Friday, 27 April 2007

Respect for the Dignity of Individuals

"A society that does not recognise that each individual has values of his own which he is entitled to follow can have no respect for the dignity of the individual and cannot really know freedom."

- F A Hayek, The Constitution of Liberty


Thursday, 26 April 2007


One of the many reasons why I think Monterey is more interesting than Davos:

I mentioned one of the TEDtalks by Hans Rosling sometime back.

Anyway, not too long ago, in a discussion with a senior member of a reputable international institution, I was told that although intelligence, diligence and productivity are very important, they are not the most valuable attributes of a member of an organisation or an employee of a company.

The most valuable attribute, it is said, is the ability of a member or employee to inspire people around her to a common cause, objective or direction – to shape opinions, drive ideas and stir passion. This is especially true for those in leadership positions.

It is not difficult to see how this is also relevant beyond organisations and companies, extending to the society in whole. The questions are however; do we have enough people with such attribute in Malaysia? And how many of them have the capacity and ability to affect positive change for the future of the country?


Wednesday, 25 April 2007

Monday, 23 April 2007

Vote - Defeating the Defeatist Tendency

My ‘Why Malaysia Needs More Governance and Less Corruption?’ and the subsequent ‘Vote for Change?’ posts attracted many comments (for Arrested Development’s standard that is…) which are interesting, persuasive and worthy of lengthier discussions.

Unfortunately, I can only respond to some of them briefly here.

Evolution Analogy:

Cantab used evolution as a parallel to election and the danger of transitioning into a bad equilibrium through voting just for the sake of political competition. He ended by saying:

Bottom line: if we want change, WE have got to make it. Not cross ballot papers while hoping real hard someone else does the dirty work.

I fully agree that if we want change, we have got to make it work ourselves. But voting IS part of the set of actions that we could be pursuing in catalysing a change.

At this point, I think it is important for me to explain myself. I am not advocating voting for the opposition just for the sake of creating political competition as a long term strategy for a democracy. It is plea borne out of what I think is a crisis of norms and institutions in the current state of our nation which is partly due to the political monopoly of the current ruling coalition. Ideally, we should be voting for people, policies and principles (visit Haris Ibrahim’s blog: The People’s Parliament for an inspiring and earnest effort), and this would be my longer term strategy too. Unfortunately, given the current state of affairs, I do not think that this is a luxury all of us have for the coming general election. With the current political hegemony, voting for the oppositions will almost certainly not replace the incumbent coalition, but it will be sending a signal that the people do not condone corruption, inefficiency and the squandering of our future and wealth.

When I said democracy is a process, I meant it in a more holistic sense and not just the election-selection process. The road to democracy requires the co-evolution of informal norms and formal institutions that would ultimately allow for a governance of a state that is of, by and for the people. One of the most crucial elements for this is to have a society that has a strong desire for leaders to be made accountable to the public.

Having read economics in the undersized rooms of the under-funded portion of the Sidgwick site, I am more inclined to view the situation to be more of a parallel to competition between firms rather than an evolutionary process.

Firms derive their power from the support of the consumers while political parties derive their power from the support of the people. At the risk of oversimplification, monopolies, having complete market dominance, have very little incentive to improve, be efficient and tend to exploit the consumers by charging higher price for their product. On the other hand, competition tends to result in pressure to improve and ultimately better serve the interest of the consumers. For local examples, imagine a poorly-run state-backed monopoly (Proton, perhaps), and an industry with intense competition. A good example for the latter is the pre-paid mobile-phone industry in Malaysia. Notwithstanding the wastage from over-advertising, it is very difficult not to see how competition has resulted in improved services for consumers (try imagining 1 cent per sms 3 years ago…).

Marginal Vote:

A single vote is like a broken pencil – it is pointless. As cliché as it might sound, this is not true – every vote counts. Especially when you look at it from the collective perspective. The fear is, however, this pointless reason is used as justification for apathy and inaction on a collective level, hence resulting in the worst case scenario coming true.

I initially intended to use the non-cooperative outcome story of a prisoner’s dilemma to illustrate this, but decided against it now since it has alluded to in my previous post on rude driving, and it can get a bit geeky.

