Towards A Competitive Malaysia #59

Chapter 9: Institutions Matter (Cont’d)

Institutions of Law Enforcement

Peace and stability are prerequisites for prosperity. In times of war and turmoil, only criminals and arms dealers would be raking it in. As for investments, those with wealth would be concerned with preserving, not enhancing it.

The military is to ensure safety from organized threats from within (armed rebellion) and outside (war). Malaysia has had experiences with both. During the Japanese Occupation and communist insurgency, little economic development took place. The basic consideration was survival, with resources diverted to that sole function.

While no one has done a treatise on the economics of war, it is plain that all the death and destruction are not only tragic but also a colossal waste. The multiplier effect of civilian spending is many times greater than that of the military. Yet today the bulk of the budget of many Third World countries, Malaysia included, is being consumed by the armed services. The best and brightest are absorbed into the army instead of engaging their talent in economic enterprises and creating wealth for themselves and their country.

The power that has the stronger economy usually prevails. The military might of the old Soviet empire collapsed because of its rotten economy. The path towards military supremacy is not in buying expensive sophisticated warplanes that your illiterate pilots could not operate, rather to build schools and train teachers. That would also pave the way towards economic development, quite apart from producing smart soldiers.

Thankfully for most, war is a rare occurrence. The more readily identifiable threat to society’s security and stability comes from those who flaunt and break the laws: the criminals. The extreme of lawlessness is anarchy, which will bring us, economically, to the same conditions of war. At lower intensities of lawlessness, we see the wasted expenditures on private guards and obsessions with gated communities. If the Filipinos were to expend their collective resources on a good and efficient police force instead of each clan providing for their own private security and expensive alarm system, they would have a much more orderly and economically vibrant society. Those private guards could now be diverted to assembling computers, not weapons.

Crime imposes a huge cost on individuals as well as society. In some Latin American countries crimes consume up to a quarter of the GDP.

The rule of law is one of the most critical requirements for economic growth. It is the necessary incentive to work, invest, and innovate. Why partake in all those activities if the fruits of your labor would be taken away? It is immaterial who takes that wealth away: robbers or the state’s confiscatory tax.

Crime, like war, imposes its costs directly through the damage incurred with the criminal activities, and indirectly by inhibiting legitimate economic and other activities. Even threats of crime can be devastatingly effective in discouraging investments.

Tourism in New York City rebounded only after the authorities cracked down on petty crimes. An interesting side benefit to this strict crackdown is that it discourages other more serious crimes. The sociologist James Q. Wilson termed this the “broken window syndrome,” that is, when law enforcement agencies crack down on such seemingly inconsequential crimes as vandalism and the breaking of windows, the real criminals would take note. (This is different from the broken window syndrome of economics discussed earlier, which refers to the income multiplier effect of spending to fix broken windows.

Malaysian police have yet to learn this. When drug addicts freely “mainline” on the streets in broad daylight or cars illegally double park with the cops blissfully ignoring them, the signal sent is that you can break the law with impunity. Another innovation from New York is community policing where cops become part of the community instead of being stuck in their cars or at their desks.10 They are busy on their beat, mingling with the citizens. The emphasis is on preventing crimes, in contrast to the usual pattern of reacting to them. Many cities also require their police officers to live in the city, again to increase their civic involvement so that even in their off hours they would remain as authority figures.

The colonial government knew a thing or two about community policing long before the concept was even acknowledged. The authorities recruited simple village folks with minimal education to be “special constables.” They patrolled the villages on their bicycles or on foot, and otherwise let the community know of their presence. They are aptly referred to as mata mata, the “eyes” of the authorities. These law enforcement officers must be seen as working for and not against the community. A major problem with big American cities until recently was that their police officers were predominantly white while the citizens non-white minorities. There was minimal identification between the two. Worse, these officers often lived away in the suburbs; they were seen more as an occupying force rather than part of the community. Today that is changing with enough blacks and other minorities on the force. Major American cities have not seen a major racial incident since this innovation.

