The Malaysian Economy — Argument beyond corruption

Wan Hong suggests a different approach to criticising the Malaysian economy — going back to the basics.

From national news front pages to alternative online media sites to kopitiam talk, the Malaysian economy seems to be a topic of conversation that pops up from time to time. And I have realised that once on the path of discussing our economy (insert jargons like fiscal consolidation, national sovereign debt and such here), at one point, the conversation will tend to gravitate towards the issue of economic corruption. Over teh tarik and roti tissue, we bemoan about how Datuk so-and-so has so many millions, alleging figures and numbers of ringgitthat has been drained out of our economy.

But I wonder, from an economic point of view, if hypothetically all this ‘money’ that has been allegedly stolen by cronies were to be returned to the country, would Malaysia then have what it takes to achieve a truly high-income developed state?

Notwithstanding corruption, which is seen to be and is a serious national issue, my point here is to discuss about Malaysian economy beyond the sighs of corruption. I want to provide an economic framework to think about the economy and hopefully gain some insight, and not end the conversation with the typical lament about how corruption has hurt the economy.

Let us talk about economics.

To those uninitiated, it is indeed puzzling when one reads economic news. “Bank Negara announces that the country will be relying more on ‘domestic consumption growth’ to ‘accelerate’ the ‘next quarter growth’ of the economy”. What exactly does it mean? Applying economic theories, allow me to break things down into the simplest sense, just to get the discussion going:

Aggregate Output Function

Output/Gross domestic product (Y) = Consumption (C) + Investment (I) + Government spending (G) + Net export (NX)

Y = C + I + G +NX

This is the most fundamental equation to understanding what makes up the total output of an economy, the gross domestic product (GDP). Consumption (C) refers to the domestic consumption of our economy – that is, how much the people in our economy spend on local goods and services. Investment (I) refers to the money spent investing in our economy, by the rakyat or by people from overseas. Government spending (G) refers to the annual government budget, which is the economic responsibility of the government to tax and to spend in our economy (indeed, the government is a big player in an economy). Lastly, net export (NX) refers to the sum of national export after subtracting how much the country imports (it can come out as either a negative or a positive number, depending on whether the country imports (negative) or exports (positive) more).

Any increase in either component of C, I, G, NX will increase the economy’s output (Y). Without saying, any decrease in either or all of the components will, in turn, lead to a decrease in output. The aim here is to increase the output. The higher the output, the higher the country’s gross domestic product. The economy is producing more and consuming more, thus reflecting more wealth and the higher income of the nation.

Of course at this point, if you have taken Economics 101, you would realise that I have neglected some fine print from the equation. As a caveat, I do not intend to give a lecture on economics, but rather would like to focus on some of its basic structures, just to provide an insight to the economy.

Yes, this equation is imperfect, and relying on gross domestic product as the sole indicator of the economy is a fallacy. But what you need to know is that this equation neatly breaks up the components of what makes up an economy.

That being said, one has to understand that each component has its respective growth rates and that each component has its respective size of contribution to the output. Say, when Bank Negara announced that “domestic demand remained the key driver of growth, expanding by 8.3%, while exports turned around to grow by 1.7%” , it was referring to the fact that the ‘Consumption’ (C) had increased by 8.3% in that quarter and that ‘Net export’ (NX) had increased by 1.7% in that quarter. On another matter, the percentile of contribution of each component to the economy is another matter. For instance, C could contribute, say, 30% to the output while the other components, (I, G, NX) collectively contribute to the remaining 60% of the economy. Unfortunately, I do not have the actual statistics with me at this point, but from a theoretical framework, this is one way of measuring the economy.

Relating it back to the corruption issue, when money is leaked out of the economy, it means that the money that should have been reflected in the output (Y) has not been accounted for.

Aggregate Production Function

Understanding the aggregate output is just one side of the coin. The economy can be broken down in yet another method, the aggregate production function.

In its simplest variation,

Output/Gross domestic product (Y) = Technology (A) x Capital (K) x Labour (L)

Y = A x K x L

What this equation essentially does is break down the source of output (Y) into the multiples of three components – technology (A), labour (K) and capital (L). This way, the output of the economy is measured by the inputs of labour, capital and technology. The elegance of this equation is that it is a theory of economic growth. An increase of either a single input component or all components (A, K, L), will lead to an increase of output (Y).

In the case of Malaysia, we have all these years been relying more heavily on the labour (L) component and not on technology (A), relative to the Asian Tiger economies – Taiwan, South Korea, Singapore, Hong Kong. Some economists argue that this is one reason why Malaysia is still a developing country – because Malaysia is more focused on perspiration (labour intensive) rather than inspiration (technological improvements).

The point of difference between the first and the second equations is that the first equation, the aggregate output function merely breaks down the components of the economy. It does not inform us on how to achieve economic growth. The second equation, the aggregate production function is more for the purpose of analysing the source of growth through the input components.

The attentive reader will realise that mathematically speaking, both the aggregate output and aggregate production equation should be equaled. That is,

C + I + G + NX = A x K x L

However, as these both equations were developed independently of each other and are based on different fundamental theoretical assumptions, it is rare to equate them in this form. In short, these two equations, though referring to the same thing, should be viewed separately for understanding and interpretation.

Thus far, the reader will most certainly have some questions regarding the assumptions and credibility of these given equations. Unfortunately, I apologise for I am unable to provide a full-length explanation of both these equations here (the task would require an economics textbook). However, it is safe to say that if you ask any economics degree undergraduate, s/he should be able to explain them in further detail. Both are rather essential parts of economic studies.

But my intention here is to provide an example of an economic framework we can use to discuss the economy. Going back to my initial question – if the money loss from corruption is somehow returned to the economy, how then would our economy fare? The answer to that question (bearing in mind the first equation) is that no matter which component the money back re-enters the economy through, whether it is via C, I, G or NX, the country will be economically richer due to the increase reflected in output (Y).

However, to have more money in an economy is not the same thing as growing money in the economy. After all, anyone can spend a ringgit, but it is the return of the ringgit spent that makes the difference – the bang for the buck. Therefore, in order to understand economic growth, we have to bear in mind issues beyond corruption (thus where the second equation comes in handy) – to understand the source of growth and to realign our input resources to propel our nation to a high income nation.

To tie this back to the point I raised at the beginning, I believe that to an extent, every country has its fair share of corruption, if not in the form of outright money-under-the-table business, then at least in some form of collusion or government-discriminatory economic interventions. These are interpreted in economic terms as opportunity costs. Rather than always harping on the issue of corruption when discussing the economy, I believe that it is more productive to have foresight on the growth of the economy, when giving our twenty sen-worth of armchair criticism.

Of course, there is much more to learn if one is to truly master the ins and outs of an economy. However, these two fundamental equations of macroeconomics can form a starting point in gaining a little more insight on how to approach the topic of the economy.

 


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Economics is undeniably important, but it is cold & difficult & best left to those who are at home in abstruse realms of thought.

Posted on 17 December 2013. You can follow any responses to this entry through the RSS 2.0.

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One Response to The Malaysian Economy — Argument beyond corruption

  1. Pepper Lim

    Nice!