Instead, I refer to an example given in Malcolm Gladwell’s The Tipping Point on what is called the bystander problem’:

“One of the most infamous incidents in New York City history, for example, was the 1964 stabbing death of a young Queens woman by the name of Kitty Genovese. Genovese was chased by her assailant and attacked three times on the street, over the course of half an hour, as thirty-eight of her neighbors watched from their windows. During that time, however, none of the thirty-eight witnesses called the police. The case…became symbolic of the cold and dehumanizing effects of urban life… Nobody can say why the thirty-eight did not lift the phone while… [but] it can be assumed… that their apathy was indeed one of the big-city variety…

The truth about Genovese, however, turns out to be a little more complicated — and more interesting. Two New York City psychologists — Bibb Latane… and John Darley… — subsequently conducted a series of studies to try to understand what they dubbed the "bystander problem." They staged emergencies of one kind or another in different situations in order to see who would come and help. What they found, surprisingly, was that the one factor above all else that predicted helping behavior was how many witnesses there were to the event.

In one experiment, for example, Latane and Darley had a student alone in a room stage an epileptic fit. When there was just one person next door, listening, that person rushed to the student's aid 85 percent of the time. But when subjects thought that there were four others also overhearing the seizure, they came to the student's aid only 31 percent of the time… When people are in a group, in other words, responsibility for acting is diffused. They assume that someone else will make the call, or they assume that because no one else is acting, the apparent problem — the seizure-like sounds from the other room… — isn't really a problem. In the case of Kitty Genovese, then, social psychologists like Latane and Darley argue, the lesson is not that no one called despite the fact that thirty-eight people heard her scream; it's that no one called because thirty-eight people heard her scream…”

Similarly, that our single vote does not matter in the bigger scheme of things might be true on an individual level, but on a collective level, it could be disastrous. If everyone who wants change thinks that his/her vote is powerless to affect change, than the status quo will remain.

As for Elegant Lily’s comment, he articulated a very real and relevant concern on communal politics being key in determining election outcome. It is a sad truth that division by ethnicity exists across almost all aspects of the Malaysian society, with politics being chiefly so. That said, I do believe a growing number of Malaysians are increasingly realising the importance and urgency of looking beyond racial identity for the future of our nation.

Similar to the argument on marginal vote, it is very important for this group to realise that they are not powerless to affect change. I sincerely believe that we should not allow the dominance of the status quo to feed our defeatist tendency.

Quoting Cantab out of context, “
if we want change, WE have got to make it.”


Rude Driving

Woke up early today. Felt fresh and energetic, with much optimism and eagerness to brace the challenges that this new week brings. Like an enthusiastic bunny, I got ready to work.

Then came the driving.

As usual the town traffic was real bad, no surprise there. But today, I must have woken up with an ‘I am a pushover’ label on my forehead. At least 20 cars cut into my lane rudely, mostly without having the courtesy to signal. Dozens used emergency lanes to avoid queuing and then jammed their stupid cars into the normal lanes, causing massive traffic standstill for those who were polite enough to drive normally. And when two or more lanes merge into one, again you will get standstill because nobody would make way, and drive like they were playing side-way chicken – as though being a car length behind on the road would result in catastrophic consequences.

And then an ambulance passed by. Not only were cars reluctant to make way, some actually trailed behind the ambulance, exploiting the temporary split traffic.

What the freaking shit is wrong with us, Malaysian drivers?

Predictably, I reach work annoyed, grumpy and full of bad vibes… *mumble grumble*

Rationalising Rude Driving

While not everyday is as bad, the situation I just described is normal by most standards. If you want to witness the worst of Malaysia, you have an option watching a parliamentary debate or driving during peak hours. Rudeness and arrogance trump civic-mindedness and common courtesy. The irony of this is that if everyone drives politely, I am almost certain that the traffic jam would be much better (personally, traffic congestion is a function of volume of traffic and the cooperative behaviour of drivers).

In a society, acts that are rude and exploit the goodness of others are normally frowned upon and usually punished, either formally or not. Such is the basis that ensures that the welfare of everyone is protected and for the society to grow. Some of these are informal norms while others are formally enforced. For examples, someone who cuts queue in a post-office is subjected to the informal disapproval of everyone else while someone who steals will be punished by law.

While the examples given above are exceptions rather than norms, the problem of rude driving in Malaysia is the reverse. Why is this so?

