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Dear Anwar...




Anwar, in recent weeks you have sought to allay fears of an imminent recession by iterating that an eight-percent growth was attainable next year. I must caution you, however, that the temptation to 'dash for growth' must be resisted at all times. Growth fluctuates about a long-run trend. If there is a period of prolonged departure from this trend, then by implication, a recession will be imminent so that the long-run trend in growth is returned to. Many have suggested that seven percent is an adequate long-run rate. Such suggestions whilst completely arbitrary do however capture an essential point: there is no economy in the world that has a long-run growth rate of eight percent per annum! Attempts to maintain eight-percent growth will not only become more difficult in the future, as people would be disinclined to believe its feasibility, it would also imply future periods of stagnation.

There is also another common misconception which I feel I must warn you about. Undoubtedly, moves towards a liberalisation of the economy would hit hardest our heavy industries. Some may view this as a retrogression insofar as our technological progress is concerned. I submit that such concerns, whilst understandable, are misleading. The temptation to 'dash for technology' should be resisted - possessing the latest technology does not guarantee strong growth. Nowhere is this more potent than India, where despite access to nuclear and space technologies, India is hardly a success story thus far. Moreover, attempts in Singapore to target technologically advanced industries has resulted in no higher a long-run economic growth rate compared to Hong Kong, an economy with which it shares so many similar characteristics but which does not have an interventionist industrial policy. Exposure to foreign competition is still in my view a more effective mechanism to upgrade our technological capabilities. After all, the multiplicity of firms at the forefront of production are in a better position than a government to decide what technology best be adopted or which would succeed. More importantly, firms are also a better judge than governments in deciding whenthe technology-upgrading is feasible. The greater diversity that follows from allowing firms to decide the technology-upgrade (rather than government sequentially targeting industries) also allows greater access to technological expertise. We do not know at present which technologies will prevail and which will fail. Thus, diversity allows us to entrench our position in as many technologies as possible. All this therefore points once again to the liberalisation of the economy and minimal government intervention in economic activity.

INCOME INEQUALITY. Anwar, under the Seventh Malaysia Plan, income inequality is expected to rise. As we are a labour-abundant country compared to the industrialised nations, this forecast jars with the predictions of the Hecksher-Ohlin Theorem, which predicts that in a labour-abundant economy, liberalisation should reduce income disparity. Although still in the infancy of research, there are a group of economists who believe that inequality harms growth. However, this is not a call for redistribution programmes insofar as the key to tackling income inequality is through education. In a country where human capital is relatively scarce, it is inevitable that those with expertise command rents thereupon. These rents manifest themselves in a relatively huge wage rate accrued to those with education. As more and more the nation's population becomes educated, however, these rents would be eroded and therefore, in a relative sense, income inequality is reduced. In order to facilitate this process further, I also propose that all Government scholarships be awarded on a means-tested basis. Also, in conformity with our aim to become a 'caring and compassionate' society, the welfare of the less fortunate should not solely be made the responsibility of government. That is, the helping of others need not become solely a public domain. As such, I propose the encouragement of private educational trusts in order to help with the funding of education.

STRUCTURAL REFORMS. Anwar, apart from reducing the Current Account deficit, one the most talked about feats which you allegedly must achieve is to strengthen the financial system. A strong financial system will undoubtedly be able to withstand the impact of any future economic crises. However, it does not over come the problem of over-lending. Over-lending will always be present so long as interest rates are lower than they ought to be, however strong the financial system might be. As such, measures to strengthen the financial system must play a decidedly secondary role to the proposals outlined earlier on the conduct of monetary policy.

Finally, Anwar, before turning to long-run growth, allow me to alert you to the market structure of the Malaysian economy. Eighty percent of Malaysian industries are oligopolistic; that is, they are dominated by only a few companies. That this is so implies that there is potentially lost output. It is a well-known proposition in microeconomics that a lack of competition in a market is characterised by output being lower than is socially desirable and, as a consequence, prices being higher (than is socially desirable). The combination of both features results in a net deadweight loss. Once again, such losses mean that the economy is comparatively inefficient. As such, I propose that there be a serious commitment to instituting a national competition policy to ensure that our markets are sufficiently competitive.

Page 4: Longer-Term Considerations: - Long-Run Growth



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