Ethnicity, Identity and Economic Growth: Part 1

Recently, I read with much interest an article with the intriguing title of "The Political Economy of Ethnicity" by Paul Collier in the Annual World Bank Conference on Development Economics 1998. Professor Collier is a development economist renowned for his research on development and civil war in Africa. This is the same person who wrote the well-received book titled The Bottom Billion.

In his paper, Collier (1998) highlights the well-known paper by Easterly and Levine which found that aggregate ethnic diversity significantly reduces economic growth. The authors had argued that ethnic diversity (measured via an index called ethnic fractionalization) makes it harder for policymakers to reach cooperative solutions to problems instead engaging in zero-sum games (Collier, p.388). Interestingly, diversity lowers spending on productive public services while increasing rent seeking. It also leads to inhibits the development of social capital and trust.

The type of politics associated with ethnically diverse societies is "identity politics" which emphasizes differences amongst citizens. An interesting outcome of such politics is the distribution of resources by the state via patronage to benefit party loyalist rather than the median voter. Collier and his colleagues extended this line of research by investigating the role of political institutions using econometric analysis based on cross-country data. One of their finding is that democracy (proxied by degree of political rights) can reduce problems caused by ethnic diversity. Why is this so? Collier argues that democracy provides institutions that mediates potentially costly disputes between ethnic groups.

The comments on the paper by Pauline Peters (an anthropologist) and Jennifer Widner (a political scientist) are also interesting. Amongst other, Peters argued that ethnicity in itself is never the sole basis of identity. Other factors such as religion, clan, occupation and other social status may be important. More importantly, Peters argued that ethnic differences do not cause economic decline or political violence and that what is important is to identify the conditions under which ethnic difference is associated with adversarial relations or violence. Widner also emphasized the importance of identity, noting that "ethnic identities are socially constructed, highly malleable and situationally defined". People are also deemed to have multiple identities, the strength of attachement to each depending on different situations.

Rents on 3G License

In March 2006 blog, I commented to the exercise of awarding 3G licenses. One of the point raised was the substantial amount that DIGI would have to pay for a 3G license if it were to purchase it from one of the 3G license owner.

In May 2008, DIGI acquired TIME dotCom’s 3G licence by issuing 27.5 million new shares, valued at MYR649 million (USD194.6 million). This amount would definitely be substantially more that what TIME paid for the license in 2006, reported to be around RM50 million.

This examples nicely illustrates the value of rents on licenses issued by governments.

Picture source: http://www.mobileworld.com.my

Did we or did we not have a Social Contract?

The debate on 'Social Contract' continues to be hotly debated in Malaysia. In a recent forum (STAR, 12 May 2008), Royal Professor Ungku Aziz stated that the notion as it is used in Malaysia was “a fantasy created by politicians of all sorts of colours depending on their interest”.

In the same forum, Tun Mahathir disagreed with Ungku Aziz on the matter. According to Tun Mahathir, a social contract did exist although not in written form. The following statements from Tun Mahathir were reported by the STAR (12 May 2008):

“There is no written social contract. But there was an understanding among the founders of the Alliance that we should share.

“Tunku (first Prime Minister Tunku Abdul Rahman) gave one million citizenships to the Chinese, and in response, he expected the Chinese to give some support to the demand for independence and to the sharing concept. He didn’t spell it (the contract) out 100%, but there was this understanding, not written,” he said.

Dr Mahathir said the social contract was a social understanding, which included sharing the economic cake with the bigger portion given to the bumiputras “so, eventually they can catch up with the non-bumiputras.”

Why all the fuss about social contract? The term 'social contract' is associated with the French philosopher Jean-Jacques Rousseau. It refers to an agreement by individuals or social entities within a society to fulfill certain obligations in return for each other's promise to do certain act.

In the Malaysian context, the social contract (if it exists) refers to the 'special status' accorded to indigenous population (or Bumiputras) in return for the granting of citizenship to non-indigenous population, namely the immigrant communities in the country. This interpretation is clearly what Tun Mahathir had in mind in the above statements.

The recent round of debate certainly raises a few interesting issues.

With regards to the issue of 'existence' of social contracts, do they need to be 'written' in the first place? The answer seems to be no, as social contracts are not generally regarded as implying legal obligation. But some argue that such a contract was indeed written into the Federal Constitution of Malaysia in the form of Article 153.

If the existence of such a social contract is assumed, the legitimacy of such a contract may also arise. Do parties, namely politicians, to such a contract truly represent the 'people' involved (even when they are elected representatives)?

Another important issue pertains to fairness and justice. Can a social contract that is an outcome of unequal bargaining power be an unjust one?

