Sunday, April 11, 2010

What does it meant by ‘High Income Economy?’

What does it meant by ‘High Income Economy?’

So much hype in the Model Ekonomi Baru about this new target of achieving high income economy status by 2020. If you want the definition, he it is in Wiki.
Funny that the document elaborate so much about the target of high income economy, but have not elaborated at length on how to get there.

A country is just like a household. There is more than one way to get rich. A household can get rich by saving and scrimping, and invest whatever saved under the mattress or in income generating venture, eg put the money in interest bearing bank account.
Members of the household could learn and study to improve their skills and knowledge, so that they can work and sell their labour at higher wages, and a country could invest in education of its citizens so that the citizens can sell their services at higher wages.
Another way of getting rich, as written by Sakmongkol aka Datuk Ariff Sabri is to be entrepreneur, i.e. creating product or services and be capitalists, setting up businesses. The country should encourage entrepreneurship and make it easier for them.

Singapore has been a high income economy for many years, and it didn’t take then just 10 years to achieve that status, more than 20 years of working at all the above. Most rich high income countries in the West get there by scrimp and save, following Solow’s 1956 work. Yes there are countries which doesn’t have to follow this model, they are well endowed in natural resources, and have the brains and ability to manage their resources well, for themselves and future generations. Brunei, Gulf countries, Norway among them. But then there are countries who are rich in natural resources as well as clever and educated populace, yet squandered their wealth through corruption and infighting.

Its true that in the 70s, 80s, and 90s Malaysia has a high savings rate, which is made up of high household savings and a low negative savings by the government, but still in black. At that rate of savings achieved in those days, and following Solow’s growth model, we were on the way to achieve developed nation status by 2020.
Here, I am not writing to criticize, but where do went wrong?
We were too greedy, we wanted to get there faster and used financial leverage, i.e. we borrowed lots of money, and invest in infrastructure before its time, sort of making a great leap forward. The result is all there to see, we have infrastructure that flopped, like multimedia thing (I am not even going to say super corridor) or infrastructure that ahead of its time and bleeding cash every year like albatross hanging around our neck, eg new capital city, new airport, tall buildings etc.

To put it in a simple picture, Solow divided income into 2, income from labour and income from investment. Since there is only limited time in a day whereby we can work, eg 8 hours a day, the only other way to increase income is from investment, so the more money we invest in income producing ventures, the more income we will get. So as long as out savings rate is in positive territory, we are on the way of getting rich.
As for the second and third methods, i.e. invest in education and skills and encourage entrepreneurship, they go hand in hand. One cannot get business minded society without investing in education. These are human capital, and human capital will flow to wherever there is conducive environment to create wealth and prosper.

So how do we create condusive environment for our citizens to prosper?
Simple, our government must do their job, i.e. to govern and rule with fairness, efficient in bureaucracy and to invest in infrastructure like good roads, ports, airports etc.
Sounds simple, but most government stray from those edicts. For example, govern and rule with fairness require the government to formulate laws that is fair and to set up judicial system that is fair and unbiased, and law enforcement agencies must also be fair and fast in handling the judgments. Legal cases, either civil or criminal should not take years to go through court system; it should take less than 4 months at most.
What say you? Is our government departments fast and friendly as well as fair?
I believe we do have good infrastructure, only that our mentality is still not appreciating them.

So what happen when we get there, i.e. being a rich country? We will have to forgo the crutches of development aids from rich countries, and expected to shoulder the burden of giving aids to poor and developing countries. As such we will have to pay a higher portion of our income in taxes.
There shall not be poor and starving in our community, every member of our society shall have proper housing, hence the social safety net for our citizen who have fallen on hard times.
We shall strive to evenly distribute our national income among our citizens, so that there is not a huge gap between the top quartile income group and lowest quartile. Hence its important to have minimum wage law.

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