Dr Richard Leete, Excellencies, Ladies and Gentlemen
I am very happy to be here this afternoon to celebrate this launch with such a distinguished gathering.
- I do so with a sense of pride and gratitude. The publication of this book coincides with a momentous milestone in Malaysia’s history – the country’s 50th anniversary of independence. Fifty years is an opportune time for us to evaluate the country’s development record, draw lessons and assess future challenges.
- Malaysia is, by any measure, a success story. We have emerged to become one of Southeast Asia’s most developed and prosperous countries. The UNDP regards Malaysia as a country with a high development index, having achieved a significant number of Millennium Development Goals. The economic leap we have made is remarkable vis-a-vis countries we were on par with 50 years ago. 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 sixfold, 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. Moreover, progress was not limited to income growth. Poverty has been reduced drastically. There have been significant improvements in life expectancy, infant mortality, literacy and other indicators of human development.
- 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. When I was in graduate school, I learned something about the growth performance of the East Asian countries 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%). To put it simply, these East Asian countries underwent the fastest economic transformation in human history up to then, 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.
- In certain 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.
- First, Malaysia is a resource-rich country, in contrast to the East Asian tiger economies that are resource-poor. 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.
- 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. In Malaysia, ethnic groups differ sharply in occupational pattern, income level, geographic location, language and appearance. This makes promoting national unity of utmost importance for continued political stability and economic progress. The New Economic Policy (NEP), formulated after the 1969 riots, was an ambitious socio-economic restructuring program that had as its two major objectives, “the eradication of poverty among all Malaysians, irrespective of race,” and “the restructuring of Malaysian society so that the…identification of race with economic function and geographical location is reduced and eventually eliminated”. These objectives were to be undertaken “in the context of rapid structural change and expansion of the economy so as to ensure that no particular group experiences any loss or feels any sense of deprivation in the process”. The NEP is credited with restoring social and political stability by bringing about growth with equity. The Malaysian experience is a classic illustration that development, particularly 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 it about.
- In societies where political dominance by one ethnic group is combined with economic weakness, state intervention in the economy is likely to be widespread and pervasive. In such a situation, the state has an important role to play in ensuring an equitable distribution of income between people, between groups of people and between regions. When 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.
- That Malaysia was able to prosper these last 50 years is due in large part to political resolve, economic pragmatism and effective implementation of policies. A well-conceived policy shift from import substitution in the 1960s to export-oriented industrialization in the 1970s and 1980s ensured continuous rapid growth. In response to the economic slowdown in the mid-1980s, the government moved away from state-led industrialization and promoted private investment across a broad range of sectors, thereby significantly improving productivity and attracting large inflows of foreign capital. As a result of these and other macroeconomic adjustments, the economy grew rapidly in the decade before the onset of the Asian financial crisis in 1997. Despite initial scepticism, criticism and opposition at home and abroad, it is now generally acknowledged that the government’s policy measures, including capital controls, helped the country weather the Asian financial crisis and put it on the road to recovery.
- Malaysian policy-makers are acutely aware of the changes that need to be made if the country is to continue to prosper in the next 50 years. This begins with the acknowledgement that policies that have worked 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. 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, like the other newly industrialized countries of Asia, was driven mainly by large increases in the use of inputs of labour and capital. 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.
- As we gain a better understanding of how societies develop, a deeper set of questions emerges: why have some countries been able to pursue sound economic policies with greater success than others? Why do some end up with much worse policies and performance than others? A popular school of thought seeks to explain the success of the East Asian countries on their Confucian culture, or what is sometimes referred to as “Asian values”. For example, the argument is sometimes made that the Confucian emphasis on frugality and abstinence from instant gratification allows these countries to achieve the high savings rates that has, in turn, made possible high investments. The limitation of this interpretation, and other such simplistic cultural explanations, is that it attributes a recent phenomenon (high savings) to a millennium-old cause (Confucian culture). To muddy the waters further, some scholars have pointed to certain Confucian characteristics as the cause(s) for the underperformance of these societies in times past. This is not to deny the influence of cultural factors on economic performance, but the effect is likely smaller than often claimed by its proponents. As Jeffrey Sachs has written: “The cultural explanations of economic performance may be helpful in some circumstances, especially in accounting for resistance to capitalist reforms in the nineteenth century, but such explanations should also be tested against a framework that allows for other dimensions of society (geography, politics, economics) to play their role. Controlling for such variables sharply reduces the scope for an independent role of culture”.
- As someone who received part of his academic training in economics, it should not come as a surprise that I believe incentives to be hugely influential in shaping behaviour. Create the right incentives for efficient market behaviour and people will respond accordingly. It is only when China in the late 1970s and India in the early 1990s reformed their incentive structure were they able to achieve high growth rates. However, for growth to be sustainable, these incentives must be embodied in institutions. The ability to provide the appropriate institutional environment for markets to flourish and operate efficiently is essential to sustainable development. Countries that have failed in this respect have experienced stagnating or falling incomes and persistent poverty. These supporting institutions should include the protection of property rights, the rule of law underpinned by a strong legal system, an independent judiciary and the protection of the environment. There must also be incentives for governments to provide good governance. This can be achieved through mechanisms such as the separation of powers, readily available avenues for the public to monitor public behaviour and rules that inhibit corruption. They all contribute toward the effective and efficient functioning of a modern economy.
- I congratulate Dr Richard Leete for undertaking this much-needed study. He is eminently qualified to write such a book. In addition to being a scholar, he has having spent most of his working life in this region, including 10 years at the Economic Planning Unit as advisor on human resources. He is, of course, currently the Resident Representative of UNDP for Malaysia, Singapore and Brunei. I was privileged to be given the opportunity to read the proof copy of this book. I guarantee that all of you will enjoy reading it.
- It now gives me great pleasure to launch “Malaysia: From Kampung To Twin Towers – 50 Years Of Economic And Social Development”.