Viewpoint: The need to return to fundamentals

Viewpoint: The need to return to fundamentals
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IN the classic story of the race between the speedy hare and the lumbering tortoise, the speedy hare gains a sizeable lead over the lumbering tortoise at the start of the race. Midway through the race, the hare believes that its lead over the tortoise is so insurmountable that it decides to take a nap, believing that the tortoise will never catch up.

Famously, the tortoise just plods along, doing its best and going as fast as it can, given its biological capabilities and limitations, overtakes the napping hare and wins the race.

The plain and simple reason that the tortoise won — despite it having no right to win a race against the hare in the first place — was that the hare got cocky and complacent. It believed that its speed, which it used to get the massive lead, would also get it to the finish line, which is a far different thing from gaining a lead. In some ways, the hare believed that what got it “here” would get it “there”.

Fifty-eight years after the winning of independence by Malaya from the British, the national economy has come a long way. Over the past 55 years or so, according to World Bank data, real gross domestic product in Malaysia has grown by about 6.2% per annum. This is a massive achievement; it is generally noted in growth literature that average global growth tends to hover around 2% per annum.

The bulk of Malaysia’s growth, however, was “mid-loaded” with growth rates of over 9% per annum in the early to mid-1990s. The Malaysian economy has never really recovered to the heights of those growth rates from the 1997/98 Asian financial crisis. Furthermore, it is difficult to know for sure if recent Malaysian growth was due to external forces far beyond its control or due to its “fundamentals”.

For instance, in the mid 2000s, Malaysia was a beneficiary of the commodity boom cycle while in the early 2010s, emerging markets, including this country, were the recipients of plentiful capital inflows from cheap finance in Western nations. Would Malaysia’s growth rate have averaged around the 5% to 5.5% it did during that period had it not been for these commodity and credit boom cycles?

Having turned 58 — though, to be fair, we should ask ourselves this all the time — we must ask ourselves this: are we the hare in the tortoise and the hare parable? Do we believe we can always achieve some end-game growth or income target, such as Vision 2020, no matter what we do?

Have we become complacent in developing our economy and, more importantly, in developing our nation? Did we, in recent years, ride the commodity and credit cycles to generate growth as opposed to getting growth from our inherent development fundamentals?

According to Turkish economist Dani Rodrik, the three key growth fundamentals for developing economies are the acquisition of skills and education by the workforce, the improvement of institutions and governance, and structural transformation from low-productivity to high-productivity activities (as typified by industrialisation). Thus, growth or development fundamentals relate to the ongoing improvement of a country’s productive capacity and inherent capabilities.

Therefore, we should ask ourselves this: have we relied too much on our inherent strengths and natural resources as opposed to seeking to continuously better ourselves as an economy, a society and, ultimately, a nation? To be fair, Malaysia has a history of successful economic restructuring with the primary economic activity having shifted from agriculture to manufacturing and, finally, to services.

We have produced goods and services, for better or for worse, that we would not have dreamt of producing when we achieved independence. However, in recent years, when we compare Malaysia’s export structure in 1998 to its export structure in 2013, we see that commodities have become a larger share of total exports. Were we not supposed to have diversified from commodities? Why then do they comprise a chunk of our exports now?

If indeed Malaysia is the hare, then it really needs to reconfigure itself. The way to do that is to return to development fundamentals. Firstly, the acquisition of skills and education by our labour force. Do we believe that the acquisition of skills and education by our workforce today is sufficient for the rigours of the present-day economy?

Are our educational and training facilities of world class, with links to other world-class educational and training facilities around the world? My suspicion is that the answer to these questions is: not even close.

Secondly, the structural transformation from low-productivity to high-productivity activities — while it is true that the government, firms and people recognise the importance of moving up the value chain and, indeed, have made sincere attempts to both upskill and diversify our economy, it is telling that our primary export — electrical and electronics goods — is very low value-added in the sense that these goods are a result of importing to assemble and then re-exporting. What truly high value-added goods (and exports) do we produce in massive capacity today?

Finally and most importantly, in my view, comes the improvement of institutions and governance. Truly effective and “good” institutions and governance structures reduce the risk of the nation being subject to the arbitrary choices and moods of its leaders. It is true that this may limit the upside that comes with leaders making good decisions but it really restricts the massive downside that comes with leaders making poor decisions.

Furthermore, recall that most leaders, by definition, are average and only about 2.5% of all leaders are actually exceptional (good) leaders. An important indicator of how solid a country’s institutions are is simply how much arbitrariness leaders can get away with, for better or for worse.

Thus, we must ask ourselves if our current institutions and governance structures are actually improving or deteriorating. If they have been deteriorating, why is that so? And exactly what institutions and governance structures do we want for our economy and our nation? These questions do not just shape the economic and political landscape of the nation but they shape the very idea of sovereignty in the future of our nation.

Therefore, the question remains: is Malaysia the tortoise or the hare? To be clear, Malaysia could very well be a fox or a cheetah or a snail or a sheep. What’s important is, have we — our leaders and ourselves — become complacent after reaping the rewards of Malaysia’s remarkable development over the past 57 years?

Did we, as citizens, make Malaysia what it is today because of our contentment and reluctance to suffer serious pain to improve ourselves? If we did, we must re-examine ourselves. Perhaps, we will find that we are the hare that got complacent and maybe we will find that we want to follow the way of the tortoise. Indeed, being the tortoise may be an advantage.

As Rodrik argues, “Countries that rely on steady, economy-wide accumulation of skills and improved governance may not grow as fast but they may be more stable, less prone to crises and more likely to converge with advanced countries eventually.” Whatever animal we may be, let us take heed of the wisdom of the tortoise as we continue our journey as one people and one nation.

Nicholas Khaw is an economist-in-training at Harvard Kennedy School. Prior to this, he was an assistant vice-president of the research division of Khazanah Nasional Bhd.


This article first appeared in Opinion, digitaledge Weekly, on September 7 - 13, 2015.