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

The Necessity of a Hand-in-Hand Institutional and Societal Reform

Published in The Edge newspaper, April 2019.

In 1982, China’s paramount leader, Deng Xiaoping, introduced a two-term limit to China’s Presidency. The purpose of the term limit was to prevent the potential adverse consequences that may arise with a single authoritarian leader, such as was the case with Mao Zedong, who served as the leader of the People’s Republic of China for 27 years, from October 1949 till his death in September 1976.

In March 2018, under the leadership of President Xi Jinping, the legislature of China, the National People’s Congress, voted 2,958 in favour of abolishing presidential term limits, with two opposed and three abstaining. This reversal of Deng Xiaoping’s critical reform meant that President Xi was now able to maintain his leadership of China indefinitely.

In theory, if indeed President Xi, or anyone else for that matter, was a benevolent ruler, capable of putting the people first, then there should be no quarrel between an autocrat and a democrat. But that is a very big ‘if’. What political economy research has found is that while there is no significant difference in average growth rates between autocracies and democracies, the volatility of those growth rates differ.

Growth under autocracy is far more volatile than growth under democracy, and indeed, most of the world’s most spectacular growth stories and most of the world’s most spectacular growth failures have typically come under autocracies.

Coming back to term limits, while it isn’t typically a wise choice to take political lessons from a fictional hero-turned-villain, in the movie, The Dark Knight, Harvey Dent – later Two-Face – says, “You either die a hero or live long enough to see yourself become the villain.” I think Dent is spot on – everything should have a ‘best used by’ expiry date.

It is along this ‘Dent-ian’ view that I wholeheartedly support Pakatan Harapan’s manifesto pledge to introduce a two-term limit for the Prime Minister role. And I was also very encouraged to hear Prime Minister Tun Dr. Mahathir state at the recent Invest Malaysia event that the government was still actively pursuing the process of limiting the Prime Minister’s term to two terms, though challenging it may be given that this change (and the separation of responsibilities of the Attorney General and the Public Prosecutor) requires amendments to the Federal Constitution.

I sincerely hope that this promise by Pakatan Harapan can be fulfilled. But let’s suppose that Pakatan Harapan managed to get Parliament, one way or another, to acquiesce to this pledge and agree to amend the Constitution to limit the term of the Prime Minister to two terms. Great, we got this done, we now have term limits for the Prime Minister role.

But if the Constitution can be amended as such now, it can also be amended in the future. What if, some time in the future, the government of Malaysia – regardless of whichever political party or leader is in power – reverses these amendments and pulls a Xi Jinping, removing term limits?

The truth is, any given reform, whether it is something as monumental as term limits for the Prime Minister, or something much less monumental such as the colour of school shoes, can always be reversed. Reforms are designed and implemented by humans. The reversal can also be done by humans. And, to be clear, it is not just the term limit reforms that I am concerned about, it is any reform that promises to improve governance, integrity, and other such desirable traits to the country. Can we really protect against reform reversals?

Well, the good thing that we see from research with regards to democracies is that democracies – like Malaysia – allow for the smoothening of volatility, at least of growth. I do suspect that it does go beyond growth, though, in fairness, I have not seen research on the impact of democracy on, for example, corporate earnings. But even if democracies do ‘smooth’ volatility, you can have multiple scenarios of low volatility – the easiest to contrast are good outcomes, low volatility (great!) versus poor outcomes, low volatility (trouble!).

Democracies do not prevent sub-optimal outcomes for a country. We’ve seen this over and over again around the world. This is because, in a democracy, politicians typically try to cater to their voters. In Economics, this is represented by the Median Voter Theorem which states that “a majority rule voting system will select the outcome most preferred by the median voter.”

What if the outcome most preferred by the median voter is a poor outcome? Say, Brexit. Anytime a given democracy has spoken, it is incredibly difficult to reverse the decision, however ill-conceived, as Theresa May and the United Kingdom have painfully found out. The same way, while I may believe term limits are great, the median Malaysian voter may not. That voter may disagree with me and believe that term limits are disastrous – a belief I consider to be sub-optimal – but if politicians play to that, some day, that reform will be reversed.

A recent research paper by economists Istvan Szekely and Melanie Ward-Warmedinger at the European Commission have argued precisely as such. In their work, they investigate reform reversals in former transition countries in the European Union. What they found is that as countries reform themselves to fit the institutional requirements of the European Union, social norms and social learning among the citizens of those countries have not necessarily “been strong enough to outweigh opportunistic behaviour of politicians seeking short-term windfall gains.”

Indeed, external anchors – such as the European Union – may help to protect those reforms, but they cannot replace domestic anchors in the form of a citizenry with the requisite social norms and social learning to support those reforms. In other words, countries that depend on domestic reform via international treaty will typically see a reversal in the reforms that they hope to engender.

The authors give the examples of fiscal systems in Romania and Poland, pension reforms in Hungary, Romania and Poland, as well as banking supervision in Bulgaria and Slovenia, which saw wide-spread reform reversals as social learning could not keep up with the rapid reforms. New institutions did not have sufficiently strong social norms to maintain them. As a consequence, partial and opportunistic reversals occurred in countries where “governments were weak and the economic implications were not felt immediately.”

I think there are a lot of lessons here for Malaysia. As the authors argue, “the ultimate solution to prevent reform reversals is to accelerate social learning processes.” In other words, as we embark on major (and required) institutional reforms in Malaysia, we must also embark on a major communication outreach to ensure that our society embeds the required norms and learning processes to solidify the continuity of those reforms. The institutional reforms that Pakatan Harapan and the Prime Minister propose are critical, and should we get those reforms over the line, we must ensure that we, as a society, do not allow those reforms to be reversed.

May 9th 2018 and the Evolution of a Nation

The Integration of Science and Arts