In search of a socially just development growth model

Malaysia is said to be on track to achieving the goals of high income and developed nation status by the year 2020. While macroeconomic targets like the GNI per capita at US$15,000 (RM48,892) and the creation of 3.3 million jobs are arguably within reach, the graduation process to become a fully developed nation is still an onerous one.

What constitutes a developed nation? Surely it is beyond just economic numbers. It involves a lot more key metrics encompassing the strengthening of both economic and social institutions and good governance as exemplifying justice and social cohesion, rule of law, transparency, accountability and integrity as the hallmarks of most developed economies.

The metrics cover quantitative measurements of sovereign rating and creditworthiness much as it pays attention to accessibility to economic opportunities for all and social protection of the weak and disadvantaged groups. Core labour standards need to be much improved as protection of the environment is a matter of critical policy of the state.

More substantively, there is a global admission of a rising disconnect between a country’s per capita GDP and its citizens’ well-being as rapid output growth both exacerbates health challenges and erodes environmental conditions.

Trickle-down economics or the mantra of “a rising tide that lifts all boats” has been widely challenged by overwhelming evidence that despite rapid growth, economic inequality has been rising in most countries and is grossly inadequate in meeting the basic needs of the rakyat and in ensuring the quality of life, living standards and welfare of society as a whole.

With that backdrop, it provides little significance for the prime minister to gloat about achieving 6.4% economic growth for the second quarter of this year and 6.2% in the first quarter. Similarly it doesn’t make much sense for a minister to highlight an 18% to RM5,900 per month from RM5,000 in 2013 for average household income when 80% or 7.9 million of the country’s household were reported to be “cash” recipients of BRIM3.0 in 2014.

The task of the current administration or the next Malaysian government for a national transformation is of a different order of magnitude from the previous government after independence. Transformation would require a sea-change beyond just the pursuit of growth, economic efficiency and job creation.

Most important is to address the critical issue of growth model, ie. of  developmental challenges.

The history of socio-economic development in Malaysia is arguably one of relative underperformance. Yes, we have outperformed regional peers like Thailand, the Philippines and Indonesia, but countries like South Korea, Singapore, Taiwan and Hong Kong have far outperformed Malaysia since the heydays of 1980s and beyond. Why?

Malaysia belongs to the nations that are said to be in the “middle-income trap”. Malaysia, like many countries, has successfully made the transition from low-income to middle-income status, thanks to rapid economic growth, but has been subsequently failed to transition to high-income status.

The middle-income trap is a development stage that characterises countries that are squeezed between low-wage producers and highly skilled and fast-moving innovators.

While there is a consensus that Malaysia is at a crossroads, there is less of a consensus about which road to follow to achieve the developed status of a high-income economy.

To recapitulate, Paul Krugman (1994) published an article on foreign affairs entitled “The Myth of Asia’s Miracle”, challenging Asia’s economic ascendency as essentially unsustainable. His basic argument premised on Asia’s super-charged growth throughout the 1970s to mid-1990s was largely explained by the mobilisation of domestic resources of both capital and labour, neither of which was sustainable over a longer timeline.

This was in stark contrast to the nature of the earlier American economic growth model, where work by John Kendrick (1961) and Robert Solow (1957) found that between 80% and 90% of American growth in the first half of the 20th century was explained by Total Factor Productivity (TFP), ie. the utilisation of pre-existing capital and labour, not the application of ever increasing amounts of capital and labour, as was the case in Asia.

According to the Solow Growth Model, applying more capital per worker, ie. increasing investment, would result in higher output per worker but only up to a certain point. As the economy reached a capital-saturation, additional capital would cease to lead to higher output, in a diminishing return fashion, and growth would stall.

As it is, the momentum of Malaysian economic growth and much of Asia’s developing economies have indeed been noted to have fallen over time. Malaysia’s economy has to transition away from an input-led growth model towards one driven by productivity and strongly leveraged on innovation and higher-value added enterprises. The Malaysian government and Khazanah Nasional Berhad, as the Malaysian sovereign fund manager, would surely admit that this is a work in progress.

Be that as it may, this writer is now looking forward to attending the up and coming Khazanah Megatrend Forum (KMF) 2015 in Kuala Lumpur next week, entitled “Scaling The Efficiency Frontier: Institutions, Innovation and Inclusion”. The KMF will be focused on finding a pathway for a sustainable economic growth model. – September 29, 2014.

* Dr Dzulkefly Ahmad is executive director at the PAS research centre.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.