This article first appeared in Forum, The Edge Malaysia Weekly on July 30, 2018 - August 5, 2018

The Marxian idea of economic determinism stipulates that economic forces shape the political, social and cultural aspects of a place. In politics, the slogan “It’s the economy, stupid”, originally used by US President Bill Clinton in his successful presidential campaign in 1992, became popular in election campaigns. The assumption is that voters care mostly about their pockets, lending credence to the idea of economic determinism.

The rise of identity politics has, however, negated somewhat this notion of the selfish homo economicus, or economic human, voter. The American and British experience has shown that a significant number of people vote more to further their identity interests than their economic interests — racial or religious considerations matter more than improving their economic well-being. We saw that in Malaysia as well in the last general election.

The economist in me is tempted to ascribe economic considerations to racism and extremism as well — this group identity means to harmonise preferences and derive demand from them. In that sense, institutionalised racism and religiosity are themselves economic forces that shape political and socio-cultural outcomes.

That voters care about their economic well-being — notwithstanding how that is derived — is obvious. Public policy is supposed to address their concerns but good economic policy cannot be wholly demand-driven. In fact, a major pitfall for governments is the tendency for decisions to be wholly driven by popularity — the irony of popularly elected governments everywhere. Many economies have been ruined by populist policies.

The Najib administration started out in 2009 with the intention of transforming the economy. It formed the National Economic Advisory Council and tasked it with coming up with the New Economic Model (NEM), which was released later that year. It was the right thing to do at the right time.

The world economy was then in the throes of the global financial crisis as a consequence of the US subprime mortgage problem and the government elected here in Malaysia in the previous year had lost its two-thirds majority in parliament. A crisis was unfolding and the people were a discontented lot.

The objective of the NEM — to carve a sustainable and inclusive growth path — was an appropriate one to underpin the intended transformation agenda. It explicitly recognised the rising inequality and that a “new” economic structure was required, thus making the case for a transformation. It also sought to nationalise the economic imperatives of the agenda, neutralising some of the contentious identity-based arguments.

Despite the softening of the language of reform compared with that of transformation, the thrust of the NEM met with resistance. The same language of identity politics, rhetorical though it usually was, persisted and prevailed to preserve the same structure. Some of the prescriptions went through but as in all solution concepts derived systematically, a partial application of the solution does not result in a partial achievement of the objective. Sometimes, it results in a deviation altogether from the objective.

The very difficult policy choice of broadening the tax base via the introduction of the Goods and Services Tax (GST) was a very high political price to pay but the fiscal discipline that should have come together with it was absent. A high political price was paid without getting the commensurate economic dividends. While the tax base broadened, the fiscal deficits persisted and debts did not come down but mounted instead.

But the biggest failure of the transformation agenda was how it was disconnected from the NEM to begin with. The Economic Transformation Programme (ETP) became about implementing specific projects that actually drained the nation’s coffers without being transformative in the NEM sense.

If the idea behind the NEM was to transform a forest into a more vibrant one with taller trees that could attract higher leaping monkeys, the ETP was bogged down in tree-level decisions — what tree specie to plant and where. And its premise was about doing more of the same thing than doing new things. The NEM’s prescriptions, on the other hand, were more about managing the water and air quality in the forest and ensuring the environmental quality upon the belief that under such conditions, the trees will thrive and attract the right monkeys — a sort of endogenised transformation rather than the deliberate planting of specific trees.

Policy effects transformation by affecting incentive structures in the direction intended by it. Government should not be involved in choosing and growing trees but creating an environment that is conducive for trees to grow. And the main challenge for the Malaysian economy in both its long-term prospects and the consequences of its existing growth path is moving away from its still-heavy dependence on commodities and natural resources.

The Pakatan Harapan (PH) government has yet to table its economic plan beyond what is contained in its manifesto and its short-term list is made up of specific action items. Its longer-term proposals, though, do contain some broad themes that require translation into specific programmes and tying them all together into a coherent policy framework.

Improving the institutions of governance is something that will yield long-term dividends — this is akin to improving the overall air and water quality in the forest. In some sense, this strand of policy reform requires the exorcising of ghosts that have haunted the national psyche. It, therefore, requires a new national narrative that binds the majority of the people together.

Another broad concept contained in the manifesto is decentralisation. This has various implications, from defining the role of government in the economy to federal-state fiscal relationships.

GST’s replacement — the Sales and Services Tax (SST) — is still a consumption tax, albeit with a narrower base. The effect is neutral on aggregate demand as it merely transfers consumption from government to households. The challenge arising from this is filling the gap created by the loss of revenue.

Fiscal consolidation extends beyond managing existing and future liabilities, which will come from postponing big-ticket projects and better value-management of projects that have already begun. The revenue side of the fiscal equation — taxation policy and a serious look at non-tax revenue possibilities — warrants serious consideration.

Another set of challenges concerns the labour market and productivity. This is more than just about dependency on foreign workers. It is primarily about the quality and productivity of domestic workers, which point to the quality of human capital and the various institutions involved in that process.

It is also about seriously attending to the issue of female participation and mobility in the labour market. If the economy is not able to benefit from this better part of the labour market throughout their productive life, the whole economy is functioning below par. This problem requires solutions at the micro level — in the family, community and the workplace.

While there may be specific cases of exorbitant executive pay that shareholders may look into, making “high pay” a popular issue is addressing the wrong end of the problem. The real problem that needs serious thinking is the generally “low pay” and the attendant low productivity that is affecting the nation’s competitiveness. The resulting disparity in income — which is a market outcome, not one obtained coercively — is what should occupy the thinking on this issue.

The inequality we observe is a consequence of what the economy does, its economic structure and how the various economic resources are rewarded in the process. Until and unless the issues on the supply-side — quality and competitiveness of human capital — and the demand side — how resources are employed and rewarded — are addressed, the overall problems of national competitiveness and long-term growth prospects remain unresolved.

Clearly, it will take time to resolve any of these issues. The nature of political governance is such that the renewal of mandate occurs in much shorter intervals than is necessary for structural reform to take place. Most, if not all, elected governments want to do the right thing and they have a plan of sorts to go about it. But the real challenge lies in executing the plan.

At the end of it all, I would rather see economics as the basis of political contests than identity-based issues. I would rather see a contest between peddlers of prosperity than between peddlers of salvation when it comes to public policy.

Dr Nungsari Radhi is an economist and managing director of Prokhas Sdn Bhd, a Ministry of Finance advisory company. The views expressed here are his own.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.