Towards A Competitive Malaysia #16

Chapter 4: On Being Competitive (Cont’d)

Competitiveness and Productivity

To most, being competitive would have the same meaning as being efficient. Economists have a more precise term to describe essentially the same thing: productivity, “the ratio of output per unit of input.”4 In simple English, it means how efficient you are at producing goods and services for a given resource, whether it is land, labor or capital, or what value you can produce by using the same amount of resources. In the earlier example of “return on investment,” it is a measure on the productive use of capital. The more usual measurement of productivity is the value of goods and services are being produced per hour of labor. This is the statistics tallied by governments.

The McKinsey consultant William Lewis in his book, The Power of Productivity, defines the term more elegantly: “Productivity is simply the ratio of the value of goods and services provided consumers to the amount of time worked and capital used to produce that goods and services.”5 Note the important proviso: provided consumers (users). One may be good at snake charming or arguing but if consumers do not value those activities then they would be useless or “non-productive.” This caveat is important for in the former Soviet economy, government factories were very efficient (“productive”) in producing goods; the problem was those goods were not wanted in the marketplace.

American rice farmers by using combines, fertilizers, and high-yield seeds are so much more productive than Malaysian ones because an hour of work by the former produces more rice than an hour’s work by the latter. Higher output translates into higher income; hence American farmers drive Cadillacs and vacation in Hawaii, while Malaysian farmers exist just above the poverty level. This is what we mean when we say that American farmers are much more productive. Because of their productivity, American rice is cheaper in Malaysia than the local variety, despite American labor and land being more expensive, plus the added transportation costs!

The crucial point is that just because your workers are being paid more for their labor (as with American farmers), it does not mean that their subsequent products would be more expensive. It depends on that all-important measure: productivity.

Granted, those farmers receive massive federal subsidies, America’s commitment to the World Trade Organization notwithstanding. For the most part those farmers use their subsidies to enhance the productivity of their operations, and thus increasing America’s farm exports. Not always. Every year the US Department of Agriculture pays farmers handsomely to leave their land fallow and dairy farmers to cull their cows, all in the name of “price stabilization.”

Ultimately when we refer to the productivity and competitiveness of a nation, we are referring to the well being of its citizens. While we cannot quantify this directly, we can infer it through such indices as the per capita GNP (income), longevity (a measure of health), and level of education. These could be considered the equivalent of a nation’s bottom line.

National prosperity is strongly affected by the competitiveness of the citizens and their enterprises. As long as a nation improves its productivity, the standard of living of its people will continue to climb. Declining productivity translates into lowering of the standard of living; hence the obsession of economists in tracking productivity.

Measuring a company’s competitiveness is straightforward enough, doing it for a nation is more complicated. First we have to consider all the various sectors of the economy, and the productivity of the country then is the average of all the industries and sectors weighted appropriately. The remarkable productivity of the American economy is that all its sectors—from agriculture to manufacturing and service industries—are highly productive. Japan may be highly productive in manufacturing and high technology, but its agriculture, banking, and retail sectors are protected and have low productivity.

Malaysia, like other developing countries, has significant employment in agriculture and construction. Both sectors have extremely low productivity, thus the aggregate national productivity is also low. Unless Malaysia significantly improves the productivity of these and other sectors, then the overall national rate will remain depressed.

Malaysia shares one important feature with other developing countries. Its ruling class is an impediment to improving productivity. Its members control the licenses, import and export permits, and major financial institutions. They do not brood or welcome competition, and when the competition comes from abroad, they hide behind their nationalism to protect their interests, at the expense of citizens and consumers. The elite are content with their rent-seeking activities instead of actually creating wealth.6

Competition is the best way to spur productivity. The playing field must be level with no undue barriers to discourage the entrants of new players. The barrier may be overt, as through explicit legislations allowing only certain individuals to partake in certain activities (a cardinal feature of Malaysia’s NEP and America’s Affirmative Action programs) or subtle, as with Malaysia during the pre- NEP era of the 1950s and 60s. Then, the colonial corporations, in cahoots with existing non-Malay enterprises with their clan and ethnic trade organizations, resorted to predatory practices, effectively squeezing out new entrants to the marketplace. It was wrong then, and it is wrong now; the economy (and hence citizens) suffers through the consequent reduced productivity.

The government’s major presence in the marketplace is a major impediment to effective competition. No surprise that Malaysia’s GLCs are not models of efficiency or productivity.

If countries enhanced their productivity, there would be no shortage of investors, local and foreign. Otherwise even their own investors would flee (capital flight), patriotic exhortations notwithstanding. One effective way to improve productivity is to allow more productive companies to invest. They will ease the transfer of technology as well as productive work habits and business culture.

I have always been impressed at how efficient Malay executives and workers of multinational companies are as compared to those working for GLCs. I vacationed at Club Med in Cerating and then traveled up the coast to Rantau Abang and stayed at a Tourist Malaysia’s resort. The difference in service could not be more different, despite both charging comparable rates. The senior managers at both places were Malays. One behaved like the other managers I observed at elite resorts elsewhere in the world, the other was like your typical aloof civil servant. No marks for guessing who’s who!

Despite its importance, one cannot be too obsessed with the traditional measures of productivity or carry it too far. Those measures cannot be blindly applied to other human endeavors. It takes four skilled musicians to perform one of Haydn’s string quartets today just as it was over two centuries ago when he composed it. No apparent gain in productivity there, if we use the economists’ traditional measures (Baumol effect).7 With modern technology however, millions can enjoy through their CDs and televisions the live concert performed in London, and do so over and over again in the comfort of their own surroundings. Granted, the experience may not be of the same intensity as being at a live performance, but that is a small trade off. From that perspective, the productivity of those musicians is considerably enhanced, potentially reaching millions instead of the lucky few during Haydn’s time.

The challenge is in creating an environment where productivity can be continuously enhanced. There are two levels at which productivity can be affected: at the general macro environment; and at individual and company (micro) level.

These concepts can best be illustrated with the sailing metaphor. The first decision is your destination. Having decided that, you plot the best course, factoring in the wind, weather, and sea conditions. Then you would select your appropriate craft. If speed were your top priority, you would want a fast boat like a catamaran that would literally skim over the surface. Fast and exhilarating, but wet! If you prefer comfort, safety, and a cabin to sleep, choose a displacement sailboat like a Tayana. Those constitute the macro environment.

Within that macro environment, your progress would depend on how well you trim your sails, read the waves, distribute your weight, and keep you hull free from fouling. You would be on the lookout for approaching sandbars, high waves or other obstacles that could potentially impede your progress and necessitate course change; hence the importance of a competent skipper and crew. Those constitute the microenvironment.

Whether you are in a race or merely a pleasure cruise, those factors still matter, and you want them all to be optimal.

Next: Macroeconomic Environment Enhancing Competitiveness