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.

Excerpts:

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.

Elanor

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.

Elanor

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.

Elanor

Out – Skinny Jeans and Babydoll

Girls, according to my microeconomic textbook author, skinny jeans are out and baby doll dresses might soon be passé:

…Skinny jeans have been fashionable for the last few years, but there are signs that the trends are now moving toward straight-leg designs. If the tide changes, pretty soon everybody will be selling straight-leg jeans.

…

If all the designers are showing baby doll dresses in the spring of 2006, then there’s a good chance that is what everybody will be wearing by the summer of 2006.

But then again, he also went on to say:

Since I have the same fashion sense that most economists have — that is, none whatsoever — I cannot attest to the accuracy of the law professors’ description of the fashion industry.

Ouch!

Anyway, it is a good article on economics and intellectual property law.

Elanor

Important Things in Life

He wisely counsels that anything that happens to your finances is secondary to the important things in life – picking a suitable and compatible mate, developing a relationship with your children, and doing something that you enjoy.

- Jeremy Siegel on Warren Buffett

As quoted from Greg’s blog. Look at all those defensive comments from both entries. Makes you wonder.

The Journey Matters

Resurrected asked:

“On a very separate note, what are your thoughts on the FTA with the US? I just read on CNN that South Korea has signed theirs with the US.”

Good question :)

There are three reasons why I chose not to openly opine on this issue. Firstly, I am not adequately informed about the finer details of the US-Malaysia FTA to formulate specific arguments for or against it. And generally, informal debates on FTA are often not solely grounded on economics considerations, and occasionally, they could get quite emotionally and philosophically charged and degenerate into variants of ad hominem arguments.

Secondly, this topic is largely unexplored in the economics literature. Most economists disagree with the effectiveness of FTAs in moving economies towards a more globalised world. The argument is often about how proliferation of FTAs is akin to a spaghetti bowl of bilateral ties – disparate, chaotic and potentially inefficient. Multilateral or universal liberalisation is preferable (interestingly, as I was writing this, I was prompted to read Martin Wolf’s latest Financial Times op-ed on the danger of FTA, using the latest US-Korea agreement as a backdrop). On the other side of the argument, given the Herculean task of successfully negotiating multilateral agreements, bilateral ones could be the only realistic and practical way forward. The only problem then is on the proper designing of the agreements. I am sympathetic to both sides.

Thirdly, there is really nothing much to talk about, regarding the US-Malaysia FTA. It is a case of too little too late. Doubt that anything substantial will come out of it at all.

I am however, generally quite sanguine on the issue of trade agreements. I view China’s entry to the WTO as a clear example why. In a recent World Bank's publication, East Asian Visions: Perspectives on Economic Development (highly recommended; it is a collection of essays by some of East Asia’s most influential thinkers – eminent policy makers, statesmen, and scholars – on how competition with the west has bred success; how crises in the region have provoked introspection; and how the rise of China is catalyzing change), Long Yongtu, chief negotiator for China’s WTO accession wrote that in retrospect, the long process of 15 years that it took for China’s to enter the WTO was ultimately more valuable for the development of China than the membership of WTO itself.

“[A]s the chief negotiator of China’s WTO accession and having had to endure so much difficulty and shoulder so many burdens during this long process, I now believe that it may prove to be a good thing for China to have undergone these difficult years of negotiations. It may seem illogical, but it is true. The key is how one views the accession process. If you look at this process of negotiation only as one in which you have to make endless concessions to your partners and confront endless challenges at home for the sake of obtaining a WTO membership card, then you would find this process very painful and long indeed. If instead, you look at the process from a strategic point of view, in the framework of China’s long term economic development, as well as its relationships with the rest of the world, you will find that many positive elements have been generated through this historic process.

…

The fact is that many people only perceive the apparent difficulties and pain of the negotiations themselves. They do not know that there is another side to the coin, an even tougher and therefore more significant process, one of consensus building among our own people at home on some major issues that are being confronted not only by China, but also by many other countries, especially the developing ones. The issues include, although they are not limited to, the following:

• How to address economic globalization
• How to achieve a balance between trade liberalization and economic development
• How to tackle social issues such as unemployment in the restructuring of the economy

It is the process of consensus building around these major issues domestically that turns out to be the more important aspect of China’s WTO negotiations.

…

That is the most significant lesson we can draw from the negotiations: that we have involved not only dozens of negotiators, but also millions of ordinary Chinese in the process. To some extent, the process became an unprecedented, massive education programme for our people regarding globalization and the restructuring of the economy, with its positive, as well as negative implications for their day-to-day lives. I believe that this striking feature of China’s WTO accession—not as a diplomatic exercise in Geneva, but as a range of broad-based activities involving millions of people in a quest for a better life—is a unique experience in the context of contemporary trade negotiations. (Emphasis added)

…

In conclusion, China’s 15 years of negotiations have prepared us to participate in economic globalization in general and for a new round of trade negotiations within the framework of the WTO, as well as many regional-level and bilateral-level trade negotiations, in particular. We have discovered that a balanced approach between the opening-up policy and sustaining economic development works for China. Economic development would not take place without a real opening-up policy. That is why we support the Doha round, a new round that will bring greater economic benefits for the world and especially for the developing countries. That is also why we actively participate in the regional-level effort to liberalize trade and investment, which might prove to be the building blocks for global liberalization.”

In any reforms, there are always three groups of people – those implementing the change, those against it (who are currently in the system), and those who will benefit from in ultimately. For far-reaching reforms, the last group is often the biggest, but also unfortunately the most remote from the process (either because they are not in the process or because they do not exist yet), and the second group however, is often the group with the most power. A successful reform requires the buy in from the last group*.

Elanor.

(* On a totally irrelevant tangent, sincere oppositions should take note of this; the importance of the support from the younger generation.)

Existential Crisis?

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to avoid being deceived by economists.

- Joan Robinson, Cambridge University

Hmmm…

PS: Sorry for the hiatus everyone. Will resume blogging soon after my many things are sorted.