Touché

This post is not exactly economics in a strict sense, but Don Boudreaux’s latest column in Pittsburgh Tribune-Review, On the Nature of Politics, is so discerning in its opinions that I can’t help myself from blogging on it.

“Call me cynical but I doubt that most politicians who promise to solve (real and imaginary) problems by passing statutes truly believe their own rhetoric. They might not disbelieve what they say, but I'm convinced that politicians don't ponder the complexities of reality deeply enough to convince themselves of the truth of what they proclaim. They say what they say and promise what they promise chiefly as a means of ascending to power and glory.

I suspect that people self-select into politics because they have an unusually large lust for being in the limelight and an unusually small concern for the ethics of the actions they must take to get there. And because enough voters stand ready to blame their own (real and imaginary) misfortunes on the evil doings of "the rich" or "the corporate elite" (Elanor: or, in Malaysia, the “economically greedy ethnic group”?), unprincipled power-seekers are eager to ride this ignorance into office.”

So fellow Malaysians, remember this the next time our esteemed leaders brandish their strong rhetoric (and their choice physical weapon) and wage war against imaginary threats. We are wiser than to be treated as such.

Elanor

Donald J. Boudreaux is the chairman of the Economics Department in George Mason University Fairfax, Virginia. He blogs at Café Hayek.

The Three Global Innovating Forces

In Oxford University’s Ngaire Woods’ recently published report “Power Shift: Do we need better global economic institutions?” for the Institute for Public Policy Research, she detailed why and how international agencies (WTO, IMF and the World Bank) should be reformed. The penultimate chapter outlines “three innovating forces” in global politics that are pushing towards the reshaping of the international institutions:

“The first change is the rewriting of rules by new powers claiming a place on the international scene. Individually, countries such as China, Russia, India, Brazil, Argentina and Venezuela have begun to change the rules governing exchange rates, energy, trade, and sovereign debt rescheduling.

…

…A second driver of change is the transformation of global regulation. The old model was state-centred. Governments regulated within their borders with some cross-cutting commitments to other governments entrenched in treaties. …The new model harnesses communications technology, nongovernmental organisations, and consumers. It opens up and redefines the interests of some companies to include labour and environmental standards. It uses multiple sources of information… It is carefully tailored to the needs of the private sector, as we are seeing in codes of conduct in capital markets. …The new regulation is not enforced by formal sanctions. Rather, it relies on bloggers, newspapers, transnational advocacy groups, third-party monitors, and pressures on companies from shareholders, auditors, insurers, and clients.

…

…Networks present a third source of innovation in global governance. It has become popular to describe global politics in terms of networks of regulators, firms, lawyers, accountants, and judges. Experts in each of these areas are increasingly connected. As they work together, learn from one another, and emulate each other, this leads to a global convergence in norms and rules. …The benefits of networks are clear for the powerful. They offer a way to coordinate, quietly and informally. (emphases added)”

While these forces are specifically applied here in the context of reformation of international agencies, they nonetheless underscore very important emerging innovations that are reshaping the future global economic and political landscape.

Elanor

Mario, Luigi and the Global Economy - Part III

The third and final part of the essay "A Glimpse into the Future Economy: Pay Attention The Next Time Your Son Fires Up His Playstation 2™", written middle last year. This final instalment focuses on the core message of the essay in the Malaysian context.

Concluding Remarks:
The Bigger Picture, and the Future is Now

The world is fast changing. The heightened international financial integration in recent years, compounded by the continuous globalisation of trade and unprecedented sophistication of cross-border information flow, has inevitably resulted in an increasingly integrated world. While political ones remain, economic borders are fast disappearing. And therein lies the importance of the three lessons.

Firstly, fast, borderless and free information is a key characteristic shaping the future economy. The market is the world, and benchmarks are international. To remain relevant and achieve success, we would need to open up to the world. And to attract global buyers and investors, we need to offer top-class international products, be it cars, financial services, infrastructures or talents. There will be no place for protectionism, because it will only delay pain and foster complacency, and the indiscriminate global market forces have very little tolerance for the inefficient.

Secondly, we must understand the rule of the game: interdependency. Countries are now closely linked to each other in what can be considered a network of capital, expenditure and information flows, in which shocks occurring in one country can have tremendous spill-over effects on other countries. Economies and markets are no longer atomistic entities, and they cannot be monitored in isolation. Regulators and policy-markers will have to reemphasise their worldview and surveillance processes. Seeing how market forces shape this global network, they must understand and embrace the market, not condescend and stifle it.

