The Malaysian Model and its Relevance for South Africa

Malaysia has had a strong allure for South Africa and other countries in the region. Of particular interest have been its policies aimed at redressing racially-based economic imbalances and its willingness to question the merits of conventional macroeconomic and industrial policy advice from international financial institutions.

Like South Africa, Malaysia has been ruled since independence by a single coalition dominated by the interests of the majority ethnic group. An election this Sunday will provide a real possibility of political change. The occasion calls for a realistic assessment of what has come to be regarded as the "Malaysian model."

My own view is that a) the divergence of Malaysia's macroeconomic policies from conventional "best practice" has been greatly overstated, b) whatever the merits of "bumiputra" affirmative action policies, the costs have also been large and by now certainly outweigh the benefits, and c) key features of targeted industrial policies have impeded rather than promoted the country's economic growth.

These views are echoed concisely in a Financial Times opinion piece. According to the columnist, David Pilling, failures of past policies make political change a real possibility.

"There is huge anger at entrenched corruption and buddy-buddy crony capitalism. Many Malaysians have come to the conclusion, almost certainly correct, that affirmative action has outlived its purpose and is holding the country back.

"There is increasing recognition, too, that economic performance is not all it might have been....Manufacturing exports have been stalled for years and attempts to build an indigenous steel and car industry have flopped. It has been easier for cosseted businessmen to jostle for lucrative state contracts than to compete internationally."

Pilling's view is that there is a "need to roll back a system based on race and patronage in favour of one based on competition and merit."

Whether political change happens, and whether it will result in meaningful policy reform remain to be seen. But discussions in South Africa and elsewhere need to be informed by a realistic view of the nature and impacts of the "Malaysian model." Otherwise the dti and others will continue to copy Malaysia's failures rather than learning the real reasons behind its successes.

Health for Empowerment and Growth

Promoting empowerment of disadvantaged groups through incentives to broaden ownership of capital has had mixed results in terms of social justice and long-term growth. Experience in Malaysia and South Africa for instance shows that such schemes have certainly enhanced the wealth of a select few of the “previously disadvantaged.” But broader trickle-down effects to the poor have been much harder to find. And the costs have been high, with serious questions about the extent to which they might have impeded longer-term productivity growth as a result of implicit taxes on wealth and creation of a rent-seeking business society. As a result, there is growing pressure in Malaysia to abandon the “bumiputra” policy. Some of the loudest voices belong to those who were supposed to be the beneficiaries of the program.

These countries should take note of some new research findings from the US. A recent report by Chay, Guryan and Mazumder shows the startling and large effects of improvements in basic health care for black infants in the 1960s arising from hospital integration. They show that better infant health care explains substantial improvements in educational achievement, independently of other causes such as school integration and changes in family backgrounds.

The lesson for countries like Malaysia and South Africa is clear. If you want to promote empowerment of disadvantaged groups, use basic health and education to tackle the root causes of inequality and the real barriers to economic opportunity. The resulting improvements in human capabilities will pay additional dividends in the form of higher long-term productivity growth as well.