Towards A Competitive Malaysia #17

Chapter 4: On Being Competitive (Cont’d)

Macroeconomic Environment Enhancing Competitiveness

At the macro level, the prime prerequisite for enhancing growth and competitiveness is obvious: the absence of war, turmoil, or civil disturbance. During such times the nation’s efforts would be directed at non-productive endeavors as killing and destroying. Nothing good could come out of that, the competition being which party could inflict the greater destruction. Besides, money spent on armaments and the military has little multiplier effect, meaning the resulting spending does not percolate or multiply much in the economy.

Had the billions Saddam Hussein spent on his army tanks been diverted to buying tractors for his farmers, Iraq would have had a very productive agricultural sector, and his country would have benefited greatly. The only purpose served by those expensive tanks was as easy target practice for American pilots.

The view that war is good for the economy is an illusion. During the Korean War, Malaysia enjoyed an economic boom with the price of rubber skyrocketing. That war may have been good for Malaysians but it was hell for the Koreans. Malaysians have conveniently forgotten their own hell of World War II.

The “war is good” thinking in economics emerges from the “broken window” effect. [Note: Not to be confused with the “broken window” syndrome in law enforcement where if minor acts of vandalisms like broken windows were ignored, that would encourage other more serious crimes, and soon a general breakdown of law and order. The American sociologist James Q. Wilson first made this observation. See Chapter 8 under “Institutions of Law Enforcement.” Imagine a storm breaking the window of the local bakery. The baker would now have to spend money to fix it, which money would now flow to the window fixer. He in turn would have to buy the glass window, and thus part of that money would now flow into the glassmaker’s pocket. The glassmaker would now have to order more materials and the money would now flow into the silica miner’s pocket. Thus the money-flow goes on, percolating through the economy. The same dynamics would occur with damages wrecked through war.8

The flaw with this thinking is to imagine what would happen if that window had not been broken. The baker would now spend the money on building an addition. The same multiplier and ripple effect would occur, as with fixing the window except that the baker has now an additional space that he could rent out or expand his business. He would be adding productive capacity instead of merely replacing it.

War activities do not add to the productive capacity; on the contrary, they destroy it. Further, the multiplier effect of military spending is considerably lower. [Not to be confused with the “broken window” syndrome in law enforcement, where if minor acts of vandalisms like broken windows were ignored, that would encourage other more serious crimes, and soon a general breakdown of law and order. The American sociologist James Q. Wilson first made this observation. See Chapter 8 under “Institutions of Law Enforcement.”] When you fire a bullet or drop a bomb, there is no multiplier or any beneficial effect, only destruction.8

Spending on war and the military is wrong morally; it is also economically non-productive.

Yes, there were advances like jet engines and nuclear power from military spending that benefited society. Those benefits are coincidental; we would accrue them just as well if not better without having to go to war, as with the peaceful joint outer space exploration.

The negative effect on the economy applies not only to war but also to civil unrests and disturbances. One of the smartest moves Mahathir did as Prime Minister was to sign the peace treaty with the Malaysian Communist Party (MCP) in 1989. The organization, which once dared to take on the mighty British, was well on its way out save for a few raggedy stubborn old men wandering in the jungle. With that treaty, the government was spared the huge expense of maintaining a military presence near the Thai border. In a magnanimous gesture, even though the MCP was technically defeated and the treaty essentially a surrender document, the government included in it prohibitions against gloating or using any term to suggest the reality—a surrender.9 The proud old men in the MCP maintained their tattered dignity, and Malaysia had peace and its ensuing dividends. The surprise is that this brilliant maneuver by Mahathir is not more widely lauded and appreciated.

Malaysia’s first Prime Minister Tunku Abdul Rahman saw early the wisdom of having peace. After getting a commitment of independence from Britain, he quickly sought the MCP’s leadership for peace talks.10 Tunku was even wiser in that he refused to give away the store in search of peace. He intuitively knew the difference between peace and appeasement. When the Baling Peace Talks collapsed, the Tunku prudently secured a defense treaty with Britain as an insurance policy. Thus a newly independent Malaysia was able to divert funds from the military to schools. The country’s subsequent impressive economic performance was due in large part to that early investment in education.

In contrast, neighboring Indonesia was consumed with buying the latest expensive armaments while its schools and other institutions were left to deteriorate. Today, the difference between the living standards of the two people could not be more different.

Threats to Malaysia’s stability can arise both externally or internally. In the early 1960s there was the needless konfrontasi with Indonesia. That crisis sapped resources from both sides that otherwise could have been devoted to nation building.

All of Malaysia’s neighbors could potentially threaten Malaysia’s stability. Ironically, despite the daily headlines of squabbling with Singapore, I do not consider that tiny republic a threat at all for the simple reason that its citizens are enjoying a First World standard of living and would have the most to lose from hostilities between the two neighbors. Being rationalists, they will restrict their ranting to only verbal volleys across the causeway. The more serious and credible threats come from Indonesia, Philippines, Thailand, and more distantly, China. I will revisit this issue of regional security in Chapter 13.

My Diamond of Development presumes that there is peace and stability, for only then could Malaysia prosper.

Next: Microeconomic Environment Enhancing Competitiveness