Lastly, and perhaps most imminently relevant to Malaysia now, is the third lesson. Replace Sony with China, and Microsoft with India, and you will observe that the example used above is a close analogy to what most emerging economies in Asia are facing now, Malaysia included. To compete directly with China and India in what they are good at will be certain suicide. Remaining at the status quo would mean marginalisation, and competing with more advanced economies is not really an option, yet. Thus, having a different strategy is crucial. We have to be willing to tap unexplored territories. We can’t rely solely on our traditional, but increasingly irrelevant, strengths. Instead, we have to create new niches and generate new competitive advantages.

We need our very own Wii.

References

Computer Entertainment Suppliers’ Association, 2005, “CESA Games White Paper”, Computer Entertainment Suppliers’ Association, Tokyo.

DFC Intelligence, 2005, “Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry: Overview”, DFC Intelligence, San Diego.

Economic Planning Unit, 30 May 2006, “Ninth Malaysian Plan 2006-2010”, Prime Minister’s Department, http://www.epu.jpm.my/rm9/html/english.htm

FIFAworldcup.com, 30 May 2006, “Frequently Asked Questions”, 2006 FIFA World Cup Germany, http://fifaworldcup.yahoo.com/06/en/o/faq.html

International Game Developers Association, 30 May 2006, “Game Industry Info, Data and Statistics”, International Game Developers Association, http://www.igda.org/faq.php#biz01

Levitt, Steven D., and Stephen J. Dubner, 2005, “Freakonomics: A Rouge Economist Explores the Hidden Side of Everything”, HarperCollins, New York.

Sheng, Andrew, 2005, “The Weakest Link: Financial Markets, Contagion and Networks”, Unpublished paper.

Vogel, Harold L., 2001, “Entertainment Industry Economics”, Cambridge University Press, Cambridge.

Yahoo! Inc., 30 May 2006, “Yahoo! Finance”, Yahoo! Inc., http://finance.yahoo.com/

Youtube.com., 30 May 2006, “Search: Wii”, YouTube, Inc., http://www.youtube.com/results?search=wii&search_type=search_videos&search=Search

Dirigisme

I was reading Martin Wolf’s book on globalisation during lunch and found the following paragraph from the preface especially reflective, overlapping with my conviction on what is wrong with much of the Malaysian system.

"Working as an economist (of the World Bank) on east Africa between 1972 and 1974 and then on India between 1974 and 1977, I learned first-hand of the damage done by dirigiste, inward-looking economic policies. This was not only because of the grotesque inefficiency, but also because of the epidemic of corruption they caused. Throughout my ten years at the Bank, I was principally engaged in arguing for greater reliance on the market mechanism and trade."

- Martin Wolf, Why Globalisation Works, Preface, xiii

When will we start to look outward?

Elanor

Mario, Luigi and the Global Economy - Part II

The second part of my essay on what we can learn from the interactive entertainment industry - the three lessons.

Lesson 1:
Knowledge is Power

Although it is typical to stereotype gamers as smelly and socially inept individuals in need of more physical exercise, the video game industry basically caters to the most wired and technologically savvy community on earth (and incidentally also the community with the most free time). Information within this community literally travels at the speed of light, via the Internet. If a game is bad, virtually every gamer will know about it days after it is launched. Reviews and games guides, written in multiple languages will appear globally, mostly free of cost, almost immediately after official releases. This leads to extreme success cases for games: either they sell like hotcakes because everyone knows they are good, or not sell at all because everyone knows they are bad. Information makes or breaks a game.

And this is the first lesson one can learn from the video game industry. In the future, consumers will be highly wired - information will be transmitted quickly, globally, and at minimal or no cost. Information asymmetry will diminish; producers would no longer be able to capitalise on the ignorance of consumers. Any attempt to be dishonest will be severely punished, as everyone will know. Firms must understand and cater to consumers’ needs. And firms successfully doing so will be rewarded favourably. In the future economy, knowledge is power.

Lesson 2:
It’s a Game, a Serious Game

As alluded to in the boxing analogy, the video game industry is a game, a serious game. Your every decision matters, your competitors’ every decision matters. When Microsoft makes a move, expect Sony and Nintendo to react. There is also no time for losers in this game. Mistakes and complacency are not tolerated. Want to have a good example? Just google “Atari” (once an undisputed video game market leader and monopoly) and “bankruptcy” together.

This is the second lesson – in the future, every market participant is interdependent, and decisions cannot be made in isolation of others. To be successful, firms will need to always be ready and be able to anticipate the market, and this can be achieved by understanding the interdependencies between all parties. Markets and economies are networks, leaving very little room for the ‘ceteris paribus’ mentality common to traditionally trained economists. In the future economy, market acumen will be crucially more valuable than a fancy Economics degree from Cambridge.

