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Malaysia's Development Challenges: Graduating from the Middle

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Malaysia's Development Challenges: Graduating from the Middle bs_bs_banner BOOK REVIEWS In the Quest for Prosperity, Lin proposes that observing that countries will fail by investing so governments of poor countries can promote far from their comparative advantage to a govern- growth by providing the ‘hard’ (power, telecom- ment knowing what ‘hard’ and ‘soft’ infrastruc- munications, roads, etc.) and ‘soft’ (education, ture and provision of information will be of most financial, and legal) infrastructure necessary to use to certain infant industries. support the structural transformation that has to While being critical of Lin’s central thesis, I take place continuously for an economy to grow have to say that this is an enjoyable and instructive based on its comparative advantage. Moreover, book. The reader is treated to a wide range of its comparative advantage will change as the eco- developing country experiences drawn from Lin’s nomic structure changes. travel in his World Bank job. These experience are The new line in Lin’s thinking about the eco- used very well to illustrate important points about nomic growth process that may make some econo- the development process—especially about the mists uncomfortable is his emphasis on mistakes made by developing countries in government provision of the ‘hard’ and ‘soft’ attempting capital-intensive import substitution. infrastructure to reduce the transaction costs for There is also an excellent summary of the eco- new firms. The justification for such government nomic theory of growth (Chapter 5). However, it actions is that the process of industrial upgrading is a contentious book and hopefully will foster and structural transformation is beset by market much debate over the growth paradigm. failure and, therefore, because of these informa- tional and infrastructural externalities, pioneer Ron Duncan firms will underinvest. It is reasonable enough to The Australian National University argue that governments should be in the business of providing these kinds of infrastructure; but Lin goes much further by implying that governments will know what forms of market failure—informa- Malaysia’s Development Challenges: tional or infrastructural—will exist at any point Graduating from the Middle along the structural transformation route. Hal Hill, Tham Siew Yean, and Ragayah Haji Mat Zin Economists uncomfortable with the idea of (eds) governments attempting to ‘pick winners’ will Routledge, London and New York, 2012 squirm when Lin talks about ‘encouraging the Pp. xxvi + 348. ISBN 978 0415 63193 8 entry of firms into some industries aligned with the country’s comparative advantage’ (p. 93) Malaysia’s Development Challenges: Graduating and ‘helping the private sector identify the new from the Middle is an edited collection of 13 chap- industries that are consistent with the economy’s ters on various aspects of Malaysia’s political comparative advantage, which evolves as the economy, including politics and governance, endowment structure changes and to facilitate corporate ownership and performance, policy the entry of firms into industries in which they responses to economic crises, the financial sector, can prosper’ (p. 101) But do bureaucrats know public finance, regulatory reform, the service any better than investors what activities are con- sector, the electronics industry, educational sistent with a country’s comparative advantage? policy, poverty and inequality, demography, and Economists do not have much of a tool kit for the environment. In spite of the wide diversity of identifying a country’s comparative advantage— topics, the chapters cohere with a common especially from an ex ante viewpoint. Apart from theme: the contrast between the extraordinary broad overall perspectives about of whether a progress of the Malaysian economy since Inde- country is labour, land, or capital abundant, pendence and the major obstacles that may retard all we have is Balassa’s Revealed Comparative continued progress from middle income to high Advantage measure, which is an ex post exercise. income status by 2020—the stated goal of Lin bases his proposed new paradigm on his Malaysian policymakers. The editors, Hal Hill of earlier discussion in the book (Chapter 3) on the The Australian National University and Tham lessons from the failure in post-World War II Siew Yean and Ragayah Haji Mat Zin of the attempts by newly independent poor countries to National University of Malaysia selected a virtual develop by investing hugely in capital-intensive who’s who of leading Malaysia specialists as the industries. But it is a big stretch to go from chapter authors. 