself is also a form of tyranny in itself. Universal fairness or consensus is therefore a special case which is hard to come by in reality.

In this imperfect world, how do we arrive at a second-best form of  fairness where the views of society is taken into consideration? In economics, the common approach is to prevent the rise of a dominant economic force or monopoly and promoting competition or smaller harmless units. This anti-trust approach runs into problem when there are foreign monopolies which the domestic government cannot control, and where the local competitors are too small to have a fighting chance. One response is to prevent the entry of foreign monopolies - but this has the problem of not being able to enjoy the fruit of foreign innovation. The theory of comparative advantages teaches that one should allow in foreign monopolies while trying to establish our own local monopolies which we can try to dominate in foreign markets. (This is interesting as the theory of international trade seems to run counter to the theory of perfect competition.)

It is in trying to dealing with the reality of monopolies or large economic forces that government has to regulate the market. The failure of the government to regulate when the market is allowed to compete freely among itself in the hope that the "invisible hand" will somehow takes care of everything has led to disastrous results in recent years in the global financial sector. (What the policymakers have failed to realise is that when the "invisible hand" works, it forces those who are incompetent to fail and this is not allowed for financial institutions because they hold in trust deposits of the public!)

In Malaysian economics, the attempt to destroy Chinese monopoly has not led to the break up of Chinese businesses into smaller units, but the creation of Bumiputra monoply which unsurprisingly work in collusion. While the monopolies stay, the only transformation is the ownership.

The major problem with the political solution to an economic problem is that the solution concentrates on power - both political and economic. It is the abuse of political and economic power that leads to the corruption of the proper functioning of the national economy and society and the major victims in this game is the ordinary men and women for they have to be deprived of their basic means to survival and livelihood so that the elite can enjoy opulence in the midst of economic stagnation. In other words, low interest rates, low currency, persistent inflation and the inability to create sufficient decent jobs for new highly trained job seekers. There is no proper investment in technology and productivity gains.

In Malaysian politics, the domination of one coalition (as well as one man in that party) is now being fought by one coalition opposition (which is being dominated by one man). What is interesting is that a supposedly racist coalition is being challenged by a supposedly socialist-justice-religious coalition. The racist argument is now proven to be a convenient strawman for the elite to share and consolidate their grip on the economy. The general public has now become wiser after three decades of abuse. The socialist-justice-religious coalition jumps in to ride the current in the hope of taking over the power.

The call for clean elections is another way of expressing the feeling that change is imminent, "if only things are fair." The attempt by the opposition coalition (which is dominated by one person) to capitalise on that call by creating social disturbance is an indication of how healthy competition can quickly degenerate into a desperado act. Who ever says politicians are ethical people?

The current political problem is purely an economic problem which has its seed in a misguided policy of disenfranchising the whole working population by giving special privileges to one group (thus giving them the signal that they can take and do not have to work) and by telling the rest that they do not have to work so hard because not all that you work hard for will not be yours - in addition to the cut that the government (and civil servants) will take from you in the form of the income tax. Malaysia has undergone the great economic experiment of how to destroy the incentives to investment and innovation while inculcating a national culture of grab and run away.

The opposition idea of how to do the same things with "transparency and no corruption" is to work on the assumption that the current economic model with its domination by monopolies is still correct.

The old guards have all gone, the intermediate generation has gone off to other countries, and the only ones that are left are those who have decided to stay back and pick up the pieces from the economic debris. Malaysia needs new political and economic leaders to provide a new and clear vision of how to stay competitive in the new global economy.

The newly imposed minimum wage may be the best first step yet. It will have problems because it will make uncompetitive businesses unprofitable. It will also say that low skilled workers may not be the path to high income. But with an economy which the central bank and economic planners still think that low skilled labour intensive plantations and assembly lines is the mainstay, we may have a long and treacherous journey ahead. However it is, do not be fooled by the promises of desperate people.