Lesson 3:
Think Big, Think Smart

The industry will be entering the next generation console war soon; and it will be a massively intense three-way battle between Microsoft, Sony and the supposed underdog, Nintendo. Microsoft and Sony are the undisputed goliaths of the battle, competing directly in almost all dimensions to win the increasingly large pool of dedicated gamers. Microsoft has the financial wherewithal to rival that of a small nation, and Sony’s has the technological advantage, market leadership and a deep creative pool from its ownership of a major media conglomerate. But the unlikely winner in this battle could be Nintendo. Having neither the financial and marketing muscle of Microsoft nor the super-computer processing power of the Blu-Ray compatible PlayStation 3, Nintendo decided to aim bigger, and smarter.

Instead of competing directly for the pool of dedicated gamers, Nintendo has decided to aim for a much bigger and untapped market of non-gamers. And it does this with its smart new console: Wii. Wii is highly innovative and unconventional, with a motion sensitive game controller that looks more like a pair of nunchucks rather than a video game joypad. Its just-released trailer shows the most unlikely people – a grandfather and grandson fishing, an entire family orchestrating a classical piece, a middle-age couple golfing, a healthy looking bunch of ‘twenty-something’s playing tennis – all using the unique Wii’s controller. Video gaming has never looked so accessible.

And this is the last lesson. In the future economy, you have to think big, and smart. Major economic forces will be working their ways, shaping the global economic landscape. We have to adapt, and smartly so, or risk being marginalised. Can’t find your own niche? Create it.

… to be continued…

Mario, Luigi and the Global Economy - Part I

Last year, before the hype and launch of both Sony’s and Nintendo’s latest next generation consoles, I wrote an essay on how we could learn from the developments in the video game industry in embracing the future of the global economy. I am reproducing the essay here in three parts.

A Glimpse into the Future Economy:
Pay attention the next time your son fires up his Playstation 2™

By Elanor Tan
7 July 2006

What we can learn from the interactive entertainment industry.
_ _ _ _ _ _ _ _ _ _

Talk about video games to an average Malaysian adult and you would be able to command as much seriousness as a conversation on a badly-dubbed Japanese cartoon on free terrestrial television. Okay, that might have been a slight exaggeration, but with a medium that is dominated by brightly coloured characters, catchy tunes and addictive fun, it is difficult to look beyond the levity that is projected. Serious adults do not talk about video games, or formally, the interactive entertainment industry; they talk about more important issues like the 9th Malaysia Plan, national policies on the automotive industry and foreign direct investments (FDI) and perhaps, when it is after business hours, the World Cup 2006.

The global size of the interactive entertainment industry in terms of sales revenue is more than US$36 billion (which is roughly more than 3 times what the government plans to spend yearly in the 9th Malaysia Plan) and the US domestic market alone is approximately US$10 billion yearly, more than the Hollywood box-office total receipts and is expected to overtake the whole music industry by 2008. Exports of video games from Japan alone are bigger than the entire net FDI inflow into Malaysia; the market capitalisation of Nintendo in Tokyo is currently 36 times that of Proton, and Sony’s R&D expenditure in 2005 on video games, at 62 billion Yen, is bigger than the entire budget for the World Cup 2006 Organising Committee (approximately 400 million Euro).

But the purpose of this write-up is not to elaborate on the enormity of the interactive entertainment industry, its ascendance to be one of the biggest entertainment businesses, or the entertainment value of poorly-dubbed cartoons. The attempt is to introduce briefly the structure of the video game industry, dissecting the lively market and economic dynamics it has, and from there, draw lessons on what lies ahead in the future global economic landscape. It is the author’s sincere opinion that the interactive entertainment industry today epitomises some essential elements that will shape the future economy.

Brief Introduction:
Boxing Matches, Marriage of Art and Technology, and Dinner Conversations

The video game industry is very distinctively organised. The entire industry can essentially be divided into two distinct segments, both with decidedly unique features. The first is the video game console market - the market on video game hardware. It is an extremely concentrated market, characterised by traditionally not more than 2 major players, with one main console each. The current configuration of 3 major players supporting 3 main consoles - Sony with the Playstation 2, Microsoft with the Xbox and Nintendo with the GameCube - is unprecedented (and partly explained by newcomer Microsoft’s immense financial capacity to absorb losses).

