Sunday, September 27, 2009

Economics @ Home © Volume 1 Issue 10

Output and Growth - Part 3

Dividing the topic of output and growth into several parts was not the initial intention. Ordinarily, I would have preferred to leave a topic to one part alone. However, as I began typing, I realized that there was actually more content than I thought. I also understand that it is difficult to finish a long article in one reading. In this third part, I will exhibit how leakages are detrimental to growth prospects of our resources at the macro and micro level.

Conventional economics suggest that growth comes from investment, and investment is a result of savings. Investment is a very broad term and the things that come to mind when we think about investment are things like stocks and capital expenditure. To be very specific, investment is the postponement of current consumption for future gains. A typical individual would save a portion of his income, usually in the bank and earn the interest offered on deposits until he needs the money. What began as perhaps RM1000 in savings could grow to RM1030 after a year with a 3% growth rate and RM1060.90 after two years. If he had not postpone his consumption, then he can only purchase up to RM1000 worth of products. The idea of growing resources seems easy enough.

People who have studied Keynesian theory would surely recognize that the multiplier of national income is a function of marginal propensity to save. The key here is to achieve maximum growth rate. Is 3% a high growth rate? Before we explore how to achieve high growth rates, we should first take a look at some examples of how growth can be achieved (or lost).

Malaysia was once known as one of the Asian Tiger economies. This is a very misleading statement. Upon a closer look at the underlying factors leading to growth in national income, we will realize that while it is true that our national income did grow at a rapid rate, we have failed terribly at growing our resources. As luck would have it, our country was bestowed riches in the form of natural resources. We are net exporters of crude oil, palm oil and rubber. As technology inevitably advances, we were able to harvest these resources more efficiently and in larger amounts. This has thus increased our national income or as we call it, output.

As mentioned before, growth is a function of investment. While Malaysia happily constructed mega projects all over the country and allowed its proceeds to "leak" through the system in terms of corruption and handouts, we forgot to save. Our country's meek attempts at investment included projects like the Multimedia Super Corridor and the poor excuse of an international airport that is in the middle of the jungle. Other excuses of investments include the billions of dollars spent on the Port Klang Free Zone (PKFZ) and attempts to increase the value-added-ness of our country's output.

I will just throw it out there that a country like India, which has one of the highest poverty rates in the world (at 50%), has a much larger network of fibre optics per square area than our country. While Malaysia has never stopped talking about high speed internet, our broadband champion, Streamyx, has yet to be able to provide consistent service even with its copper cables. When are we going to migrate to fibre optics and if we do, will it be just as inefficient? I wonder if such inefficiencies would have been minimized if there wasn't protectionism in the telecommunications industry.

While infrastructure is one way of investing, human capital is another great area to invest in. Singapore is a success story for human capital investment. Other than handouts to unqualified students, our government has also "invested" in the best technology for a select group of schools that were conveniently renamed as "smart schools". Brand new high-end computer equipment were bestowed upon these schools, funds were granted to construct labs to house these equipment and endless scholarships were awarded to the inadequate to study in these schools. When can we learn that there is no way that we can become world champions in golf, tennis or soccer by using Tiger Woods's clubs, Roger Federer's rackets, or Lionel Messi's boots in their respective sports? Giving a caveman a computer is not going to create an IT expert.

What's worse is that not only are the high-end equipment under-utilized, but they were also procured from "government contractors" who had to "bid" to supply these equipment to the schools. Of course the definition of bidding is debatable, especially in a country which refuses to keep up with the times in teaching English effectively. Goodness knows that these equipment were obtained at exorbitant prices that are way above the market price. A simple inquiry to any school will let you know that the schools are not allowed by the Ministry of Education to purchase computers from other contractors except the ones appointed by the government in the name of standardization. And I thought that the concept of buying wholesale would entail discounts that are derived from bargaining power. The obvious flaw in this system is the lack of competition.

These leakages are too common in the government bureaucracy. Not only have our resources been misallocated in terms of investment, but most of our savings are foregone via these leakages. Not only has our country failed to invest efficiently but also simply failed to save. Thus, that is why I say it is misleading to call Malaysia an Asian Tiger. We are perhaps a complacent sloth that failed to forage and store food for the winter. We have grown fat and content by exhibiting income growth without growing our resource base. We merely consumed more by producing more efficiently. How high can you build your tower if you do not build a wide base?

To apply these concepts at the micro-level, I will focus only on income for the time being. While saving our money in terms of fixed deposits (FD) is a sure way to grow income, it is probably obvious to you by now that 3% is meagre. Taking into account average expected inflation of 5%, your real returns from FD would be negative. FD is a sure way of getting poor slowly but surely. This is an example of fund misallocation.

In worse cases, we ourselves spend unnecessarily in unproductive goods and services and forego growth completely. Not all these expenditures are deliberate. Just this month, I spent RM200 on my examination fees and other smaller amounts for car-servicing etc. While these expenditures are "necessary", they function as leakages because I will not be able to invest them for future gains. The money is lost forever. Compounded at about 5% per annum, RM200 would become RM325 in just ten years, a growth of almost 63%.

While these leakages are unavoidable, we can choose to minimize those that are. For example, unnecessary shopping and fine dining. I am not forbidding myself from the occasional indulgence, but what I am saying is that skipping one or two of these expenditures per month can grow your resources quickly if invested in the right places.

As a final word, this issue of Economics @ Home dwelt upon the "do-nots" of saving and investing. What may seem like an unproductive activity is intended to create an awareness of the detriments of leakages. We often condemn the leakages that result from the government's misallocations, but also tend to overlook our own leakages. It is important to build a strong self-awareness when it comes to allocating our resources. Next week, as a conclusion, I will try to be more productive in exploring the possible ways in which we can grow our output/income more efficiently.

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