A comparable problem exists in Malaysia. The police force, like other branches of the government, is overwhelmingly Malay. The police live isolated in their barracks behind barricades, with minimal interaction with the community they serve. This problem becomes acute when the community they serve is predominantly non-Malay. There is minimal opportunity to build trust and relationships. Absent both, and the relationship is akin to that of guards and their prisoners. The police force in predominantly Chinese areas should have sufficient Chinese presence, and I would make the police constables live among the citizens.

When we think of crime, we think of robbery and other violent crimes. We readily appreciate their negative impact on the economy and on our safety. No less injurious to the economy (and also to our well being in the long run) are white collar crimes: embezzlement, breach of trust, and outright corruption. I will cover these, in particular corruption, later.

Stability and security are prerequisites for economic development. To encourage development, a nation needs to go further. It must have in place institutions to ensure that citizens get to keep that which is rightly theirs; allow them to exchange freely among themselves goods and services (that is, to trade); and lastly, to adjudicate the inevitable conflicts.

Next: Property and Contract Rights

Ensuring Our Oil Bounty Would Not Be A Curse

First posted in my column, SEEING IT MY WAY in

www.malaysiakini.com, June 6, 2008

With Malaysia forced to end or at least reduce its petroleum subsidy, it is well to learn from the experiences of other oil-producing countries.

There are enough lessons in the world today on how we should manage our precious God-given oil bounty. Prudently done, as in Alberta (Canada) and Norway, it would bring peace and prosperity. Anything less and it would be a curse; the new wealth would breed corruption and tear the socioeconomic fabric of society, as seen in today’s Iraq and Nigeria.

I would rather that Malaysia emulates and enhances the Albertan and Norwegian models. Malaysia should, like Canada and Norway, remove all subsidies on petroleum products. This would encourage conservation. It would also prod Malaysians into the global economic reality instead of being insulated from it.

In order for this giant step to be accepted, the government must divert the savings into a separate trust fund for use by future generations when our oil would run out, with a small portion devoted for current use in subsidizing cooking gas for the poor, and users of public transportation.

The Lessons from Norway and Alberta

Norway, with a land mass slightly larger than Malaysia and a population only twice that of Perak, ‘sterilizes’ its oil revenue by diverting it into a separate trust fund for use by future generations. The wisdom of that initiative is that the new wealth did not disrupt the social and economic fabric of Norwegian society. There was no runaway inflation as in Nigeria, and the Norwegians did not become lazy profligate consumers dependent on their new oil wealth, as with the Arabs.

The Norwegians pay the same world price at the pump for their petroleum, currently at about RM 7 per liter, nearly three times the new Malaysian price. One consequence is that while they have one of the highest per-capita incomes, car ownership among Norwegians is one of the lowest in Europe. To them, a car is simply a means of transportation, not for ostentation. Everybody knows that they are already wealthy; they do not need to flaunt it. Further, the cars on the streets of Oslo are mostly fuel efficient brands like Volkswagen rather than luxurious Mercedes. In fact there is a stiff tax for gas-guzzlers.

Among the many positive consequences are that their roads are not congested and their air less polluted.

Today the Norwegian Petroleum Trust is the world’s second largest sovereign fund, and fast expanding. It may have already exceeded half a trillion (500 billion) dollars. When the oil wells run dry, as they inevitably will, the Norwegians could still enjoy their present lifestyles as the Trust Fund’s income could cover the country’s budget till perpetuity.

Like everyone else, the Norwegians do not like paying high prices for petrol, or anything else for that matter. However, they willingly do so because they see the direct and tangible benefits of such an enlightened policy.

The Albertans too pay world price for their energy, with their government diverting the extra bounty into a separate Heritage Fund. Unlike the Norwegians who invest in global stock markets, the Albertans invest in their schools, universities, and hospitals. Consequently, as noted in the Economist and also from my firsthand knowledge, Alberta is the only place where the rich send their children to public schools! The University of Alberta (which happens to be my alma mater) is now regarded as one of the finest, thanks to generous funding from the Heritage Fund.