While economists use deeply sophisticated models to understand the nature of markets like the video game console market, those who do not speak Economics may find that the console market is best understood from the perspective of boxing matches. Like boxing, industry players fight it out in rounds of predetermined duration; 1-3 minutes for boxing, approximately 5 years for console battles. In these rounds, players introduce their consoles and compete intensively for a tacitly decided 5-year period (the console market will enter its 5th round in 2007). In these matches, losers hardly last for more than 2 rounds and KOs happen quite often (Atari, Sega and recently, Nokia, are good examples). In fact, there are even pre-match press conferences in the form of massive international electronic entertainment expos in which the players try to out-compete each other even before the matches begin.

The other segment is the games or software market. Unlike the console market, in which technological brawn and processing agility dominate the main arena, the games market is mostly a competition of artistry and creativity, much akin to the movie and music industries. Participation in this market is significantly different from the console market, with much less concentration. Games publishers range from huge companies, such as Electronic Arts, to micro-teams of independent game designers from downtown Tokyo. Different from the console market, the games market is much less susceptible to product saturation but have much shorter retention period per product. Hundreds of games get published yearly, with most games staying on the radar of gamers for no more than a few months. Like the console market, the games market is also highly competitive, but in a significantly different manner. There is no definite success formula for a successful game; some games sell millions of copies, while others bankrupt their publishers. The basic requirement is that games have to be addictively fun. Unfortunately, making something that is addictively fun is neither an exact science nor a time-invariant concept; but generally, creativity, innovation, passion and gamers’ empathy are required.

Clearly, the video game industry is unique, and much can be learned from it if you know where to look. For economists, it is essentially a goldmine of experimental opportunities. For those interested in clever dinner conversation topics, like the proverbial VHS versus Betamax standard war, the video game industry has dozens of similar if not more interesting anecdotal examples. But for this author, it presents 3 important lessons in embracing the future of the global economy.

… to be continued…

Address Poverty First

Economist Tyler Cowen’s recent New York Times article on incomes and inequality in America is both interesting to read and relevant to some of the issues we face. Particularly, his concluding paragraph resonates well with the urgent need for Malaysia to change her archaic motivation in implementing socio-economic policies:

“The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people.

What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.”

Equality? How about Equality in Poverty?

Elanor

Malaysia Must Embrace Change

With all the discussions on firm-innovation driven growth and development recently amongst (for example, read the World Bank's blog Innovation in Emerging Markets) how Malaysia is floundering), I found Martin Wolf's Tuesday editorial piece on the Financial Times rather timely. The piece is not only interesting but also very relevant. Titled "European corporatism must embrace change", the discussion of the piece centred on the argument by 2006 Nobel Laureate Edmund Phelps on the core distinction between the continental European and the US, and why the former failed to converge to the latter.

Reading the article, it is not very difficult to identify the similarities between the European model and that of Malaysia

Here are some paragraphs from the article.

"...A central distinction, argues Prof Phelps, is between capitalism and corporatism. By capitalism, he means a system of free enterprise that embraces and motivates entrepreneurship. By corporatism, he means a system in which businesses have to negotiate change with the government and “social partners”.

Capitalism does not mean laissez faire, argues Prof Phelps, just as corporatism does not mean an absence of private ownership. The difference lies in the openness of the former to economic experiment and so to the gales of Joseph Schumpeter’s creative destruction. The new entrants nurtured by a dynamic free enterprise economy are the catalysts of innovation. But the incumbents protected by corporatism are too heavily invested in the status quo: they are prisoners of the present.

The US, as it has been since the late-19th century, remains the world’s frontier of market-led innovation. Well-organised corporatist economies, suggests Prof Phelps, can catch up on the progress made by such a dynamic capitalist economy, but cannot surpass it, because they are parasitic upon the latter’s vitality.

....

Here Prof Phelps offers bad news and good news for continental countries. The bad news is that a system delivering neither dynamism nor high employment is failing. The good news is that Prof Phelps believes it is possible to combine dynamism with desired “social inclusion”, provided the welfare state subsidises employment, not idleness. He does not simplistically recommend low taxes and an end to the welfare state. His focus is, instead, on a willingness to embrace market-led change. His advice is good: those who resist economic change will surely be overwhelmed by it, in the end. "

Similarly, the Malaysian system must embrace change.

Elanor

Read the full article here (highly recommended) on FT.com:
European corporatism must embrace change
By Martin Wolf
Published: January 23 2007 17:27

Loser's Sentiment and Economic Policy

"What’s So Special about China’s Export?"

