Raja Nazrin's keynote address at the National Economic Outlook Conference 2008/2009

KEYNOTE ADDRESS BY RAJA MUDA OF PERAK, RAJA NAZRIN SHAH AT THE NATIONAL ECONOMIC OUTLOOK CONFERENCE 2008/2009
DATE: 28 NOVEMBER 2007 (WEDNESDAY), TIME: 10.00 AM
VENUE: HOTEL HILTON KL

“Fifty Years of Development: Lessons Learnt”

Ladies and Gentlemen:

1. I am delighted to be here this morning to speak at this National Outlook Conference, an event that is one of the high points in the nation’s economic calendar. The Malaysian Institute of Economic Research has served the nation well for over twenty years with its independent research, and it is only fitting that we recognise its many contributions. Independent research institutes have a very important role to play in modern societies. Their analyses and conclusions may not always receive universal agreement but divergent viewpoints can be useful in provoking healthy debate about issues of national importance. They force us to think more deeply, more clearly and more creatively. They help us avoid the dangers of “groupthink”.

2. It is in this spirit that I turn to the subject at hand. Today, I want to exercise speaker’s licence and focus my address on issues of development and nationhood. I do this for the obvious reason that whether we can achieve our development goals hangs critically on whether we can remain one united and cohesive nation. The latter is a mantra that is constantly repeated but quite often construed and implemented in narrow and self-serving ways. I am of the view that we urgently need to re-evaluate our existing stereotypes and notions about development. I will draw attention to some concepts from the recent development literature that I believe are very relevant to us, with the hope that these can take root in discussions among scholars and policy-makers.

3. Let me start with the present state of development and then proceed to deconstruct it into its component parts. Malaysia today runs with the pack of middle income countries. With a 2006 GDP per capita measured in purchasing power terms of almost US$11,000, the country has a figure that is higher than Mexico and Turkey, two countries that are members of the Organization for Economic Cooperation and Development. At independence in 1957, Malaya was comparable with Sri Lanka, the Philippines, Ghana, Morocco and Senegal in terms of per capita income. Fifty years on, the country’s per capita income had increased six fold, to reach a level that is double that of Sri Lanka, three times that of the Philippines and Morocco and six times that of Ghana and Senegal. More importantly, there have been marked improvements in life expectancy, infant mortality, literacy, access to education, health services and in the incidence of poverty. The country has surpassed most of the United Nations Millennium Development Goals and, while there remains a great deal to be done, the UNDP accords the country a High Development Index.

4. All of this point to Malaysia being a development success story, and, not just from the viewpoint of our own policymakers but also from the international community. The standard reasons for this are an open economy, liberal foreign investment policies, high savings and investment rates, prudent macroeconomic management, pro-private sector policies, and high public investments in education, infrastructure and rural development. These days it also seems relevant to point out an often taken-for-granted fact: Malaysia has always had a civilian government and no military presence in domestic politics or the economy. If nothing else, this alone should be a strong selling point for the country. Overarching all of these reasons is the fact that development has taken centre place on the national agenda for the greater part of the last half-century and produced undeniable results. The relative lack of civil conflict has enabled the focus on development to take place, while development has, in turn, had a generally calming effect on the various social groups.

5. The question as to why some countries grow rapidly while others grow slowly or not at all constitutes one of the most important in all of economics. It is a question that has kept economists busy for decades, and, I expect, will continue to do so for some time yet. It is now a cliché to talk about the growth performance of the East Asian economies during the post-Second World War period, first that of Japan then those of the newly-industrialising tiger economies, namely South Korea, Taiwan, Hong Kong and Singapore. These countries had grown at an average of 6% per annum in per capita terms over a sustained period. To put things in perspective, compare this with the growth records of the leading economies during the Industrial Revolution in the late eighteenth and nineteenth century (around 1-1.5%) or the growth records of the advanced capitalist economies during the first three decades of the post-Second World War period (around 3%). These East Asian countries underwent the fastest economic transformation in human history, to be surpassed only by developments in China and India in recent years. The spectacular economic performance of these countries naturally generated a lot of interest in the so-called East Asian model of development, and in particular on the extent to which this model could be replicated in other countries.

6. In two very important respects, Malaysia is a more suitable model for other developing countries than the East Asian tiger economies. This is because Malaysia shares features with many countries in Asia, Africa and, to a lesser extent, Latin America that makes it an ideal case study.