Malaysian Petroleum Trust Fund

Malaysia can improve on the Norwegian and Albertan models. We must commit to remove all subsidies on energy, and do so in a phased and predictable manner, perhaps over a couple of years. This must be coupled with a properly thought out plan to protect the poor.

For example, there must be subsidized cooking gas for the poor, and only for them. We can easily estimate the energy needs for the typical poor family, and limit the subsidy or even direct grants only for that amount, and nothing more. It should be fairly easy to devise such a poverty-ameliorating program with minimal leakage. We could model it after America’s “food stamps” program.

Likewise, we should subsidize and thus encourage public transportation. In British Columbia, season pass holders (rich and poor) for public transit get a rebate from the government. There is a public good in this; for by not using their cars for commuting, the air is less polluted and streets less congested, and thus require less maintenance.

The money saved from removing the subsidies should be diverted to a special Petroleum Heritage Fund. The corpus (or principal) would be invested locally in a broadly diversified portfolio to include stocks, bonds, real estate, and venture capital. The fund should be passive investor, concerned only with profit making.

The Norwegians limit their holding in any company to no more than 5 percent, meaning, they are in it purely for the profit potential and not to seek control or management. It is for this reason that unlike other sovereign funds (Singapore’s Temasek and China’s many funds), the Norwegians are the most sought after investors.

Like the Alberta Heritage Fund, the income from the Petroleum Fund should be used to improve our schools and universities, as well as providing affordable housing and better health care. Just as the corpus must be invested locally, the income too must be spent locally. Thus no scholarships to send students abroad, instead the money should be spent to improve local universities so as to benefit the greatest number of students.

The country now has many such trust funds, from Tabong Haji to Employees Provident Fund. All too often they serve as nothing more than as sources of cheap funds for the politically well connected. They are also not well managed.

To sell this I dea, the Petroleum Fund must be professionally managed and free of political interference. This is a very high but achievable order. This means its governing board must have wide representations, including nominees of the opposition political parties and NGOs. Anything less and it would be hard to sell the policy.

Pakatan Rakyat’s leader Anwar Ibrahim rightly expressed the public fear and mistrust that the funds saved from reducing or abolishing the subsidy would be used to benefit Abdullah’s political cronies and family members. Anwar and Malaysians generally have good reasons for this suspicion.

I am not impressed with Abdullah’s proposal to provide tax rebates for car owners. If they can afford to buy a car, then they do not need any subsidy or rebate from the government.

Abdullah must also spend the petroleum dollars locally to benefit especially the residents of the oil-producing states. It is morally indefensible and politically foolish to see residents of the three states where oil is produced (Trengganu, Sabah, and Sarawak) among the poorest in Malaysia.

If Abdullah does not handle this petroleum subsidy issue wisely, it could prove to be the final straw to his downfall. On the other hand, if he could learn (a big if) from the Norwegians and the Albertans, he could not only salvage his political future but more importantly, leave a significant legacy.

Towards A Competitive Malaysia #58

Chapter 9: Institutions Matter (Cont'd)

Institutions In a Modern Society

As society becomes complex, we need new mechanisms to guide social relationships; hence the need for institutions. In the words of economist Douglass North, institutions are the rules of the game; they are the humanly devised constraints that shape human interactions.1

With the right policies and institutions, we can take full advantage of whatever attributes a nation has. A generation ago, the Yucatan Peninsula of Mexico was nothing more than the sleepy villages of poverty-stricken fishermen. Today, it is a major tourist destination. The right policies, leadership, and institutions made that possible.

With misguided policies and inept institutions, even sand could be made scarce in Saudi Arabia. Malaysia has over 100 inches of rain annually, yet the taps are frequently dry. In Las Vegas, in the heart of a desert, homes sport fountains and swimming pools.

Humans are social beings; we interact with each other. One manifestation is our propensity to trade, to barter and exchange goods and services. Trading is not a pleasure and an end in itself, unlike sex (also another basic human instinct), rather each party feels that he or she would benefit from the transaction. When the ancient hunter bartered his excess hides for the farmer’s surplus barley, each felt that he was better off after than before the exchange.