- Dani Rodrik, 2006, NBER Working Paper 11947
______________

The Danger of Seeking a Grand Narrative

I have often been accused of being a believer of a particular school of thought, or an advocate of a certain strand of economic ideology. They usually take the following forms:

“Aha, you are just so Keynesian, Elanor”
“Yes, Elanor, you so believe the Market will solve all problems of human civilization”
“Gosh, you are such a nerd!”

While I still can’t find a suitable defense against the third sort of claim, I am often dumbfounded by accusations such as the first two. I normally respond by giving a blank look (or, occasionally and only when it is entirely appropriate, I say “go bless your lil’ cotton socks”). Firstly, I have no idea what I have to believe in if I am a Keynesian, or how Market should be defined, or if I have to join a political party if I am supposed to be a Liberal. All I know is that if I am all these at the same time, it means that I am most probably schizophrenic.

Secondly, and more important, I don’t believe in any form of grand narrative that is supposed to provide elegant and complete explanation to any particular issue, event or phenomenon, especially complex ones. Just as how capital liberalisation alone doesn’t explain the miracle of the Asian economies in the 1990s, neither does it, by itself, explain the end of the miracle. Almost all the time, it is the collection of small tales that explains the whole story. The same, of course, applies to our personal lives, but that is for another post.

Any attempt to view any complex issue through the lenses of any single convention based on dogmatic convictions will ultimately reduce our ability to comprehend the issue in its entirety. The danger arises when this is used as a basis to come up with remedies or policies. It is due to this danger why we should always have in mind that short-term interest rate is very blunt policy tool for diverse macro-economic issues, why a free-floating yuan is not a panacea of the global imbalances, why war does not solve terrorism, why hasty privatisation cannot be the sole solution to the efficiency problem of the transition economies in the Europe, or why affirmative action is not the only way we could address economic inequalities.

And this brings me to my titular topic.



Picking Winners, Dropping Losers

Dani Rodrik, an economist from Harvard, recently published a working paper (read the paper here) explaining China’s exports and economic performance. It is a middle-length empirically based-paper with many interesting results. One of the main messages is how China’s economic policies allowed its exports composition to achieve a level of sophistication of a country that has at least three times the level of income now (and six times back in the early 1990s), giving China a formidable competitive advantage (low-cost, high-tech).

In his own words, Rodrik says (page 3):

“…China’s policies resemble more those of a country that messed up big time than those of a country that became a formidable competitive threat in world markets to rich and poor countries alike.”

So what exactly did China get right in its policies? You can’t explain it with some grand economic theory. Nor can you find China’s policies neatly described in a 5-year national economic plan or a 15-year industrial master blueprint manual. No, its success is a collection of smaller stories. Rodrik’s concluding paragraphs (page 24-25) summarise his findings very well, as well as providing a lesson that I personally feel is very germane to the economic policies of Malaysia:

“This brings us to… the nature of future industrial policies. A clear implication of this paper is that China’s industrial policies—however incoherent they may have been—have had a hand in China’s past success. Future economic performance may also need to be supported by such policies…

The usual criticism of industrial policy is that governments cannot pick winners, and therefore should not try. But this is not the right way to think about industrial policy. In environments that are rife with uncertainty and with technological and informational spillovers, markets under-provide investment in non-traditional products. The appropriate role for industrial policy is to fill in this market incompleteness by subsidizing investments in new products. It is a given that not all of these additional investments will prove to be socially profitable. Good industrial policy consists of withdrawing support from those projects that are revealed to be failures, so that resources do not get bottled up in unproductive activities. Hence the appropriate criterion of success for industrial policy is not that “only winners should be picked” (an impossible task) but that “losers should be let go” (a much less demanding and more doable task). The latter is the relevant yardstick against which industrial policies ought to be measured.

Therefore, a key question for China going forward is whether Chinese policies will maintain their experimental and flexible nature—whether governments will remain willing to support new industries but also willing to turn against ventures that under-perform…

We can identify the higher-order principles involved at a sufficient level of generality, but need to fashion blueprints that are suited to the local context. The challenge for China therefore is to develop institutional models that are based on Chinese realities.”

The lessons on the design of economic policies are profound. Firstly, picking winners is not just justified, it is a prerequisite. Protection of infant industry and so on, can lead to successful development stories. Malaysia has always been good at doing this.

Secondly - and this is really the key message of this post - we have to let the losers go and move on. If the current strategy is not working out, change the strategy. If a policy has already outlived its usefulness, end it. And Malaysia has shown that she is capable of doing this too. Our very own capital controls is a classic case in point.