163 © 2013 Crawford School of Public Policy, The Australian National University and Wiley Publishing Asia Pty Ltd. ASIAN-PACIFIC ECONOMIC LITERATURE Overall, the chapters are of very high quality, economy into a Gordian knot that must be cut if typically characterised by critical reviews of prior progress is to be made. Because the debate over research, presentation of time series trends (often the NEP is at the heart of almost every chapter in consisting of secondary data from government this volume (and national politics), a brief digres- reports), and discussion of government policies sion is required before addressing the major con- and programs. The volume begins with an excel- tributions of the volume. lent overview of Malaysian development by In the aftermath of the 13 May 1969 race riots in Hill—presented in the form of six stylised facts, Kuala Lumpur, the NEP was crafted as a 20-year or generalisations about Malaysian economic government program to eliminate poverty among progress and policymaking: rapid growth, rapid all groups in Malaysia and an affirmative action structural change, consistent openness, compe- program to bring the Malay majority into eco- tent macroeconomic management, social progress, nomic parity with the more urban and well- and ‘institutional quality, political economy, and educated Chinese and Indian minorities. Since ownership structures’ (a grab-bag of loosely 1990, the NEP has been successively repackaged as related thoughts). My only lament is the lack of a the National Development Policy, the National concluding chapter that summarises the major Vision Policy, and the New Economic Model, but findings and the overall significance of volume. the essential elements of the original program Although Malaysia’s progress has been less have continued. Many supporters of affirmative spectacular than the Asian miracle economies of action, such as Ariff, are very critical of the use of South Korea, Taiwan, and Singapore, Malaysia’s the NEP agenda to provide subsidies (scholar- average annual per capita GDP growth rate of 3.5 ships, credit, jobs, and corporate wealth) to the per cent for the last three decades has still been families of very wealthy Malays and those con- one of the best in the world. This record is all nected to positions of power in the government the more impressive given periodic economic and politics. Although low-income Malays (and crises—the decline in commodity prices in the some Chinese and Indians) have also gained from late 1980s, the Asian Financial Crisis of the late NEP programs, there is little doubt that the ben- 1990s, and the Global Financial Crises of 2007– efits have been skewed to the Malay elite under the 09—and population growth rates of over 2 per guise of inter-ethnic equity. cent per annum. Each economic recession has The primary criticisms of the NEP in this been V-shaped: a major dip followed by a rapid volume are that government cronyism has dis- recovery. And in a world beset by wars of succes- torted the discipline of the market economy and sion and ethnic strife, Malaysia’s precariously has corrupted the integrity of public institutions. balanced regional and ethnic divisions have been Over the years, the government has sponsored remarkably peaceful. These divisions have not a number of public (or semipublic) corporations disappeared and some think that social relations that have had preferential access to capital, have worsened; but the safety valve of emigration natural resources, no-bid government contracts, and rising economic levels for most Malaysians and protected markets. With a few notable excep- has generated more moderation than conflict. tions, most of these enterprises have been failures. These achievements are acknowledged by the There has been little accountability for the mis- chapter authors, but their primary focus is on the management or for the diversion of public funds shortcomings of Malaysian governance and eco- into the pockets of the new Malay tycoons, who nomic policies that are likely to slow Malaysia’s are often working closely with Chinese busi- assent from middle to high-income status in the nesses. Inter-ethnic class alliances, along with coming years. ethnic patronage, are the key dimensions of the In his hard-hitting preface, Mohamed Ariff post-NEP Malaysian economy. charges that government policies allowing large- Another major theme of several chapters is the scale immigration (about 25 per cent of the decline in the professionalism and competence Malaysian workforce is foreign born) have kept of the civil service and of the Malaysian govern- wages low and stifled innovation. He also begins ment, including regulatory agencies and the the volume’s critique of the New Economic Policy courts. In spite of Malay preference during the (NEP) with the charge that its implementation, if pre-NEP era, the Malaysian government sector not its intent, has led to corruption, rent seeking, had traditionally been multi-ethnic
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