The global economy today is experiencing major transformations. In the last two decades, the emerging economies have become a growing and stronger force in contributing to global growth in output, trade, investment and even in finance. The developing countries’ share of the world’s output has grown from 20% in the early 1990s to about 36% in 2011, and that of international trade from 30% to 45%.
Similarly, a substantial amount of foreign direct investment (FDI) in developing countries currently originates from other developing countries, in addition to the fact that emerging and developing countries hold a significant amount of foreign exchange reserves. This is a reversal compared with the previous decade when advanced economies held two-thirds of all reserves. In fact, the World Bank has projected that by 2025, global economic growth will be predominantly generated in emerging economies.
These transformations in the global economy are not without precedent. In the economic history of nations, we have seen the rise and fall of past civilisations, as well as the changing paradigms of economic powers. One example is the influence of the Muslims of Andalusia — in what is today Spain — over Europe. And at its zenith, the British Empire’s power and influence stretched all over the globe, shaping it in all manner of ways.
We learn in history that the great civilisations thrived on trade as well as excelled in science, mathematics and medicine. Today, we still find that supremacy in trade and widespread applications of technology, in addition to a wealth of skilled and knowledgeable manpower, are all crucial factors that enable nations to successfully compete in an increasingly globalised economy.
There have been several developments in human history, which have altered the way in which people live. One of the most far-reaching was the domestication of grains and animals 10,000 years ago, which made agriculture a viable alternative to hunting and gathering. With the agricultural economy, value could be stored. People could stock up food and save it for times of need. Agriculture could generate surpluses, which could be exchanged for other supplies, leading to the spread of trade. With the agricultural economy came a more settled lifestyle, and the possibilities of early specialisation of labour. It represented a huge increase in living standards, and enabled populations to expand.
Over two centuries ago, a further advance was made — the advent of the Industrial Revolution. The use of mechanical power to replace the effort of humans or their animals ushered in the age of industrialisation. It began in Britain with the application of hydropower to the textile industry. Water power was replaced in turn by steam power, and then by gas and electricity. The application spread rapidly beyond textiles to other industries, notably iron and steel, and then mass manufacturing in general.
The basis of this new economic organisation was not land, but investment capital. What resulted was the industrial economy, which boosted the production of goods and later food. The capital economy heralded the age of mass consumption and, as Adam Smith observed, “the end of all production is consumption”.
It has been the industrial economy that has made the most striking gains in human living standards, for it has enabled ordinary people to achieve a higher standard of living than ever before in the history of mankind.
Recent changes in economic organisation represent more than a late development of the capital and industrial economy — the dawn of the Fourth Industrial Revolution. It seems that what is happening now represents not a development of the capital economy, but its replacement. This new paradigm helps to place in context the changes that take place in the economic organisation. The phrase “new economy” has been used to describe this phenomenon. One aspect of many of these enterprises, which is new, is in the degree to which their major resource is not financial capital, but the skills of people.
Budding entrepreneurs used to compete for financial capital. Now, many new firms compete for a supply of talented or creative people instead. Their output is often not measured in material goods, but rather in services and software. They can be found not only in the new technology, communications, computers and internet-based activity but also in services, including financial services and major advancements in life sciences such as nanotechnology, proteomics, genomics and biotechnology.
Malaysia’s remarkable success in transforming itself occurred within the space of two generations, from an economy based on agriculture and primary commodities to a modern, industrialised economy. In the current context, at the heart of our transformation is the strengthening of the growth trajectory to become a developed and high-income economy.
In this respect, maintaining short-term economic resilience and strengthening long-term structural foundation are the necessary conditions for us to move forward. These require structural issues to be addressed, particularly with respect to the need to shift to higher value-added and knowledge intensive activities, as well as to provide the conducive eco-system for private initiatives and talent to drive the nation’s growth trajectory.
The shift calls for productivity growth. In particular, strong future growth performance depends critically on the economy’s ability to sustain improvements in technological dynamism and to successfully transit towards internal sources of demand. This, in turn, entails that we continue to support growth driven by total factor productivity (TFP) through improvements and advances in technology and, more importantly, growth of skills and entrepreneurship. The new growth trajectory requires better education, scientific discovery and adoption of cutting-edge technologies. New ideas and constant innovation through science and technology are the key drivers for this innovation-driven growth.
This requires greater investment to create strong human capital development as investment in people is key to solving the challenges of sustainable growth. In this context, education and training, especially in science and technology, will provide the needed skilled workforce. Recognising the importance of education in strengthening the nation’s competitiveness, Malaysia has invested heavily on education.
Innovation and innovative capacity are already rising in emerging economies. Innovation is a kind of a frame of reference, a mindset or an environment that requires the courage to make mistakes and the understanding that we are allowed to fail.
Talent is key to these breakthroughs. We cannot be on the road to a knowledge-intensive and innovation-led economy without talent to drive it. While Malaysia has talent, including global talent, we also have to compete internationally for our own talent. Thus, Malaysia needs to be globally competitive to create, attract and retain talent.
In the final analysis, becoming a developed nation will be meaningful only if the benefits trickle down to all Malaysians. However, attaining the high-income status economy is a prerequisite for improving people’s well-being and achieving happiness. It ought to be noted that the top 10 countries in the United Nations World’s Happiness Report 2016 are all high-income economies.
Samirul Ariff Othman is an analyst with local think tank Malaysian Institute of Economic Research. He completed his graduate studies at Macquarie University in Australia. The opinions in this article are his own.