However, one can’t help but to ponder the wisdom of extending a sweeping and unorthodox national economic policy that has been in place for almost four decades without clear efficacy or results; or protecting a clearly failing and extremely distortionary ‘infant’ industry for over two decades that seems to epitomises the very worst of Malaysia industrial prowess. And more. Juxtapose these against the merciless forces of global integration and rising hegemonic powers; one is left to wonder if there remains a place for Malaysia in the future of the global economy.

Equality in Poverty

"No. 1 in Asia"

- Malaysia's ranking in income inequality, based on 2003 gini index
____

"Equality? How about Equality in Poverty?"

- conversation with Andrew Sheng
____

Part II - Equity: The Metrics

I lied. You can't really measure equity. Equity is not a concept that can be easily measured, and based on my previous entry, it is not hard to see why. Given two scenarios, one could only compare roughly which one is more equitable. For example, consider:

1. Black slaves before the American Civil War;
2. African-americans now

Normally, it is not this easy.

Equality however, is a concept that is easier to measure.

Gini in a Bottle

The most common way of measuring equality is by measuring the equality of income across some arbitrary characteristics (eg: gender, race). This is based on the distribution of income; on how equally or unequally distributed the wealth across a population.

And the most common measure for this is the Gini Coefficient (or Index, which is Gini coefficient times 100). Essentially, 0 indicates absolute equality in income (everyone earns the same), and 100 is absolute inequality (one person earns all the income).

To grasp how the Gini index ranges in reality; in 2003, the lowest figure is in Hungary at around 25, while Namibia is the worst, at around 71. Typically, developed countries have lower Gini's, at around 30 to 40. This is especially true for welfare oriented Europe, but not so for the US. For emerging countries, the index generally hovers at around 40. African countries have the worst income inequality, at around 60.

Before moving on further, however, let's consider income inequality for Malaysia, based on ethnicity. I will let the figures do most of the explaining.

Tyranny of Numbers I: Inter-Ethnic

The table below shows how many times more a household of a different ethnic earns compared to an average Bumiputera. For example, in 2004, an average Indian household earned 27% more than an average Bumiputera household.

Clearly, there was significant improvement in equality of income across races since Merdeka.

Tyranny of Numbers II: Let's be Colour-Blind

How about income inequality within race groups?

There was significant deterioration within racial groups since Merdeka - basically, the rich are getting richer, and the poor poorer. This is especially true for Bumiputeras, which showed the fastest growing income inequality.

Tyranny of Numbers III: The Bigger Picture; at what Cost?

Now, let's look at how Malaysia compares, relative to the rest of the world.

Other measures of inequality show similar result for Malaysia. If you do not believe me, try googling.

Tyranny of Numbers IV: The Beggar Thy Neighbour?

Now, let's look at how the different races in Malaysia compare with their counterparts in Singapore in terms of household income.

We used to be the same nation, now they earn 4.4 times more than us, and the gap is widening.

Of course, money is never everything.

Points to Ponder

I will end this exhaustive analysis (in the sense that by the time you finish reading this, you will be exhausted) with a question:

Which one do you prefer?
a) colour-blind; or
b) just blind.

The Dodo Nation

“At last the Dodo said, `EVERYBODY has won, and ALL must have prizes.'

`But who is to give the prizes?' quite a chorus of voices asked.”

- Lewis Carroll, Alice in Wonderland
____

“I have always been astonished at the number of well-meaning socialists, whose aspirations I admire, who continue to fall for the erroneous view that controls and direct allocations are an appropriate answer to inequality.”

- Jagdish Bhagwati, In Defense of Globalisation
____

Part I - Equity: The Rhetoric

Economic development is the product of the co-evolution of technology, the physical and social environment, and economic institutions. Often, this co-evolution is directly influenced by decision-makers’ deliberate actions based on their concepts of what is justifiable. Much of human history - both the pleasant and ugly sides of it - is shaped by these concepts. Most of the time, these concepts take the broad forms of religion and ideology; often intermingled with notions of ethnicity and nationality.

And in these forms, the notion of equity is often a crucial aspect of consideration. For most, equity alludes to the virtue of fairness and justice. It is this allusion that dictate much of the development policies in many countries, ours included.

But what is equity? An issue very close to heart, I intend to offer a brief summary of my personal exploration into this question in a two-parter blog-entry. This first entry will focus on the rhetoric of the issue.

Personally, the best way to begin is by analysing the two radically different concepts of equality, namely Equality of Opportunity and Equality of Outcome.

