The Hedgehog And The Fox: Prerequisites to Malaysia’s economic competitiveness

This article first appeared in Forum, The Edge Malaysia Weekly, on June 7, 2021 - June 13, 2021.
The Hedgehog And The Fox: Prerequisites to Malaysia’s economic competitiveness
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At some point during the depth of the dark ages and long before industrial revolution erupted in the West, some tiny inventions in farming and agriculture were being made in Europe.

One was a modified, steel-tipped “heavy” plough that could cut through roots and dig a deeper furrow in the dense, wet soil of Northern Europe.

A second invention was the horse collar, which was just a slight improvement on the yoke used to harness a beast of burden to a plough.

The heavy plough enabled farmers to clear forests and extend their fields into areas previously considered unsuitable for farming. It gave the European growers more land.

In the meantime, some innovator invented the horse collar just by modifying the yoke enough to have it pressed against a horse’s shoulders instead of the neck that would have choked the horse off its air supply.

With this yoke, farmers could use horses instead of oxen to plough their fields. Since horses plough about 50% faster than oxen, they could till more land in the same amount of time.

As farmers produced more, trading activities increased. Road junctions where sellers and buyers met to trade goods turned into marketplaces, then into towns.

With extra cash in hand, European peasants could now travel East for religious pilgrimage, bringing them into contact with the treasure of knowledge and the glitter of the cities of Baghdad, Damascus and Jerusalem.

Towards the end of the millennium, the transfer of knowledge and exchange of experience had matured enough for Europe to emerge as the new imperial power dominating the world across the seven seas.

The two inventions were too insignificant to be noticed by anyone then, but history books recorded these to be the tipping point that intensified economic activities in medieval Europe.

Fast forward to the present age and the same intensity of activities that grew the Western economy could be seen in East Asia, particularly China, South Korea and Taiwan.

The latter two were at the same starting line as Malaysia in the late 1960s, but four decades later, the East Asian countries were two times ahead of Malaysia in the economic journey.

Today, the GDP per capita of South Korea is US$34,000 (RM140,160) and Taiwan US$32,000.

They grew twice as much as Western Europe and North America during the period of intense manufacturing and export activities of the 1970s through the 1990s.

Malaysia, despite being slightly ahead at the start of the race, is now far behind with GDP per capita of about US$12,000.

Like the emergence of the West as the centre of economic gravity in the last millennium, economists attribute the phenomenal economic competitiveness of today’s East Asia to one word — innovation.

In medieval Europe, it increased productivity in farming and agricultural production. In South Korea and Taiwan, it turned the countries into the world’s leading exporters of electronics, automobiles, semiconductors and even entertainment.

It encapsulates the interplay between the three components of GDP metrics — labour, capital and the mysterious dimension called total factor productivity (TFP), the latter being the subtle yet important contributor of management efficiency and technology towards the overall national economic growth.

It is hard to measure the level of innovation in a particular country, but one could derive a conclusion from the contribution of TFP to economic growth.

In South Korea, the improved work efficiency and technology alone contributed on average 14% to the economic growth. It is higher in Taiwan, at 24%. Meanwhile, Malaysia only recorded 5% of TFP contribution during the growth period of the past 40 years.

The high and low figure is a reflection of many things.

As the Bloomberg Innovation Index indicates, how much an economy relies on innovation as a key factor in economic growth depends predominantly on the amount of spending on research and development (R&D), its manufacturing capability and concentration of high-tech public companies.

And this is where we bite the dust.

Both South Korea and Taiwan spend almost 5% of their national budget on R&D; Malaysia allocates not more than 1.5%.

The former fully employs the highly skilled graduates of the Korean Institute of Science and Technology (KIST) to grow its economy, while our industries continue to flock to our Ministry of Human Resources for a steady supply of cheap migrant workers.

If Western economic history or the economic progress of East Asia could serve us some lessons, it would be that it takes a combination of strong spending on R&D, a home-grown manufacturing capability rather than just technology transfer and a real shift in our labour market policy to reduce our reliance on low-skilled workers.

One would not raise our capacity for innovation without the other. Even when the public health crisis could have pushed us into innovative mode, we faltered.

The timeless adage “necessity is the mother of invention” does not seem to apply to us.

As a result, when South Korea, in the early weeks of the pandemic, had come up with a mobile app to monitor and enforce self-quarantine, or China had developed a kit to test 10 million residents for coronavirus in just a couple of weeks, we could only contend with pink wristbands as a means to enforce self-quarantine and a vaccine registration system that could not handle mass registration.

Covid-19 has exposed a serious deficit in our innovative capacity. Failure to reverse this course will condemn it into a state of economic feebleness.

Nazim Rahman works in private equity

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