7. First, Malaysia is a resource-rich country, in contrast to the East Asian tiger economies that are resource-poor. It might seem intuitive to some that Malaysia’s success was a forgone conclusion given its rich resource base. But other countries have large resource endowments as well and they have not enjoyed the same result. Many resource-rich developing countries have found natural resources to be a curse rather than a blessing. They have experienced little more than short-lived resource booms, their economies expanding rapidly while resources last, but contracting once these have been exhausted. Some have succumbed to Dutch disease, with its attendant ills of accelerating inflation, declining export of manufactures and rising unemployment. Many have squandered their resource riches on wasteful expenditures. Malaysia remains one of the few that have managed to transform its rich natural resource base into sustainable development. Resource rents were productively invested in primary and manufactured exports, in improving infrastructure and in strengthening the human capital base. Within a span of 50 years, the economy underwent significant structural transformation, from one that was heavily dependent on primary commodity exports to one that is more broad-based. Gaining a better understanding of how this was achieved is not only of academic interest to scholars but should be of relevance to policy-makers in other countries.

8. Second, Malaysia shares with many countries in the developing world in having a multi-ethnic, multi-religious population. This is in contrast to the East Asian societies that are largely homogenous. Governing a country that is multi-ethnic and multi-religious is very different from governing one that is homogeneous, particularly in a society like Malaysia’s where ethnic groups differ sharply in occupational pattern, income level, geographic location, culture, language and appearance. This makes promoting national unity of utmost importance for continued political stability and economic progress. The Malaysian experience is a classic illustration that development in multi-ethnic societies consists of more than just unleashing market forces. It demands economic growth that is broadly shared among all citizens, as well as the necessary institutional environment to help bring that about. In such a situation, the state has an important role to play in ensuring an equitable distribution of wealth and income between people, between groups of people and between regions. In countries where it has worked well, the result has been a developmental state that has promoted industrial transformation and stimulated economic development. When it has not worked well, state intervention has verged on the predatory, extracting resources and providing nothing much of value in return.

9. History seems to have had a very pervasive hold over some countries by trapping them in an endless cycle of recrimination and violence. Certainly, colonialism, foreign invasion and occupation have had an extremely negative impact on development in much of the Third World. It would take a brave soul to argue otherwise. I cannot, however, come to terms with – and, indeed, I am not convinced at all about – the idea of historical inevitability. As bad as it may have been, colonialism has not held back economic progress in all cases. We forget that both Korea and Taiwan were also colonised, but they still managed to make significant economic leaps. In Malaysia, the colonial legacy left the country with some very strong positives, including the legal system, an efficient civil administration and the English language.

10. If development is not a random occurrence but the result of direct human intervention, it becomes of critical importance to find out why some countries have been able to pursue sound economic policies with greater success than others. Since humans are involved, culture would seem to be a natural candidate. Culture has many definitions but can be seen as the shared values, norms, meanings and behaviours that characterise a society. It can affect development through its impact on organisations and production, on attitudes towards consumption and work, on the ability to create and manage institutions, and on creating bonds of trust through social networks. I will expand on the last of these shortly. But exactly how important culture is to the development process is a question with many answers. Much depends on how it is thought to function. Some subscribe to the functionalist or consensus school. Others prefer Marxist conflict-driven interpretations of culture. Yet others adopt a post-modern view of culture that sees society as the product of open, negotiable and changeable social interactions.

11. The problem with culture is that some elements of it change over time, while others can remain firmly entrenched. In many respects, there can be no economic change without there being at least some degree of cultural change. Take as an example the multinational companies that located themselves in Malaysia’s free trade zones in the mid-1970s and began the process of industrial transformation. These depended on large numbers of young Malay females many of whom were from rural villages and thus traditional social structures. This required breaking strong social values that favoured marriage and household work and disapproved of the unsupervised movement of females to and from the workplace. That this occurred to a significant extent – at its height, females accounted for 75% of electronics, and over 90% of textile, employment – meant a measure of social adaptability and dynamism. This, in turn, allowed rural families to enjoy lessened dependency, higher productivity and additional source of incomes.

12. Many middle-income countries are now focused on human capital development, entrepreneurship and scientific and technological innovation, and Malaysia is no different. The question, however, is whether these can be standalone propositions. Can entrepreneurs, scientists and technologists be nurtured without an enabling political, social, economic and cultural environment? Can they flourish in the presence of perverse incentives and disincentives? The answer is obvious: they cannot. They cannot be removed from how society functions, from the societal norms and values at play, and from how state and private institutions counteract or reinforce these norms and values. Human capital development without the right environment is futility in itself. There are countries today whose citizens are highly educated and whose scientists and engineers are at the leading edge in their fields but who want nothing more than to leave their countries. Countries must change in line with the aspirations of their citizens or they risk losing their best and brightest.

13. It is time that we reunite these disparate parts into our development story. Until we merge the economic discourse of development with the socio-political setting in which societies are embedded, we will tend to underestimate what needs to be done and overestimate our capacity to do it. We will develop selective memory, remembering only results but not causes, only gains but not costs. The inability to reduce the development process to a neat set of propositions or equations will no doubt put some off. Academic journals might be reluctant to publish cross-disciplinary studies. But unless we are prepared to step outside of the boundaries of traditional academic disciplines, it is unlikely that that we will be able to conceive a clear and undistorted picture of development’s prerequisites.

