"Rethinking Growth Policies in the Developing World:" Comments 6

By Farrah Shameen binti Mohamad Ashray (Malaysia)

I. Commentary

The rate of development of each country definitely lies in the growth policies adopted. How these policies are adopted and what are the reasons behind choosing each policy has a lot to do with the interest and aim of the nation as well as the regional trends. Although nations rely on each other because of trade activities, but they are not permanent friends as nations have different interests and aims which sometimes are conflicting.

The obsession to have super rapid growth has been the trend in developing countries. Gradualism is not it. At the same time, economic super powers through international organizations led by them are also propagating globalization, free-market and deregulation, indicating to the developing countries, since having a reliance on the foreign investment and capital, must govern and mold their countries in the desirable manner of the investors.

The question is who determines the best growth policy now? Who determines what is orthodox and what is heterodox? Are the growth policies propagated by the international communities, which are usually the already developed nations the best recipe for the developing nations? In my opinion, these are the issues brought forward by the author, Dani Rodrik. After discussing the basic principles of economic policies that all successful nations adhered to such as sound monetary policy, integration with the world economy, protection of intellectual property, social and political stability amongst others, he has highlighted that there are instances in certain countries which are not so. There are countries that have succeeded to attract investors and achieve considerable healthy economic growth without adhering to these set of principles such as China and Vietnam. The reluctant reformers and pro-socialist countries have also achieved growth which also proved that economic growth does not necessarily have to be in a democratic environment. He thereby concluded that the consensus on these principles through the Original Washington Consensus (OWC), and which was later enhanced in the Augmented Washington Consensus (AWC) are not necessarily the best medicine for all. The weaknesses highlighted by the author in the AWC such as being too ambitious to be achieved, not realistic enough compared to the institutional and human resource capacity in developing countries, are real and eminent in my point of view.

Then a realization that there is a need to avoid one-size –fits-all strategies and put focus on country-specific strategies. It is also admitted that the World Bank and other International Financial Institutions (IFI) recognize these issues but have yet to be confronted it seriously and are still positively proceeding with the current programs. Finding out why it has not been addressed seriously by these institutions would be interesting.

The Diagnostic Approach which is favored by the author is to match policy priorities with the diagnostic signals. It is a strategy to first figure out the bottleneck or the constraint of growth and then finding out what are the causes/roots of the particular constraint and connects it to the problem. At the same time, decide what the most needed thing/action to take is. It would also be easier to rule list out the strength in the beginning so that it could be used rather than reinventing the wheel or to avoid creating growth policies which do not take advantage of strong aspects/characteristics of a situation or nation. This approach shows that individualism and specifics are important in creating the skill to identify problems objectively and the skill in solving problems without relying fully on packaged remedies like the Washington Consensus.

II. The Case of Malaysia : The Industrial Policy

What kind of growth policies have Malaysia adopted to achieve growth over the years? How did Malaysia choose its growth policies and what are the reasons behind it. I would like to focus only during the early days of Malaysia, when huge transformations/policies of high impact to achieve several aims were made, which is the Industrial Policy.

Malaysia, in my opinion started from an agrarian state with an economy depending at about 25% share of agriculture in its GDP in 1960s but moved to set it priorities to become an industrialized state because of the constant identification of economic progress with industrialization, looking at the Industrial Revolution in the 18th century. This is probably the only economic revolution to date for the Third World countries to imitate and which could give a spill effect so large that it could be a fast track growth policy. It was probably the only way for Malaysia which was not satisfied with status quo and wanted a leap frog in economic growth. This strong orientation to be industrialized could also be seen when the 4th Prime Minister, Mahathir Mohamad announced in 1982 that Malaysia wanted to learn from the industrialized eastern countries, Japan, South Korea and Taiwan, a policy later called the Look East Policy, instead of from the western bloc. The other reason was Japan as the second largest trading partner to Malaysia at that time has emerged as the second largest economy in the world. Industrialization was also to diversify the economy because focused economy especially on agriculture, minerals and commodities is believed to be dangerous for the economic stability in the future.

Malaysia even before independence in 1957 has already traded actively mostly by exporting commodities, supplying raw materials for manufacturing industry of Britain and becoming the market for those manufactured goods. After the Investment Incentives Act was passed in 1968 in the midst of high unemployment and social instability, the law boosted private investment, local and foreign as well as export oriented industry by providing various incentives, exemptions on tax and tariff protection . It also provided labour intensive industries tax relief based on number of employees. At this time, government regulations played an important role in the pattern of employment as well as the growth of the industries. Export oriented industries mushroom so rapidly that in the early 1980s, that some industry like the construction and plantations were having shortage of man power as many have turned to factories and industries for employment. Government of Malaysia launched the Industrial Master Plan (IMP) in 1986 to lay the foundation for the manufacturing sector to be leading growth sector in the economy. At this point of time, the unemployment rate was doing downhill; the world recession starting in 1983 causing commodities prices to fall had resulted in massive retrenchment in many industries especially invested by foreign capital. To date, Malaysia has three IMPs namely the first: IMP1 (1986-1995), second IMP2 (1996-2005), and third, IMP3 (2006-2020).

Why was Industrialization chosen to boost economic growth even now? In reference to the Washington Consensus, it can be seen that the Malaysian Government did follow the rules of good behaviour such as openness to direct foreign investment, deregulation, tax reform, integration with world economy etc. The difference between Malaysia and some other countries like the Indonesia and Philippines is that Malaysia still has it freedom from the IMF and World Bank to make policies and regulations. Thus probably the pressure to follow these principles did not come out of obligation to these IFIs but came out of careful policy considerations and of the need to resolve the issues of financial weaknesses and inefficient banking system as well as to insulate the country from rapid capital flight. In other words, wanting to prove that Malaysia has strong and sound corporate governance. However, how did Malaysia come to that conclusion that industrialization is the best? Although it can be seen that Malaysia tried to mimic the success of the Industrial Revolution, there are many country specific characteristics which were adopted to tailor make the policy into the domestic environment. In the beginning of industrialization also, it can be seen that gradualism and government control was practiced very strictly. Gradualism was practiced in the beginning as the Government was cautious of losing control and being taken advantage of by investors whom are far more experienced. Some regulations made by the government because of national interests and economic distribution motives in mind have been largely criticized. Lastly, the industrial policy adaptation has a futuristic dimension that is to prepare the country to be competitive in the world and not only to address problems at the particular time.

3. Conclusion

In the case of Malaysia, all the first-order principles of economic policy are in existence. Malaysia wanted to grow very fast and needed to grow fast. For that the government has chosen industrialization as the key sector of economic growth through encouraging spill effects of industrialization which are:

1. Urbanization and migration;
2. the development of small and medium industries and enterprises (creating supply linkages);
3. increase of job opportunities through encouragement of labour intensive industries ( which leads into increase of income per capita);
4. Encouraging Science and Technology in education and job/skill training (creating a good/quality pool of labour);
5. Poverty eradication and income distribution (increase quality of life);
6. Foreign investment and capital increases and etc.

To my opinion, it is seen like Malaysia did diagnose the bottlenecks and constraints in the growth of the economy before bravely pointing to industrialization as the key to economic growth, using the growth it generates to cover many bases at one time. The issue of misdiagnosed might be argued by some saying that the IMP has failed in many ways, but the Industrialization as a whole is a success although a handful business projects under its flagship such as HICOM and Perwaja Steel has failed to sustained due to many contested reasons.