I can think of two reasons:

1. Repetition

In a small society, cooperative behaviours are enforced and exploitative behaviours are punished, partly, through repetitive interactions. People cooperate now in expectation that others will cooperate in the future. Similarly, a short term gain by exploiting others have to be weighed against future retribution for doing so. This is easily understood by thinking of your interaction in office (or college) or with your family. Cooperative behaviours are generally preferred while rude ones tend to be avoided if possible. You are less inclined to cut queue at the cafeteria if the people there are your office mates that you will be meeting every day.

On the road however, there is no repetition. Driving is mostly a one-off event. If you cut into the lane of another person rudely, you do not have to fear to be treated similarly by the same person in the future because the possibility of that happening is very slim. The individual gain from being rude and exploiting others in a one-off event provides the incentives for every driver to prefer bad behaviours from good ones, despite the possibility that the cooperative outcome could actually be better off for everyone. In the formal parlance, being rude is in fact the dominant strategy for this prisoner's dilemma-type of situation.

2. Shame

The second reason, which is intimately linked to the first, is shame. Norms of a society are normally evolved such that cooperative behaviours could be enforced without credible repetitive interactions. Bad manners are frowned upon and usually the mechanism for enforcement against them is shame. If you cut queue in a post-office, you have to face, personally, the loathing disapproval of everyone else, even though they are strangers. This is normally sufficient disincentive for most people to not cut queue.

Unfortunately for driving, not only is everyone practically wearing a mask in the form of a Proton Waja or a Honda City, the interactions are also normally very brief for the shame effect to kick in.

So what can we do?

Formal enforcement of driving politely is an exercise in futility. The cost and complexity of enforcement will most probably be huge and with a good possibility of causing more traffic disruptions rather than less.

Furthermore, civic-mindedness is not something that should be instilled through external means – it should come from within all of us. After half a century of nationhood, it will be great to see our society having the collective will and maturity to drive with courtesy.


Friday, 20 April 2007

Stiglitz on China and Rogoff on Wolfowitz

There are two recent and interesting Project Syndicate articles by Joe Stiglitz and Ken Rogoff.


China’s New Economic Model

China’s success since it began its transition to a market economy has been based on adaptable strategies and policies: as each set of problems are solved, new problems arise, for which new policies and strategies must be devised. This process includes social innovation. China recognized that it could not simply transfer economic institutions that had worked in other countries; at the least, what succeeded elsewhere had to be adapted to the unique problems confronting China.

As China moves away from export-led growth, it will have to look for new sources of dynamism in its growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system. China has long invested heavily in higher education and technology; now it is striving to create world-class institutions.

Too many people think of economics as a zero-sum game, and that China’s success is coming at the expense of the rest of the world. Yes, China’s rapid growth poses challenges to the West. Competition will force some to work harder, to become more efficient, or to accept lower profits.

But economics is really a positive-sum game

We should all hope that China’s new economic model succeeds. If it does, all of us will have much to gain.


The World Bank at bay

Even if Paul Wolfowitz is eventually forced to resign, nothing will be gained if George Bush is allowed summarily to choose his replacement.

…Why does the world meekly go along with the status quo and let the US dictate the Bank's top position? It is a sorry tale of poor global governance. Europe does not get in America's way because it wants to maintain Europe's equally out-dated privilege of appointing the head of the International Monetary Fund, the Bank's sister institution.

Asia has little choice but to defer to the US and Europe's shenanigans because it is grossly under-represented in both organisations. As for Africa, its leaders are loath to do or say anything that might interrupt the flow of World Bank largesse.

Many people, including myself, have long complained about the leadership selection process at the World Bank and the IMF. How can the Bank and the IMF continue to go around lecturing developing economies on good governance and transparency but fail to allow change in their own houses?

And just for fun, Ken said this to Joe back in 2002:

“Joe, as an academic, you are a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a "beautiful mind." As a policymaker, however, you were just a bit less impressive.

Other than that, I thought it was a pretty good book.

Sincerely yours,


It is from his open letter to Jeo expressing his discontent for Globalization and Its Discontents.



Thursday, 19 April 2007

Vote for Change?

My post on Why Malaysia Needs More Governance and Less Corruption attracted two very interesting comments. Thank you Cantab and Elegent Lily.