14. In earliest development thinking, physical capital was seen to be the catalyst for development. The Harrod-Domar model, for example, saw growth as simply the function of savings (which was equal to investment), multiplied by the productivity of capital. There has therefore been a central preoccupation with securing the financial resources to develop. Notwithstanding the fact that it was introduced as early as Adam Smith, human capital then became the centrepiece of development. Practice though may differ from principle and some countries loudly and proudly trumpet their human capital policies but still exhibit strong physical investment-bias. With the far-reaching work of sociologists such as James Coleman, Robert Putnam and others, there has been another quantum leap in our understanding of the software of development, and that element is social capital.

15. Social capital refers to the organisations, networks and institutions that allow citizens of different backgrounds to act collectively in the national interest. As Putnam nicely puts it, “Just as a screwdriver (that is, physical capital) or a college education (that is, human capital) can increase productivity (both individual and collective), so too social contacts affect the productivity of individuals and groups". It fosters trust and cooperation and is essential to all kinds of economic transactions, especially long-term investments and efforts to raise human capital and productivity. Researchers have found other significant positive externalities, such as lower crime rates, improved child welfare, better public health, and lower rates of corruption and abuse of power. Thus, the economic benefits of social capital, and, conversely, the costs of social division, can thus be much higher than anyone expects or believes.

16. Social capital manifests itself in four ways. First, it can take the form of organisations such as associations, clubs and community groups. These promote collective action and esprit d’corps based on common goals and objectives. Much care is needed to ensure that social institutions do not, wittingly or unwittingly, promote social exclusion and discrimination rather than social cohesion. The unwavering aim should be to establish organisations that transcend ethnic, religious and cultural boundaries, promote social contacts and create conditions for reciprocity and trust.

17. Second, social capital is represented by the vertical and horizontal networks of relationships among and within citizens of different ethnic, religious and territorial groups. These networks are supposed to lead to bonding and bridging but they may again defeat the purpose if they are not inclusive in nature and are instead used to pursue narrow sectarian interests. The emphasis must therefore be on increasing opportunities for bonding and bridging in residential neighbourhoods, classrooms and the workplaces, all with the understanding that more cultural mix is better.

18. Third, social capital is embodied in official institutions such as political parties, the legislature, judiciary and civil service. Douglass North, Dani Rodrik and William Easterly have all argued that institutions determine the capacity of countries to pursue their collective interests. They are responsible for formulating and implementing policies and laws that affect all groups and these can either promote or penalise good socio-economic behaviour.

19. Fourth, social capital takes the form of synergism or co-operation between state institutions and non-governmental networks. There can probably be no higher expression of trust and confidence than governments working alongside community groups to reach target groups in the population.

20. Physical capital, human capital and social capital constitute the three prerequisites of development. At the end of the day, the difference between a fully functional state and a fully dysfunctional one may lie in nothing more than the quantity and quality of its social capital. How else do we account for economies that, in their early stages, had little physical infrastructure and not even skilled labour to speak of but which have demonstrated great economic dynamism? What would account for landlocked and/or otherwise isolated economies with widespread poverty but able to make the transition to high productivity and incomes? Good fortune? Maybe. I believe that shaping the right socio-economic environment is a very important task and that this does not lie entirely, or perhaps even mainly, in the economic domain.

21. We, in Malaysia, must seek to refine our development thinking. The development community should make social capital an integral part of its discourse. Interestingly, there are studies that show that social capital and institutional quality are related. A recent study by Easterly, Ritzen and Woolcock demonstrates that it is social cohesion that determines how effective institutions are and this, in turn, impacts the formulation and implementation of development policies. Together, social capital and institutional quality may determine our development headroom or how high we will be able to climb.

22. Malaysia has accomplished a great deal over the past 50 years. The next 50 years will be equally, if not more, challenging. Policies that have served us well in the past are unlikely to work in the future. Malaysia today finds itself squeezed between the low-cost economies of China and Vietnam and the high-technology economies of Japan and South Korea. Malaysia’s comparative advantage in the export of manufactured labour-intensive products is fast eroding. Nothing less than the most competitive, innovative and flexible responses are required. To keep internationally competitive, the country needs to take a big step up the technological ladder by moving into high-technology and knowledge-intensive industries. It is well understood that Malaysia’s past growth was driven mainly by large increases in the use of labour and capital inputs. Future growth will have to come from productivity gains and technological breakthroughs. This in turn requires the country to vastly improve its human capital base by investing heavily in training and education, and promoting research and development. Economic policies must be aimed at nothing less than performance. Economic management must be driven by nothing less than competence. In this environment, the lack of social capital and cohesion will be ever costlier to nations.

23. Throughout history it has been crises that have most often driven change. I believe this will not be the case for Malaysia. I believe that in facing future challenges we will demonstrate both pragmatism and fairness.