Adam Smith philosophized whether the “propensity of men to truck, barter, and exchange one thing [or service] for another be one of the original principles in human nature, or whether it be the necessary consequence of the faculties of reason or speech,” or some other causes, but he was certain that this attribute is common to all men and found in no other specie.7

The insight of modern economics is nothing more than to maximize this primordial of human instincts, to create institutions to facilitate this exchange, reduce its costs, and have mechanisms to resolve and minimize the inevitable conflicts such interactions would generate.

The first such essential institutions would be concerned with public safety and security; another would be conflict prevention and resolution. There must be a reliable, fair and just institution, respected and trusted to adjudicate disputes. The bane of many Third World countries is their inefficient and corrupt judiciary. The decline in direct foreign investments in Malaysia is in part related to the lack of faith in its judicial system

Before people can engage in trade, they must be assured that what they have is rightly theirs and that the ownership can be transferred. Meaning, there must be a mechanism to establish property rights, and the concomitant right to enter into contract with one another—contract rights.

Property and contract rights alone would not be sufficient. There must be mechanisms to facilitate the various parties coming together. Of particular importance are institutions to connect owners and users of capital—the financial intermediaries.

Overseeing all these would be the political institutions to provide for the orderly selection of leaders, or their removal should they prove wanting. To ensure accountability of institutions and to act as their effective checks and balances, the public must be appropriately informed and apprised. This means a free press and a vibrant civil society.

Many countries have well meaning policies and established institutions, but they exist only on paper; the reality is starkly different. The World Bank found that 90 percent of firms in developing countries report gaps between policy and reality. Policies must be effective in their content and in their execution.4

Next: Institutions of Law Enforcement

Kosovo's Independence and Pak Lah's Impotence

[First appeared as my column Seeing It My Way in Malaysiakinini.com on February 24, 2008.]

The inexplicable and highly noticeable silence of the Organization of Islamic Conference to Kosovo’s declaration of independence on February 17 reflects the organization’s irrelevance in contemporary world affairs. It also reflects the impotence and incompetence of its leader, Abdullah Badawi. Not that we need yet another demonstration of those glaring deficiencies!

As an association of Islamic political entities, OIC should be concerned and engaged with Kosovo. This after all is an organization that counted the Palestinian Liberation Authority as its member even before there was a Palestinian state. More importantly, considering what the people of Kosovo suffered while under the rule of the dominant Serbs who were intent on “ethnic cleansing,” international organizations like the OIC should take the lead in liberating Kosovo.

While secular (and non-Islamic) Western states like America and the EU are supportive of Kosovo’s independence, the OIC chooses to remain silent, an irony that defies my comprehension. OIC’s silence and non-involvement means only one thing: It condones or at least remains blind to the demonstrated atrocities of the Serbs.

OIC specifically and the world generally should support Kosovo’s independence even if the Serbs were Muslims and the Kosovans, Christians. Injustices and tyrannies recognize no religion or race; they should be universally condemned regardless of the race or religion of the oppressors and victims.

The largest Muslim country, Indonesia, joins China and Russia in opposing Kosovo’s declaration of independence. They do so not on the merits or demerits of the issue rather because of their own fear of secessionist movements within their borders. They are assessing Kosovo based on their own selfish political considerations without any regard to the greater overriding humanitarian issues. China is burdened by problems in Tibet and elsewhere; Indonesia still has unresolved matters in Aceh.

Kosovo is not the only glaring blind spot for OIC. This organization under Abdullah Badawi’s leadership is deaf to the crying tragedies plaguing the Muslim world. From the continuing humanitarian catastrophe in Darfur to the endless ravages of war in Afghanistan and Iraq, OIC’s silence is reprehensible and morally indefensible. It goes contrary to everything our Holy Quran holds supreme, and to the teachings of our Prophet Muhammad, s.a.w.

