Sunday, June 19, 2011

Volume 3 Issue 25: Two-Cent Economics

European Lesson for Malaysia

Here is an article from the Chief Economist at the Centre for European Reform.

If you read through the entire article, it explains how sustained improvement in standards of living can be achieved in an economy via productivity growth. The article briefly discusses why many of the Eurozone economies are in trouble right now, and also why many of them are stuck in a rut.

The article serves as a premonition of what is going to happen to Malaysia in about 10-20 years if we don't start focusing on productivity growth. In fact, if you replaced anything "European" in the article with "Malaysia", I would say the article would still be 90% accurate. Here are some examples:
Governments obsessed with national competitiveness are likely to pursue damaging economic policies. If economic growth is seen as being dependent on the cost competitiveness of exports, governments will focus on things that might make sense for exporters, but not for their economies as a whole, such as labor-market policies aimed at artificially holding down wage growth, which redistributes income from labor to capital and exacerbates inequality.
Does this remind you of the massive import of cheap foreign labor in Malaysia?
...An individual firm can cut wages without undermining demand for whatever good or service it produces. But if all firms cut wages simultaneously, the resulting weakness of overall demand undermines companies’ incentives to invest, in turn depressing productivity growth.
The article makes it sound so obvious, yet our government has failed to see the point after 40 long years of the NEP.
...Without stronger productivity gains there, economic growth will prove elusive...
But improvement presupposes diagnosing why Europe’s productivity performance, with a few notable exceptions, has been so bad. There are two core problems. The first is inadequate skills levels, aggravated by complacency.
If you replaced "Europe" with "Malaysia", you wouldn't miss a thing. It is exactly the problem Malaysia is facing right now.
The second problem is inadequate competition. In too many sectors, incumbents are protected. This is justified in terms of upholding “social justice” or defending “national champions.” But it merely fuels rent-seeking – the ability of particular groups in society to extract disproportionate rewards for their work. Where this tendency is strongest, productivity levels are weakest.

This is the clincher for me. What more needs to be said?