Implement Competition Law Before Removing Price Controls

The new Minister of Domestic Trade and Consumer Affairs, Datuk Shahrir Samad, is to be lauded for boldly suggesting the removal of price controls for essential goods. Whilst a casual reading of any economics textbook may initially suggests that market forces can lead to efficient allocation of resources, such argument are more nuanced. The same textbook will also suggests that markets are often imperfect and can sometimes fail, particularly so in developing countries. Even though the removal of price controls may temporarily increase prices, it is hoped that this may ultimately lead to an increase of supply with concomitant reduction in prices, thus benefiting consumers. However, this scenario may not come to pass in markets that are dominated by a few firms intent to using their market power to extract higher prices from consumers. In fact, a number of such cases have been reported in the media in the past. Recent examples in the country include beef cartel and price fixing in ferry services. In each instance, the government has struggled to rectify such problems through the use of blunt policy instruments such as encouraging more firms to enter such markets through the issuance of more licenses. In many countries, such problems have been more effectively dealt with the implementation and enforcement of a competition law which essentially prohibits anti-competitive business practices such as price fixing and collusive bidding in tenders. Thus, the existence of a competition law is absolutely essential if consumers are to benefit from any removal of price controls in the future.

Economics, Psychology and the 2008 General Election

In his recent book titled Predictably Irrational, Dan Ariely provides evidence that our decisions are influenced by the structure of choices available to us. More specifically, we like to narrow our choices to options that can be compared.

It is thus possible that one of the factors driving the 2008 general election in Malaysia is the election strategy of the opposition party in fielding only one candidate against the candidate from the ruling coalition, Barisan Nasional (BN). One can imagine that the sight of only two available candidates makes it easier for many voters to decide whom to vote for.

Origins of Religion and Religious Reformation

In a recent public lecture in Malaysia on the role of religion in the 21st Century, Dr. Karen Armstrong argues that new religions have emerged in the aftermath of violent episodes in the human history. She further argues that the core teaching of many religions can be distilled into one well-known statement: "Do unto other what you would have others do unto oneself". These statements (and others) set me thinking about religion as a possible mechanism for cooperative behavior for the human species. The violence beget violence can be theoretically proven. Is the rule-of-thumb creed "Do unto other what you would have others do unto oneself" nothing but a sort of "tit-for-tat" strategy that ensures we avoid the cycle of violence in our societies? Can one then prove that religions in the form of such rules can emerge and evolve? What then is the role of God? Dr. Armstrong also stresses the infinite and indescribable nature of God? Is God a complement to our bounded rationality?

On Rationalizing Religion

Economists have been accused (rightly, I think) of being imperialists in terms of their scope of research. One of the more interesting foray is that of religion. The economics of religion - as this fledging field is known is relatively unknown outside economics. Economics is primarily concerned with the study of the allocation of scarce resources. Man is a being with finite resources - the most obvious being his/her biological lifespan. While his biological life is finite, his life after death may not be necessarily so. Thus, in a typical economics model of a religious man, he/she allocates time and other resources across time which comprises life and afterlife. Religious activities are thus analyzed much like any other activities except the benefits (i.e. utility in economics jargon) derived from such activities accrue in this life (e.g. communal belonging) and afterlife (e.g. heaven).

Can we rationalize religion in such a manner? Is it good enough to assume people undertake such optimization without them realizing so i.e. ala a Chicago-type approach (Milton Friedman and methodology)? Ask any religious person, he/she is unlikely to say his/her belief in God is a utilitarian one.

Water Supply in Malaysia: To Privatize or Not To Privatize

The Malaysian Government recently announced that it intends to put on hold the privatization of water supply is a correct one (STAR, 30 May 2007). I think this is a right decision.

One of the key reason supporting privatization is efficiency gains. Recent studies on the impact of privatization in the water supply sector across different countries indicate that privatization do not necessarily result in greater efficiency. Malaysia’s experience is likely to be similar – based on the preliminary findings from research on efficiency in the Malaysian water sector conducted by myself and Jason Lee at the University of Nottingham Malaysia Campus.

Aside from efficiency, economists have also examined the impact of privatization on consumers. In general, research in this area has yielded mixed results. In the case of Malaysia, my own research using household expenditure data obtained from the Department of Statistics indicates that privatization does not seem to have improved access to water supply. Interestingly, I also found that privatization does not seem to have an adverse effect on water affordability in Malaysia.

To sum up, the impact of privatization on efficiency and consumers welfare in the water sector seems to be fairly ambiguous. Does this mean we should dismiss privatization in the water sector ad infinitum? The answer is NO.

This is because a key factor that determines the impact of privatization is regulation. Privatization in the presence of regulatory weaknesses will only result in excessive profits and adverse impact on consumers in the form of high water tariffs. Such weaknesses include lack of appropriate tariff mechanisms that can provide incentives to private operators to improve their efficiency.

Thus, I argue that the Malaysian Government’s decision to put on hold the privatization of water supply is a correct one given the present transitory state of regulation in the sector. However, the Government should not discount entirely the possibility of privatizing the water sector in the future.

The benefits from privatization can harnessed in the future provided that we are able to put in place a good regulatory framework and institution. Public ownership is not a good alternative as much of the deterioration (e.g. high water losses in the form of non revenue water or NRW) occurred when water companies were state-owned.