A quick recap – I ended the said post by saying:

Vote for change. As Fukuyama said, the road to modernisation requires a society that desires democracy.

To that, Cantab responded:

Vote for a change? Democracy only works if there are viable alternatives. At the moment, the opposition are a motley crew of political personalities (not even parties, me thinks), clambering to oppose for opposing's sake.

What happens then? Do we put these people in power anyways, just for the sake of change? Or do we tolerate the status quo, until something better comes along?

We cannot win.

I will vote and I will vote for the opposition.

The reason for me to do so however, is not because I believe that the opposition can do a better job in running the country. For the current situation, I do not think that the issue is a matter of the ruling party versus the opposition; on choosing between the lesser of two evils. Many people I know use this line of reasoning to justify apathy, inaction and defeatism.

Democracy is a process. And democracy works when elected representatives are made accountable to the public. For this to happen, political competition is crucial for elected representatives to have the needed incentive to perform and be made responsible. Without competition, democracy is only a name – the system will be no different from a dictatorial regime. Without leaders accountable to serving the public, complacency, inefficiency and corruption will follow and leading us to government banditry and widespread waste* that will rob the nation of its wealth and the population of their future.

Much akin to monopolistic firms exploiting the welfare of consumers, a democracy requires political competition for the welfare of its people to be protected and the progress of its society to be secured.

As Elegant Lily commented:

Given the state of things, where is the country headed? …And how to foster strong institutions in the presence of little political competition?

We need political competition for the system to work. Make our elected representative be accountable to us Malaysians.

Vote for change.

* Highly recommended reading: Tim Harford’s Why Poor Countries Are Poor: The clues lie on a bumpy road leading to the world's worst library.

Constructive Naïveté over Destructive Defeatism

My rewritten piece on confusing target for objective in attracted this comment from ‘Anon’:

If you’re so smart, design better targets and the appropriate incentive system. Hah, there you go.

This is one of those problems that EVERYONE recognizes but cannot solve any better.

Also, designing incentive systems is truly one of the most difficult things in the world and always always always subject to gaming tactics. Always.

I’m unimpressed with your article.

Dissatisfied, he/she went on to a more personal disapproval:

In fact, I find your article so bad, I wonder what you do for a living and what sort of working experience you’ve had. A person of even minimal insight into the workings of the world wouldn’t write something this naive.

To which I replied:


Thank you very much for your comments, and I apologise for appearing naïve and ignorant.

You are right to say that designing any policy is difficult, and subjected to perversions and biases. Nonetheless, designing policy is needed. It is not that designing is desirable. It is regrettably inevitable for development and progress.

The important thing is, however, for policy-makers (and the public) to quickly recognise any weaknesses in the designs and change them, that is, to pick winning strategies and quickly drop losing ones. The fear is on settling in a bad equilibrium thanks to dogmatism and apathy.

And yes, given a choice of destructive defeatism or constructive naïveté, I take the latter any day.

Do have a good day,



Wednesday, 18 April 2007

Malaysia – A Crisis of Norms and Institutions (1)

Why Malaysia Needs More Governance and Less Corruption

I have some ideas with me on the state of Malaysia which I wish to develop formally in the near future. Unfortunately, those ideas are still patchy and insufficiently coherent and robust to build a strong and persuasive thesis. To assist me in forming my arguments, I will be using this blog as a guiding notepad for me to jot down ideas every time I find some inspiration on the topic. These entries will carry the common title of “Malaysia – A Crisis of Norms and Institutions”.

Anyway, Martin Wolf’s latest op-ed on is again very interesting. Titled The World Bank must regain the high ground, he basically said that for the world leading institution in fighting global poverty to remain relevant and credible, Paul Wolfowitz must step down. As he put it eloquently:

The moral authority of the bank is in the dust. Only one decent outcome of this tragically unnecessary affair exists. The cause on which so many rightly agree is bigger than the fate of one man.

Anyway, the article also explained succinctly on the importance of governance in ensuring the development of any nation:

“If you want to make poverty history you have to make corruption history”… Governance (is defined) as “the combination of transparent and accountable institutions, strong skills and competence, and a fundamental willingness to do the right thing”. Corruption is narrower: it is the abuse of public position for private gain. Corruption… is “a cancer on the development process”.

