Towards A Competitive Malaysia #57

Chapter 9: Institutions Matter

We have to demand from our institutions the impossible, and the

possible will emerge.

—Abdul Kalam, President of India

The visible manifestations of a culture are its traditions, rituals, and customs. These bond members of that culture and strengthen their sense of identity. As societies become more complex and diverse, those elements are no longer adequate; hence the need for modern institutions. Institutions are a subset of culture; they reflect it. In this chapter I focus on institutions of the law, financial intermediaries, civil society, and the media. They bear directly or indirectly on economic development.1

A common misconception is that a society is economically backward because it lacks capital and thus cannot partake in economic enterprises. As the economist Lord Bauer wisely observed, “It is often nearer the truth to say that capital is created in the process of economic development than that development is a function of capital accumulation.”2

This misconception has profound consequences. In Malaysia it leads to such follies as the founding of Bank Bumiputra and other state financial enterprises, as well as the pumping of billions of careless credits and outright grants to Malay entrepreneur wannabes. Internationally, this misconception contributes to the squandering of foreign aid. The legacies of those noble endeavors were bloated Swiss bank accounts of Third World leaders, and the creation and perpetuation of corrupt politicians and institutions.3

Had a fraction of the funds been used to foster an environment conducive to investments and economic activities as with creating and strengthening the appropriate institutions, it would have made a significant impact on poverty reduction. Capital will flow from within as well as abroad if there were profits to be made. Investments now pour into China, not because the world is suddenly feeling charitable towards the Chinese, rather that there are profits to be made there. Chinese leaders consciously nurture this favorable investment climate. No more chanting of silly socialistic slogans; their new mantra is, “To be rich is glorious!” This simple change in mindset resulted in a phenomenal social and economic transformation, uplifting literally hundreds of millions of Chinese from the clutches of poverty.

China is finally learning, albeit belatedly, the importance of creating a climate and institutions conducive to businesses and investments. Many Third World countries are still blissfully ignorant of this important insight. According to the World Bank, it takes only a couple of days to secure a business permit in Singapore, over 30 in Malaysia, and a tedious 151 in Indonesia.4 The reality for Malaysia, as any businessman will tell you, is much worse. The Internet publication I write for, Malaysiakini.com, applied for a printing permit. More than two years later, the government has yet to even acknowledge let alone approve the application.

Then there are the costs, official and unofficial; in Sierra Leona, a permit would cost over twelve times the average annual income (not counting the grease money!); in Denmark, zero.

A good investment climate, to quote the World Bank, plays a central role in growth and poverty reduction, which in turn is essential in creating a more inclusive, tolerant and peaceful world. This is true of the world as it is for Malaysia.

There is no such thing as an ideal investment climate; it is more a process than an event. A favorable policy for China may not work for Malaysia, or what may be workable in Penang may not be so in Kelantan. One must be aware of and be sensitive to local nuances. Similarly, what once worked may no longer be so today. Times and conditions change, and policies have to be continually updated. We have to learn from past experiences, both the successes as well as the failures, and to emulate the accomplishments and avoid the fiascos of others. To paraphrase Porter, the path to an optimal investment climate is a marathon, not a sprint.

Creating a hospitable environment for economic activities does not require grand visions or revolutionary reforms. Indeed often such grand gestures flop miserably. Malaysia’s much-heralded NEP falls far short of its targets. Its earlier little successes were overshadowed by its subsequent grand corruption. The fate of the even more ambitious Vision 2020 remains to be seen, but if past performance were any indication, you would need a magnifying glass to ascertain the policy’s successes.

China’s current remarkable transformation was not through the effort of its “Great Leader of the Revolution” Mao Zedong, rather through the quiet and tireless effort of his diminutive successor Deng Xiaoping.5 It began with a simple change in mindset and attitude, beginning with Deng’s. He continually reinforced on his followers that he could not care whether the cat is black or white, as long as it catches the mice. Meaning, he could not care less whether a policy is socialistic or capitalistic as long as it produces results. No stirring slogans, and no frantic waving of the magical Red Book. On such small incremental changes are great successes built.

A recent insight of economists is that what separates countries with robust economic performance from those perpetually struggling is the quality of their institutions.6 In traditional feudal society where everyone knows or is related to everyone else and where cultural bonds are strong, there is little need for formal institutions. When you get old, your children will take care of you, there is no such thing as Social Security. Your family and your tribe are your security. Similarly, if your hut gets blown away in a storm, the village will come around to help you, gotong royong (barn raising) style, and build a new one. There is no Federal Emergency Management Agency. If a young man were to misbehave, the strong peer pressures from his family and fellow villagers would keep him in line. Their disapproval is punishment enough; there is no need for Juvenile Hall.

Next: Institutions in a Modern Society