To help the poor, liberalise

Malaysia leaped from 74th last year to 58th this year in a global economic ranking 

By Wan Saiful Wan Jan. First published in The Star 15 September 2015 

Everyone with conscience worries about the poor.  This is natural.  When we see a poor person our immediate reaction is usually wanting to help.  It is a natural tendency to help those who have less than us. 

This desire to help makes the topic of inequality a popular one these days.  French economist Thomas Piketty’s recent book Capital in the Twenty-First Century is a major treatment on the topic of inequality.   Whenever you want to discuss about helping the poor, it is trendy these days to show that you know of the book even if you have not read it. 

The central thesis put forward by Piketty is that unless the government intervenes, the poor will get poorer and the rich will get richer.  He presents 250 years worth of data and concluded that private wealth grows faster than economic outputs.  This basically means that those who are already rich will accumulate more wealth faster than the rate of economic output. And Piketty suggested that in order to reduce inequality, the government must take from the rich and redistribute to the poor. 

I admire the scholarship shown by Piketty.  His analysis was meticulous and his treatment of the data was admirable.  It is no wonder then that many in Malaysia, including many who have not read Piketty fully, love to quote him.  

I emphasise on the fact that many people have not read Piketty fully because if you have, and assuming that you know economics, you will see that there are issues raised by Piketty that need to be debated more.  Piketty himself is actively taking part in these debates.  Just like many other serious scholars, Piketty does not expect blind following.  

My main problem with Piketty’s work is I struggle to understand how he could jump from the scholarly way he treats the data to suddenly insisting that the solution lies with government intervention.  His own data does not really suggest that and it is as if he made a leap from being an analytical scholar to being a leftist ideologue.  

That is why I disagree with Piketty’s suggestion that the only way to resolve inequality and poverty is through government intervention.  Data does not support that idea.  In fact, if we follow our own local evidence, we will know that government intervention in the economy is likely to result in leakages, wastages, corruption, and high-profile complaints like 1MDB. 

Luckily when Dato Seri Najib Razak took office in 2009 he realised that it is the private sector that is truly the engine of growth.  It is by allowing and encouraging the private sector to flourish that we will sustainably reduce inequality and eradicate poverty.  That realisation results in the production of the New Economic Model and the implementation of the Economic Transformation Programme. 

The impact of those hard work have now been captured in this year’s global study led by Canada’s Fraser Institute that looked at 157 countries.  This is an annual study and IDEAS has been part of the process since 2010, together with 89 other think tanks around the world. 

The recently released Economic Freedom of the World (EFW) report analysed data on size of government, quality of legal system and protection of property rights, access to sound money, freedom to trade internationally, and the regulatory environment.  Due to the delay in the release of official data by governments and international bodies, there is always a two year lag in the report. So this latest EFW 2015 report provides a snapshot evaluation of where Malaysia was at the end of 2013 

Malaysia did very well in this year’s EFW report.  Last year we ranked at number 74.  But in this year’s report we are at number 58, which is a tremendous 16 place climb upwards.   

Hong Kong again tops the index, continuing its streak of number one rankings, followed by Singapore, New Zealand, Switzerland, United Arab Emirates, and Mauritius.  

The lowest-ranked countries are Angola, Central African Republic, Zimbabwe, Algeria, Argentina, Syria, Chad, Libya, Republic of Congo, and Venezuela.  Some despotic countries such as North Korea and Cuba cannot be ranked due to lack of data. 

The data from this annual global study actually provides a much better indication of how best to address poverty and inequality.  Unlike the ideological leap made by Piketty, and blindly followed by many in Malaysia, data actually says that if we want to help the poor, then the best way is not through government intervention or handouts like BR1M.  Instead it is by pushing on with further liberalisation. 

Global data presented in the EFW 2015 clearly shows that economic freedom breeds prosperity, and the most economically free countries offer the highest quality of life while the lowest-ranked countries are usually burdened by oppressive regimes that limit the freedom and opportunity of their citizens.  

For example, countries in the top quartile of economic freedom had an average per-capita GDP of USD38,601 in 2013, compared to USD6,986 for bottom quartile nations.  A significant difference there. 

And the average annual income of the poorest 10 per cent in the most economically free countries is USD9,881, which dwarfs the USD1,629 annual average income in the least free countries.  This means the poor in more liberalised countries have a better quality of life compared to the poor in countries where the government dominates the economy.  

I am most pleased that Malaysia has improved tremendously in this latest EFW report.  Leaping from the 74th place to 58th this year is a big success.  That was the snapshot from 2013.  If we want to keep this success, we must push ahead with liberalisation and not give in to the temptation of increasing government’s role in the economy.

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Wan Saiful Wan Jan is the Chief Executive of IDEAS

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1 Comment

  • Boris 2015 Oct 10 / 18:47

    In your article, you brought up this idea of ‘liberalisation’, as opposed to government intervention when it came to helping the poor. Toward the end of the article, you cited a study that compared the average income levels between economically liberalised countries and those that were not, coming to the conclusion that rich countries are countries that employed free trade; therefore if a country intends on becoming wealthier, they need to employ liberal policies.

    I disagree. While there is some correlation between the wealth of a nation and the nature of it’s economy, what most people tend to forget is that those rich liberal nations once were protectionist as well. We have the IMF, World Bank and other international financial institutions advising third world countries to accept free trade and capitalism, with poor growth to show.

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