Yet corruption is also the natural thing to do. That is why it has always been pervasive. It is its absence that is unnatural. A society relatively free of corruption has removed the motivations of the marketplace from politics, public administration and the law. Since rich countries are far less corrupt than poor ones, the former have a better-enforced line between what lies within the market and what lies outside it (see chart).

Yet is it their wealth that causes the low corruption or the low corruption that causes their wealth?…[A]s Daniel Kaufmann, the bank’s leading researcher on governance, argues, the relationship works both ways. “We estimate”, writes Mr Kaufmann, “that a country that improved its governance from a relatively low level to an average level could almost triple the income per capita of its population in the long term, and similarly reduce infant mortality and illiteracy.”

And more importantly:

As Paul Collier of Oxford university notes in a wonderful forthcoming book, development depends on two things: opportunity and the ability to seize it.* The quality of governance is an important determinant of the latter. But a country’s resources, size, location, environmental condition and disease load determine the former.

The argument between those who stress institutions and those who stress underlying conditions is fatuous. Both matter… [T]his…does not make the quality of governance less important, but rather more so.

In the significant case of corruption, it is a question of changing incentives and moral norms. Changing incentives involves: paying officials more; removing unnecessary and, above all, unnecessarily complex regulation; increasing transparency, not least through free media; and allowing citizens to exercise a “voice” through elections. Making such changes is hard technically and politically, since the beneficiaries of the corrupt status quo have the power to make progress difficult. But it is sometimes possible.

Mental Note 1:
Malaysia is blessed with favourable underlying conditions. Very unfortunately, the current institutions are squandering all the wealth and opportunities away.

Mental Note 2:
Vote for change. As Fukuyama said, the road to modernisation requires a society that desires democracy.


(Emphases added)

* The Bottom Billion, Oxford University Press

Tuesday, 17 April 2007

Saturday, 14 April 2007

Rethinking Industrial Policy

I have been reading a lot of Dani Rodrik lately and found his writings very insightful. His ideas are strongly persuasive but somewhat orthogonal to conventional mainstream economists thinking; I get a strong suspicion that this is because he is merely ahead of the curve. He principally favours ‘eclectic solutions that mix government and the private sector in pragmatic ways’ and is critical on the repercussions of globalisation, particularly on the danger (and folly) of rapid liberalisations of capital and trade flows. He was one of the first to write favourably on Malaysia’s capital controls during the financial crisis in 1997/98 (and my undergraduate dissertation was basically an extension of his paper with Kaplan).

Recently he has been writing much on industrial policy for developing economies, often using China’s as the centre stage for discussion. Again, his ideas are mostly unconventional to contemporary thinking, but my intuition tells me that we should listen closely.

Doomed to Choose: Industrial Policy as Predicament
(with Ricardo Hausmann), September 2006.

As in these 17th century books, the fundamental arguments are two: information and incentives. First, governments cannot substitute for the decentralized information processing that markets can achieve. Second, even if they could, it is not clear what incentives would make them use this capacity to advance the public interest. In short, governments don’t have the requisite information to pick winners but even if they did, they may not have the incentives to do so and if they tried, they would set off powerful rent-seeking behavior that will distort the achievement of the good intentions that motivated them in the first place. The proverbial road to hell is paved with well meaning industrial development plans.

But, as we have seen, this is a rather poor description of reality. …It is not an issue of state vs. market. If the government does not provide the inputs, market efficiency will be low. In this world, laissez-faire is a dead-end street. Instead, the ideal alternative is for the government to provide all the complementary inputs to all potential activities. There are two major problems with this solution. First, it is unaffordable. The government cannot address all potential infrastructure needs or fix all the standards and rules affecting all existing and potential economic activities. It would overwhelm its financial, managerial and political resources. It is just not in the feasible set. Second, the list of interventions is unknowable ex-ante. Institutions and markets co-evolve and this implies that transaction costs and problems will be revealed as new transactions appear and new markets develop. Solutions have to fit the specifics of the context. This may be the reason why there is such an enormous variability of institutional arrangements across industrial countries.

The fact that providing the complementary inputs is costly implies that choices need to be made. It is in this sense that, as Isaiah Berlin pointed out, “we are doomed to choose”. It is not that choosing is desirable. It is regrettably inevitable.

