About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

The Tortoise Won: The Need to Return to Fundamentals

Published in The Edge Malaysia, August 2015.

In the classic story of the race between the speedy hare and the lumbering tortoise, the speedy hare gains a sizable 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.’

58 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 GDP in Malaysia has grown by approximately 6.2% per annum. This is a massive achievement; it is generally noted in the 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 Asian Financial Crisis in 1997 and 1998. Furthermore, it is difficult to extricate if recent Malaysian growth was due to external forces, far beyond its control, or 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 Malaysia were the recipients of plentiful capital inflows from cheap finance in Western nations. Would Malaysia’s growth rates have averaged around the 5 to 5.5% it did during that period were it not for these commodity and credit boom cycles?

As we turn 58 – though, to be fair, we should ask ourselves this all the time – we must ask ourselves, are we the ‘hare’ in the tortoise and the hare parable? Have we grown so rapidly before that we believe we can always achieve some end game growth or income target such as Vision 2020 no matter what we do? Did we become complacent in developing our economy and, more importantly, in developing our nation? Did we, in recent years, ride on the back of the wave of commodity and credit cycles to generate growth, as opposed to getting growth from our own inherent development ‘fundamentals’?

According to 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 industrialization). Thus, growth or development fundamentals relate to the ongoing improvement of a country’s productive capacity and inherent capabilities.

As such, we should then ask ourselves – have we relied too heavily 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 a more services-based economy. We have produced goods and services, for better or for worse, that we would never have dreamed of producing at independence. However, in recent years, when we compare Malaysia’s export structure in 1998 versus its export structure in 2013, we see that commodities have become a larger share of total exports. Were we not supposed to have diversified away from commodities? Why is it a bigger 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 labor force. Do we believe that the acquisition of skills and education by our workforce today is sufficient for the rigors of the present-day economy? Are our educational and training facilities world-class with networks to other world-class educational and training facilities around the world? My suspicion is that the answers to these questions are ‘not even close.’ Secondly, the structural transformation from low-productivity to high-productivity activities. While it is true that the government, firms and people do recognize the importance of moving up the value chain and, indeed, have made sincere attempts to both upskill and diversify our economy, it is perhaps still telling that our primary export – Electrical and Electronic goods – is very low value-added, in the sense that these goods are a result of importing to assemble and then re-export. What truly high value-added goods (and exports) do we produce in massive capacity today?

Finally, and most importantly, in my view, the improvement of institutions and governance. Truly effective and ‘good’ institutions and governance structures reduce the risk of the nation being subjected to the arbitrary choices and moods of its leaders. It is true that it may limit some 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 can leaders get away with, for better or for worse. Thus, we must ask ourselves if our current institutions and governance structures are actually improving or are they actually deteriorating. If they have been deteriorating, why is that the case? And if we want better institutions and governance structures, what exactly are these institutions and governance structures that we want for our economy, and our nation? These questions do not just shape the economic and political landscape of the nation, 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 as we reaped the rewards of Malaysia’s remarkable development over the past 58 years? Did we, as citizens, cause Malaysia to be where it is today because of our contentment and reluctance to go through serious pain to improve ourselves? If we did, we must re-examine ourselves, over and over again. Perhaps we will find that we are a hare that got complacent and maybe we will find that we want to follow the way of the tortoise. Indeed, being a tortoise may be an advantage. As Dani 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 embark on our continuing journey as one people, and one nation.

Malaysia and Regression to the Mean

The Incoherence of Blanket Policies in Malaysia