Equality of opportunity emphasises on the freedom to pursue one’s private interest or vocation without arbitrary restrictions based on irrelevant personal characteristics. No arbitrary obstacles should prevent people from achieving those public positions which their talents fit and their values lead them to seek. Birth, nationality, colour, religion, sex or any other equivalent characteristics should not determine the public opportunities that are open to a person – only talent and achievement.

In contrast, while equality of opportunity stresses on the need to begin the race of life at the same time, equality of outcome focuses on the need for all to finish the race at the same time regardless of effort and action.

An example that I find most illustrative to distinguish both concepts is through the proverb of fishing - Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. Equality of opportunity focuses on the importance of giving the man the opportunity to fish by teaching him. Whether he feed himself through effort and hard-work is his own choice and responsibility. In contrast, equality of outcome focuses on feeding the man at the end of it all, regardless if he works for it or not. One values independence and freedom of choice, while the other promotes dependency and passive fatalism.

Three of Many Reasons

Personally, I revere the concept of equality of opportunity and abhor the concept of equality of outcome. The reasons are manifold, but this is not the avenue to explore them. I will however attempt to provide 3 brief objective reasons based on some simple economics concepts.

1) Moral Hazard
As alluded to earlier, emphasis on outcome promotes dependency and to a certain extent, complacency. If you consider your livelihood or welfare is an entitlement, you would have very little incentive to work hard and strive for better things, even if you could intrinsically do so. Similarly, if you know you could do better and work harder but will not be rewarded any better than someone who do worse and work less, there will be a perverse incentive for you not to do your best. Under this environment, mediocrity, not excellence, is encouraged.

2) Adverse Selection
Under a scenario of equality of outcome, inevitably there will be those who will be better off and those who will be worse off relative to their talents and potentials. Forced allocation will result in a perverse incentive for those with greater potential to leave the system, and thus leaving only average and below average behind. This is essentially a variation of the classic economics (and Nobel Prize winning) problem popularly known as the Akerlof’s Market for Lemons. To illustrate the problem, consider a scenario of a company which pays its employees equal pay regardless of performance. For the high-performers, they will have very little incentive to stay on in the company given that other companies will pay higher for their talents. Thus, those who stay will be average performers at the very best. This problem is clearly recognisable in real life (brain-drain anyone?), and amplified to the macro-level, it is a severe developmental problem for any emerging nation.

3) Severe Inefficiency
The biggest intellectual objection of equality of outcome, in all its guises (such as direct allocation of wealth, control of ownership, distortion of employment pattern and discriminatory access to business and education) is that the concept is the very anti-thesis of efficient resource allocation, the cornerstone of economics principle. It goes against how market should function, and how a nation’s development and progress is achieved through efficient exploitation of comparative advantage and specialisation of labour. A hyperbolic analogy would illustrate this point.

Imagine that there is a football team, a double badminton pair and two gymnasts, summing up to a total of 15 sport-persons. Now imagine an ambitious policy-maker, pre-occupied with what he thinks is an equitable policy, implement a policy forcing equal distribution of sport-persons in each sport. So now, we have only 5 footballers, 2 badminton players and 3 footballers who are forced to play badminton, and 2 gymnasts and 3 ex-footballers-gymnasts-wannabes. What are the consequences of this direct control? Firstly, there will be more people than needed in badminton and gymnastic, making the ex-footballers quite redundant. And assuming that they are more talented in and passionate about football, they will never quite make excellent badminton players or gymnasts. Secondly, and more direly, due to this social reengineering exercise, the entire football team collapse, leaving the remaining players neither here nor there.

Absurd? Superimpose this example with certain real life employment and ownership policies, quota and protectionism arrangements, and you will realise it is not as ludicrous.

History, Controlled Experiments and Amartya Sen

Normally, concepts and hypotheses pertaining to social institutions and development are impossible to be tested in a way normally accepted in the realm of natural sciences; we cannot really generate competing artificial and experimental scenarios to examine which concept of equality would lead to greater economic welfare and progress. But sometimes, history has a way of setting pretty close controlled environment for such experiment to take place. The best example is the case of West and East Germany, with the former ran by democratic policies that emphasise on the importance of equal opportunity and the latter ran by communist principle that stresses on equality of outcome. And then there are South and North Korea, Finland and Estonia, and, older communist China and the current market-driven China. And the verdict?

That was rhetorical.

The issue of what is equitable is a tricky one. That said, I find it very difficult to argue against the notion that everyone should be given the freedom and opportunity to explore his or her potential to the fullest regardless of race, creed, gender or age. Nor is it easy to accept the concept of having social policies that obstruct effort and hard-work from being rewarded equally due to the same arbitrary characteristics.