Industrial policy is hard, but that is no argument against its use. Fiscal policy, say, or education policy is hard too, but few people would argue that governments should just give up on them. Theory and evidence have convinced us that governments need well designed tax and expenditure programs and that they must invest in human resources. And so it is with industrial policy. Governments need well articulated strategies to provide the specific inputs that markets need in order to foster the structural transformation that drives economic development.

Industrial Development: Stylized Facts and Policies
Revised, November 2006

Let me end with one word on industrial policy, since there is much opposition to (and confusion on) this kind of policy intervention. What I understand by “industrial policy” is not an effort by the government to select particular sectors and subsidize them through a range of instruments (directed credit, subsidies, tax incentives, and so on). The critics of industrial policy are correct when they argue that governments do not have adequate knowledge to pick “winners.” As discussed in Rodrik (2004), industrial policy is more appropriately conceived as a process whereby the state and the private sector jointly arrive at diagnoses about the sources of blockage in new economic activities and propose solutions to them. Industrial policy requires the government to take an ex-ante stand neither on the activities to be promoted nor on the instruments to be deployed. It simply requires it to build the public-private institutional arrangements whereby information on profitable activities and useful instruments of intervention can be elicited.


(Emphases added)

PS: And this 'product forest' chart, from the first paper quoted above, might just be the first step that would revolutionise the way we think about economic development and industrial policy…

Wednesday, 11 April 2007

The Academia is a Meritocracy

From Mankiw’s blog today:

A student emails me from Greece to ask:

I wish to follow an academic career and I would like to teach at famous universities (like Harvard, MIT, Stanford and so forth). Do you think that this is possible?

Yes, absolutely. Academia is very much a meritocracy. Success at getting goods academic jobs is determined by research productivity, measured by such things as publications in top academic journals (such as the AER, JPE, and QJE) and citations by others in academic journals (recorded in the Social Science Citation Index and Google Scholar).

Local universities do not apply?

Subsidising Idleness is Soul-Destroying

I love reading the Financial Times – especially the op-ed articles. If I have to choose reading only one newspaper, FT is the one.

This is from Martin Wolf today. Besides his usual remarkable insights on the matter he writes on, I found the last few paragraphs being rather instructive in thinking about economic policies in Malaysia.

How to promote employment while protecting the low-paid
Martin Wolf
Published: April 10 2007

…The impact of globalisation on workers’ incomes depends on the size of the pie and their share in it. The evidence of a positive impact on the former is overwhelming. The evidence on the impact of globalisation on the latter… has been a factor, but not the dominant one.

Yet the most striking conclusion of this analysis has been the benefits of policies that promote employment… While incomes can be sustained through transfers, subsidised idleness is soul-destroying. French voters, please note (Elanor: Malaysian voters too).

The right policy, then, is to promote employment while augmenting the incomes of the low-paid… It is also to promote the highest quality of basic education across the labour force and provide good opportunities for motivated workers to upgrade their skills.

The right policy is to combine openness to trade with a politically acceptable sharing of the gains in high-income countries. The challenge is huge. But it is one at which we cannot afford to fail.

General pointer on the direction Malaysia should move towardsstop being insular, embrace globalization; stop subsidising idleness and complacency, improve education.

Unfortunately, the country is currently moving the other direction.

*Mumble grumble, emphases added*

Friday, 6 April 2007

Proton: The Perfect Basket Case Study

Yesterday, the Star had a surprisingly interesting and candid article on Proton, our favourite national car. Despite the very heavy editing (methink, since some of the paragraphs read so very weird), the piece retained some crucial points that reflected the dismal state that is our national automotive industry. Read it here.


Proton saga continues

…As consumers, all the ordinary Malaysians want is a car of reasonable quality at a reasonable price. Ordinary Malaysians have been massively subsidising Proton and at the end, we still have a company that simply cannot compete against anyone in the world.

An Australian fresh graduate can earn A$2,000-A$3,000 per month and drive a brand new Toyota Camry for A$33,000. A Malaysian fresh graduate earns RM2,000-RM3,000 per month and has to make do with a discounted Proton Saga…

Proton has tried for more than two decades and failed and will fail again if the right things are not done… How can we make Proton globally competitive?

Will the local party have the skills, resources, management, alliances, experience, technologies and a huge host of other critical assets to turn Proton around
(Elanor: just in case, this is a rhetorical question)? Or will it come in and give us a lifetime guarantee that millions of ordinary Malaysians will have to keep subsidising it?

