The four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) placed major emphasis in education and industrial policies that drives large exports to rich industrialized countries and are now highly developed economies in East Asia. Their economic success stories have served as role models for many developing countries, especially the Tiger Cub Economies (Malaysia, Indonesia, Thailand and The Philippines). In order for industrial policies to work good governance is mandatory. Governments in making decisions with regard to electoral or personal incentives can be captured by vested interests, leading to industrial policy that would only support rent-seeking the political elite, while distorting the efficient allocation of resources by market forces at the same time. This is thus by far the largest criticism against industrial policy, the failure of government.
Here then lies the basis of good governance and is the foundation of all developed economies in the world.
1. Providing a set of uniform rules and regulations. Only a good government is able to make markets possible. Failure to adhere to the strictly defined rule of law creates nepotism which are common in developing countries (hence the word developing which includes developing new rules/regulations to make markets possible). Lack of binding contractual and transparent agreements you will see business deals being made behind closed doors guaranteed only through personal relationships.
2. Defining and protecting property, institutional and individual rights and laws. This makes market more credible. The best example there is is what we call the copyright law, without such a thing there is no point in writing to earn a living nor there is any meaning in creating new music, same goes to movies. Without copyright protection, there's no incentives for individuals to develop them and hence no market to begin with. Property law which defines the rights of the buyer and sellers facilitates investments too and is in itself another form of market transaction that benefits the economy as a whole.
3. Root out fraud & corruption. Let's take fraud. A good government ensures that the infrastructure is in place so that any money being deposited into say a bank or an investment scheme doesn't just pocket our money and disappear. Or when we buy new shares from the stock market we have a reasonable degree of certainty that the company would not engage in any fraudulent activity. Hong Kong was notorious for it's street gang and heavy corruption within the authorities, keep that in check and see what we have now.
4. Builds and maintains infrastructure. A modern functioning economy are transportation intensive. We need bridges, roads, highways, ports, reliable electricity, good broadband connectivity, installing traffic lights and other utilities. We often do not realize that having them makes private businesses less costly as a result. By replacing trucks on highway with an efficient railway system you not only reduce the transportation time of goods but we also reduce the cost itself. This is evident via massive infrastructure spending by countries like China.
5. In other lesser ways, trade relations and international trade agreements can only be made via government. In Malaysia we take great effort in lowering trade barriers with countries like China and the United States as this will reduce the cost of trading with our major partners.
No doubt that Malaysia has to pursue industrial policies to grow its economic pie as we are export driven but Malaysia's government is big and a big government is what I describe as highly inefficient. Communism did not fly because the government is so centralized that it has to control everything from the flow of goods, the quantity being sold and as well as the price. Such a government is one very very large monopoly. "What would your business look like if your customers, by law or system, could not go anywhere else?" [quoted from the book Naked Economics]. When there is monopoly, innovation and responsiveness is bone dry. Is there a need to go the extra for a customer? Is there a need to provide better service at the expense of profit? The answer is NO, because there is no market share to gain, you have it all yourself.
Crony capitalism (apparently quite prevalent in developing countries) is a little bit like communism because when the government controls some element of the economy, the allocated resources go wherever politicians sends them rather than by the market. Projects that have the potential to be highly profitable do not get financing while undisclosed projects are given to brother-in-laws or well known contacts usually for personal gains. First we lose our tax money, second markets ONLY work at the peak of its potential when resources are flown to where they are valued most. This is done automatically if there is no intervention.
The rule of thumb to follow is that the government should not be the sole provider of particular service or distribution of certain goods unless there is a very good or a compelling reason to believe that the private sector or the state will fail. They are still however elements of a country that cannot be run by the private sector and states, for example public healthcare and national defense. No company can tell where you should place your submarines plus it's a secret, in areas like this it is best left to the government. In order to fix problems, the first step is always to realize that there are problems in Malaysia. One of them and the easiest is to get the government's sticky fingers out: introduce competition, eliminate cronyism, return to fiscal federalism and decentralization, give states more power & development grants, provide directed subsidies only. I am pretty convinced that the failure of the economy would be the ultimate call for a new government in our country. Communism failed in 1989, when will our central command be bygones? It is not that we are not moving forward, it's that we are not moving quickly enough.
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