It is yet another irony lost on the greater Muslim world that most of the charitable and humanitarian relief works undertaken in Darfur and elsewhere in the Muslim world are being done by Western non-governmental entities.

The Appropriate Lessons from the Balkans

Since Tito’s death in 1980, the old Yugoslav Republic had been fractured, violently and repeatedly. Countries like China and Indonesia that oppose Kosovo’s independence are drawing the wrong lessons from the Balkans.

Ethnic, religious, language, and cultural differences are not unique to the Balkans. Today as a result of globalization, as well as previous mass migrations as a consequence of wars and economic dislocations, few countries have culturally or racially homogenous populations. Such diversities are fast becoming the global norm.

States that refuse or have yet to accept this reality are sitting on a political time bomb. They are the Yugoslavias of the future, their fate sealed in inevitable brutal Balkanization.

Those countries that tolerate – and merely tolerate – the diversity within their midst will survive, but merely survive. Only the few enlightened nations whose wise leaders embrace this new reality of plurality and leverage it as an invaluable asset will thrive, and thrive well in this increasingly globalized world.

The lesson from the Balkans is not to try to homogenize or “purify” your society. The more efficient and disciplined Germans tried it under Hitler, and they paid a horrific price on themselves as well as on their victims. Decades later and not far away, Milosevic and his band of bearded thugs too tried it in their own barbaric ways.

In contrast to the old Yugoslavia, America and Canada have many minority groups, including aboriginal natives who have yet to join the economic mainstream. America counts many prominent minorities among its elite. Indeed America is currently looking to vote for its first black president. That aside, visit Washington, DC, and you see many black and brown faces in Congress as well as in the permanent establishment. There is no secessionist sentiment in predominantly black Washington, DC, or the Virgin Islands. Indeed, Hispanic Puerto Rico is clamoring to be the 51^st state of the union.

Likewise, Canada was once afflicted with a secessionist movement in its predominantly French province of Quebec. Today with the whole of Canada embracing bilingualism and biculturalism, as well as economic and other developments in Quebec, the once powerful Parti Quebecois that advocated for Quebec’s separation from the rest of Canada, is now an irrelevant force.

Then consider Canada’s aboriginal populations. While Australia has merely apologized for the maltreatment of its first citizens, Canada has gone further. It has granted greater autonomy to its northern territories so that now Canada has legislative and other bodies run almost entirely by the native population. Rest assured that they have no desire to separate; they feel very much a part of greater Canada. They are also very proud of that fact.

Yugoslavia was once united and peaceful under Tito’s brand of communism. With the fall of communism and the emergence of democracy, the country quickly disintegrated. Milosevic may have given democracy a bad rap; more accurate however is that he and many other despotic leaders are merely wrapping themselves under the cloak of democracy and freedom. They view democracy not as a system that would guarantee freedom for their people rather as a license to inflict the tyranny of the majority upon the hapless minority. In short, their brand of democracy is nothing more than a pseudo sophisticated mob rule. Mob rule is still mob rule regardless whether it has been sanitized through the ballot box.

As per the Quran, our freedom is our God-given right. It is definitely not the gift from some enlightened colonialists or our benevolent leaders. It is ours to begin with, our inherent rights. In a democracy we willingly give part of that up to the state for the common good, and only for the common good. We certainly do not give up our freedom so our leaders could oppress us. Only through freedom could humans come together. We cannot be coerced to come together; Tito’s success was only a mirage.

Malaysia is a plural society. The relevant lesson from the Balkans is that we should embrace and leverage our diversities to our common advantage. Malaysia also has much in common with other plural societies like America and Canada. There is much that Malaysians can learn from these two countries. I just hope that Malaysia – its people and leaders – would draw the right lessons from the Balkans as well as from America and Canada.

It is already too late to demand this of our present generation of leaders as exemplified by Abdullah Badawi. However with the many new young faces as candidates from all parties in the upcoming general election, it is appropriate for us to ask them the lessons they have learned from Kosovo. Even if they were to respond that they have never heard of Kosovo or the Balkans, that in itself would be highly revealing.