… [T]he whole country and its future are being held ransom to parties that do not bother to explain to Malaysians why there is another missed deadline…

In the first place, should we [even] have a national car (Elanor: again, rhetorical…)? …

Well, not everything is lost – at least now researchers have a perfect natural experiment for an industry-wide economy-wide market failure, with the guinea pigs being 27 millions ordinary Malaysians (suckers) versus a network of 250 thousands politically connected and extremely inefficient auto-players.


The Road to Modernisation

“…If a society [wants] to be modern, there [is] no alternative to a market economy and a democratic political system. Not everyone wanted to be modern, of course, and not everyone could put in place the institutions and policies necessary to make democracy and capitalism work, but no alternative system would yield better results.

…[But] long before you have a liberal democracy, you have to have a functioning state… This is something that cannot be taken for granted…

…Democratic transitions need to be driven by societies that want democracy, and since the latter requires institutions, it is usually a fairly long and drawn out process…”

- Francis Fukuyama

Go out and vote.


Thursday, 5 April 2007

The Problem of Badly Designed Targets

As prosaic as it might sound, a policy is designed to achieve its ultimate objective. Very often, incentive will be a part of the policy that will encourage behaviours and actions towards achieving that objective. Unfortunately, objectives are often subjective and difficult to measure. Nonetheless, for a policy to work, something has to be measured in order for an incentive mechanism to be designed such that there is a tangible target. The rationale is that the target is a reflection of the objective, and when the policy successfully induces behaviours to reach the target, which is easily measurable, it will then mean that the objective, which is more subjective, is achieved as well.

All is well if reaching the target always equals achieving the objective. Unfortunately, most of the time, this is usually not so. The problem often lies in the nature of the objective, which is multi-dimensional in nature, and the target, which has to be simple and one dimensional. Most of the time, the incentive will be designed such that the target will be achieved, perversely at the cost of abandoning the original intention of the objective.

A simple example is given in Steven D. Levitt’s Freakonomics. In order to improve the quality of school teaching, the Chicago public schools introduced a performance-based reward system for the teachers. Teachers of the top students or students who show the most improvement in their examinations will be rewarded in pay increase and bonuses. Teachers of students without much improvement in examination grades will not be rewarded or perhaps even be punished. In the case, the objective is noble and broad – to improve the quality of education that students get for their wholesome development. The target however, is considerably narrower – better examination grades. And herein was the problem. With this system in place, teachers had a strong incentive to dedicate all their efforts in improving examination grades, at the expense of other dimensions of education, such as wholesome learning, encouraging knowledge-seeking and character development. On a relatively harmless level, the teachers focused all teachings on how to spot and answer examination questions. On the other side of the extreme, some teachers began to cheat in examinations for their students – by giving the answers before/during the examination or by manually changing the answers after. Instead of achieving the objective, the target had in fact moved the teaching system further away from it.

One can easily see a parallel in a poorly designed education system in which chasing countless A’s is seen as a target, perhaps at the risk of undermining the ultimate objective of having a wholesome education. To Malaysian secondary school students out there – do remember the ultimate objective of schooling is learning. Let not the craze of chasing A’s distract you from something so valuable, especially during such important formative years. If your intention and passion is aligned with the ultimate objective of learning, the A’s will follow.

It is also not very difficult to extrapolate this to conceivably the most far-reaching social engineering policy of any economy – the NEP. The original objectives were poverty eradication and elimination of economic identity based on ethnicity, but now, the dogmatic pursuance of the target of 30 per cent equity has made the policy far removed from its original objectives. How much longer should corruption, inefficiencies, complacency and global marginalisation be tolerated for the sake of achieving the sacred target? When will we start to refocus on the objectives instead?

Ironically, this pervasion might actually work. When foreign investors begin to give up on us, when both our companies and talents continue to leave for better opportunities in other countries – perhaps then our economy will be so marginalised that the 30 per cent equity will eventually be reached through the shrinking of the wealth of our nation and the diversity of our population. After all, there are two ways to reach the target – expansion in wealth of the targeted group or the contraction of total wealth by the non-targeted groups leaving.

Let us hope that our nation will not go down the latter path.