In any case, ideas that I have casually introduced here have been explored probably since the beginning of recorded history by many great thinkers of our time. For greater appreciation, I recommend the classic Nobel Laureate Amartya Sen’s Development as Freedom and Francis Fukuyama’s The End of History and the Last Man. For more contemporary and fun readings, try John Kay’s The Truth about Markets: Why Some Nations are Rich but Most Remain Poor and Jagdish Bhagwati’s In Defense of Globalization.

ps: Done with the rhetoric, part II will emphasise on the metric; how do we measure equity?

Introduction

A handshake. The proverbial introductory gesture for a friendship or partnership. The crucial first impression in which future engagements are built upon.

*Shakes*

Consider this post as a virtual handshake from me :). A gesture to introduce myself and the nature of this blog, the way I intend it to be.

Titular Quirkiness

Firstly, allow me to briefly explain the choice of the name Arrested Development. Inspired by the critically acclaimed (but mostly under-appreciated) Fox tv series of the same name, arrested development alludes to the state of mind in which how most of my opinions are formulated. The now-ended Fox series centered on the character of Michael Bluth, a relatively normal protagonist, struggling to keep his habitually dysfunctional family from falling apart. He usually ends up in frustration, being exasperated by the antics of a despotic patriarch, alcoholic mother, nymphomanical sister etc.

Empathetic towards Michael is the way I opine in the things that I believe in. Mostly misunderstood, often dismissed, seldom satisfied but never giving-up. Too many ideas, too few channels; too much passion, too little capacity to make things happen. The agony of an impassioned man trapped at the bottom of the organisational hierarchy.

Anyway, there is a crucial qualification that needs to be conveyed. When Michael attempts to lead his family to what he believes is ideal, that is what it is - his perception of what is ideal. Besides Michael, the rest of the Bluth family appears decidedly happy in their own ways. Most of the time, the dysfunctionality of the family is only in the eyes of Michael (and the viewers). Similarly, my opinions are what I personally believe to be right and important, but it does not necessarily translate to be universally right or important. That said, my conviction to my own opinions is strong (and I believe that is the way it should be for anyone).

Weltanschauung Matters

Have you ever been told that a degree is just a degree, a paper qualification that provides you with nothing more than a job interview opportunity? That your real work and career would have very little to do with what you learned in university?

I say rubbish.

Yes, the literal contents of your lecture series might have very little relevance to your work, but you learn much more than just your academic syllabus in university. The time spent then is arguably the most important formative time of your life in which you hone your perspective of the world, developing your worldview (ie, weltanschauung) crucial for your intellectual integrity. You need to have a focused worldview to have solid opinions. Be it leaning towards Economics, Neo-liberalism, History, Natural Science or Theology; weltanschauung matters.

This brings us to the second introductory point. My posts will be heavily influenced by my worldview. And the way I see the world is through the lens of Economics.

My Worldview: Yawn?

Before you go "oh gosh, what a bore", allow me to explain more. Economics is not just about inflation, GDP, exchange rates and all those jazz. Striped to its most fundamental, Economics is about the study of human behaviour. It examines at its core how human, individually or collectively (ie, as an organisation, nations etc), make decisions and the repercussions of the decisions. And the most basic building block to understand this is the relationship between incentives and decisions. To appreciate Economics is to understand the cruciality of how incentives, in their multitude of forms, shape most of what happen in the world.

Why did Soros decide to speculate against the ringgit in 1997? Why was US such a pain in the Kyoto Summit? Why are the stock markets in emerging economies 'correcting' themselves by over 20-30%? Why have US wages stagnated for over a decade?

Why Starbucks coffee size starts from Tall on the menu? Why did Michael Corleone kill his own brother-in-law in the Godfather? Why are all the good tv shows shown at the same time slot in different channels? Why did you decide to end your previous romantic relationship?

If you truly examine all these questions, they all boil down to incentives and decisions. And this is the basis of my weltanschauung.

The root of this worldview was formed and formalised in my university years, especially through my interest in game theory. However, my perception has not been static. Working as an economist for the last two years allowed me to learn much and developed my understanding of Economics further. Particularly:
1) I'm now learning to look the bigger picture (read holistic) and the interlinkages,
2) I often consider heterodoxical explanations, away from standard textbooks approaches,
3) I'm more empathetic towards market behaviours.

And hopefully all these will show in my posts. Dum dee dum.

I hope this introductory post serves its purpose of introducing myself and my blog. I am definitely looking forward to conveying my thoughts and opinions soon. Comments are more than welcome :)