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The ECONOMIC FORUM

Dear Anwar...

continued...

LONG-RUN GROWTH

Anwar, the performance of the Malaysian economy has been made an example of the world over. Whilst this might be so, it is also a well-accepted proposition that our growth is input-driven. In previous sections, I have been alerting you to the need to eliminate inefficiencies and misallocation of resources in the economy. This is so because, as has been argued, inefficiencies compromise upon TFP growth. Growth accounting studies have consistently pointed to the grave conclusion that our TFP growth is negative semi-definite (that is, it lies somewhere between zero and a negative constant) and as such the structural weaknesses in our economy are simply being glossed over by high investment rates. Yet, economists have long accepted the proposition that in the long-run, investment does not affect growth rates. All that matters is TFP growth. More specifically, what matters is that part of TFP growth known as labour-augmenting technological progress. Why so? No doubt, increasing savings would lead to higher fixed capital formation; however, very soon, returns thereto would encounter sharp diminishing returns. More savings and foreign direct investment is therefore not the key to future growth and it must therefore play a wholly subordinate role in our economic growth.

How might we attain labour-augmenting technological progress? Such progress comes through two avenues: (i) imitation; and (ii) innovation. The link between R&D spending and economic growth is tenuous and as such higher R&D expenditure will not necessarily lead to higher economic growth, even more so in the case of a developing country such as ours insofar as we do not have a comparative advantage at pure R&D and therefore our attempts at it will on average be relatively inefficient. The key to growth at our stage is to encourage micro-inventions, inventions which are improvements upon existing inventions (sometimes crudely referred to as imitation of foreign technology). In order to encourage and promote these micro-inventions, I therefore propose the adoption of an official technology policy.

ELEMENTS OF A TECHNOLOGY POLICY. An important pillar in any technology policy must be the safeguarding of property rights and this points to the strict enforcement of copyright laws. An environment in which other firms are able to easily harness the results of the R&D of others would sharply diminish the returns to innovation; thereby discouraging the activity altogether. Once again, diversity in inventions should also be encouraged (for reasons already stated above). In this light, I therefore propose that the Government avoid attempts to promote so-called 'desirable industries' and confine involvement in economic activity to the minimum. This ties in well with efforts to liberalise the economy.

Thus far I have only been speaking in terms of the necessary tools that facilitate labour-augmenting technological progress. Obviously, there has to be a human element to it as well. This necessitates the encouragement of the spirit of enterprise. That to this end the Government has already taken steps and measures through the creation of the Ministry for Entrepreneurial Development, I must put on record my commendation.

Anwar, we have already touched upon the important role that small businesses play. In fact, small businesses possess a more crucial role. A large portion of technological progress is often introduced into the economy via new small businesses. To facilitate this process, I therefore propose the contracting out of non-essential services. To this end, the Government is able to take the lead. I understand that already the private sector is emerging as an important supplier of what has traditionally been the domain of government. However, there are many other avenues which have yet to be explored.

A good start may be the contracting out of economic forecasting. At any one time, a number of private-sector firms already produce their own set of economic forecasts that duplicate official forecasts. The government can therefore rely on the historically most reliable private-sector forecasts. More importantly, however, contracting out economic forecasting would help correct the informational asymmetry in the economy. To this day, the bulk of government still remains very secretive. This secrecy can sometimes inflict costs upon the private sector in the form of uncertainty. The effects of uncertainty upon investment are well-known: greater uncertainty reduces investment. Since the private-sector forecasters would need the complete set of information to be able to generate accurate forecasts - and since the Government would be relying on them - the Government would have every incentive to provide as much information to the private-sector as it possibly can; thereby correcting the imbalance. It must be borne in mind that short-term cost considerations are not the prime motivation for this proposal. Contracting out in this manner creates a whole host of specialised firms. Specialisation greatly encourages productivity and creates a fertile ground for micro-invention.

Finally, in this regard, small businesses, particularly those heavily imbued with new technology, are often shunned by commercial financial institutions insofar as the risks of failure they carry are often relative large. As such, I propose the creation of a Technology Venture Capital (TVC) Fund in order to facilitate entrepreneurs in developing their micro-inventions.

A NON-ECONOMIC PROPOSAL. Anwar, you are certainly right to lament that the number books read by the average Malaysian has fallen to historic lows. Whilst this may reflect an unhealthy attitude, prevalent especially amongst the youth of today, part of the problem may also lie in the fact that there is little incentive to undertake that extra reading. No doubt we are quite tolerant to diverse opinions compared to some nations. However, this tolerance has tended to decline over the years. In my view, this has had the effect of reducing the returns to acquiring extra-curricular knowledge. That government continually seeks a secretive role and operates behind closed doors, the expertise and talents of those with knowledge cannot be deployed in a manner that some might wish to; the attraction of possessing extra knowledge is thus diminished. I hope the Government will take a lead in this role and allow more open consultation with the learned public when forming official policy.

Anwar, I recognise that some of the proposals here may not entirely be novel in themselves. Where they do already exist, I urge you to resolve a strict adherence thereto. The credibility of government policy stems from a consistent and unwavering commitment to an aforesaid policy; strong economic performance from sound policies in themselves. Here, within the limits of my knowledge, I have reviewed various options which could be taken to constitute such policies. No doubt, there are a lot of proposals herewith articulated, more than perhaps one can reasonably expect to come through in a single Budget. But then, every epic journey begins with a small step. I hope that whichever of these policies you choose to take on board, you will hold onto them steadfastly, even where the short-term attractions to depart therefrom loom large.

October 17th will indeed be a closely-watched day. I wish you the best of luck.


Yours sincerely,
Rashdan

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