Towards A Competitive Malaysia #7

Chapter 3: The Diamond of Development

The five largest countries in terms of population are (in descending order) China, India, United States, Brazil, and Indonesia. Combined they have over half of the world’s population.1 Except for America, none of the other countries have personalities, companies, or industries that have an impact globally. As for the few Chinese and Indians whose contributions are of global significance, many do so only after they have left their homeland. As for the Indonesians, they have given the world and themselves only brutal and inept dictators: Sukarno and Suharto. The only Indonesian who commanded respect worldwide was the gifted writer Pramoedya Ananta Toer, and his books are banned in Indonesia! As for Brazil, she can rightly be proud of her soccer legend Pele.

Again excepting America, none of these countries are known for providing premium goods and services. Consider the leading brands of today. Nestle foods and Rolex watches come from Switzerland, population over just six million. Nokia phones, the gadget Malaysians cannot seem to be without, are from Finland, population under five million; the luxury car Volvo, Sweden, population eight million; and Shell Oil, the Netherlands, 14 million.

The example of Shell is particularly pertinent considering that the Netherlands does not even have oil. One would have expected that an Al Sheikh Arabi Oil Company or some such Arab entity to lead the global petroleum market. About all the Arabs could do was to invite others to explore, extract, refine, and market their oil. Then with the ensuing fabulous wealth, the Arabs managed no better than to squander it on expensive armaments for killing and destroying each other.

China and India were once cradles of ancient and sophisticated civilizations. The Indians gave us the concept of zero and other valuable insights in mathematics. The Chinese, as intimated earlier, had all the ingredients that could propel them into their own Industrial Revolution.

It is unlikely for the Chinese and Indians to have undergone any biological change in the interim to explain their subsequent decline. Nor have the climate and geography of their native lands changed. We have to look elsewhere for more satisfactory explanations of what makes Switzerland capable of creating companies that can bring out products like Nestle Foods and Rolex watches while China and India, each with a population several hundred times more, can hardly run their airlines. Air India is one of the worst airlines; even the Indians avoid it. Chinese airlines have equally lousy services, and an atrocious safety record to boot. Yet Singapore Airlines, run essentially by the same ethnic entity, is the envy of the world and consistently raking in profits.

A common refrain among Malay leaders in trying to explain Malay backwardness in commerce, especially when compared to the Chinese and Indians, is that they (Chinese and Indians) somehow have this mysterious instinct to excel in business. They are born with this talent, so how could Malays compete effectively with such divinely favored groups? Hence the need for special privileges for Malays! No less than former Prime Minister Mahathir subscribes to this view. A brief visit to Bombay and Beijing would quickly disabuse these misguided Malay leaders of their silly notion.

This chapter deals primarily with the development of societies during a much shorter time scale of a few generations. The literature is voluminous; I will touch on some of them later, but in this chapter I will explore three highly influential modern ideas: Michael Porter’s concept of competitive advantage, Robert Barro’s determinants of economic growth, and Paul Romer’s new theory of endogenous growth.

Porter’s Competitive Advantage

Searching for answers on why some countries are more successful in creating companies and industries whose products and services are in demand worldwide led Michael Porter to his breathtaking study that resulted in his seminal tome, The Competitive Advantage of Nations.2 With over 800 pages, it is presumptuous of me to summarize it in a few paragraphs, but I will for now to keep the narrative.

In the classical view, nations could best take advantage of their comparative advantage by engaging in trade. The simplified example was the comparative advantage Portugal had with its balmy Mediterranean climate over Britain in growing grapes and producing wine. Britain on the other hand had the advantage of having abundant coal, a cheap energy source. By exploiting their comparative advantages through mutual trade, the Brits get to enjoy fine Portuguese wine while the Portuguese can warm their homes and winery by importing cheap British coal. Sensible enough.

It was cheaper for the Portuguese to import the coal; if they were to provide their own energy source by cutting down their forests, fewer Portuguese would be available to make their fine wine. Similarly with the Brits; if they were diverted to making wines that were of poor quality anyway, there would be fewer to work the mines, and less coal to sell to the Europeans.

Porter introduces the novel concept of competitive advantage. What is critical is not that Britain has cheap coal and Portugal is blessed with a climate suited for vineyards, rather how each country could use those resources to maximal advantage. To follow through the example, yes it is more expensive to grow grapes in Britain because of its erratic weather, fewer sunshine days, and frequent crop failures, nonetheless the British could still beat the Portuguese in wine making by using some smarts. By harnessing the brilliance of its scientists, Britain could produce biogenetically engineered grapevines that could withstand frosts and pests, and then concentrate producing only premium wines. Though it would cost more to produce, it would command a higher price and therefore bigger profit margins. Meanwhile let the Portuguese capture the mass low-profit cheap wine market.

Similarly, the Portuguese need not be at the mercy of Britain for energy. They could develop solar panels to tap the energy source of its abundant sunshine, or design special turbines to tap the massive tidal wave energy of the Atlantic Ocean. Both sources would be infinitely less polluting, sparing the pristine beauty of the country’s bucolic vineyards. With no thick smoke bellowing from the smokestacks of its coal generators to soil the air and blight the landscape, the Portuguese could now turn its countryside into a vacation haven for the sunshine-starved Brits, just as the Californians are doing with their Napa Valley wine country.

Porter studied successful industries and companies of ten leading trading nations. Among them, three are major industrial powers (United States, Japan, and Germany); two small Asian states (South Korea, and Singapore); and three small (Denmark, Sweden and Switzerland) and two relatively large (Italy and Britain) European nations. These ten countries accounted for an amazing 60 percent of the world’s economy and 50 percent of its exports, while having about 10 percent of the population and 8 percent of the land mass.1

Next: Porter's Diamond of Competitiveness