Dr. Ferlito is senior fellow at the Institute for Democracy and Economic Affairs (IDEAS) in Kuala Lumpur, Malaysia.

Donald Trump recently threatened some big car producers (Ford, FAC and Toyota) of big border taxes in case they decided to move or start production plans in Mexico instead of further investing in the United States. The president demonstrated knowledge that our behavior is motivated by rewards and penalties, deciding to focus some of his policies on penalties, rather than rewards. However, convinced by the fact that one of the fundamental lessons of economics is that incentives matter, I believe that the mechanism of rewards might be more effective in driving a new growth trend, focused on profit expectations.

As Schumpeter taught us, economic development is driven by innovation, which manifests itself in the shape of investment. And such investments are, in turn, driven by profit expectations. The lesson to be learned seems straightforward: If you want to see growth, find the way to turn on profit expectations. Still, as the Trump’s case demonstrates, such a lesson only seldom appears to be used by policymakers with growth in mind. Rather, the idea of penalties is often used to halt economic behaviors judged as harmful, while the idea to use incentives to promote profit expectations does not often appear in policy agendas, in particular in the Western world, where profits are often seen as something to punish rather than to promote.

Donald Trump recently threatened some big car producers (Ford, FAC and Toyota) of big border taxes in case they decided to move or start production plans in Mexico instead of further investing in the United States. The president demonstrated knowledge that our behavior is motivated by rewards and penalties, deciding to focus some of his policies on penalties, rather than rewards. However, convinced by the fact that one of the fundamental lessons of economics is that incentives matter, I believe that the mechanism of rewards might be more effective in driving a new growth trend, focused on profit expectations.

As Schumpeter taught us, economic development is driven by innovation, which manifests itself in the shape of investment. And such investments are, in turn, driven by profit expectations. The lesson to be learned seems straightforward: If you want to see growth, find the way to turn on profit expectations. Still, as the Trump’s case demonstrates, such a lesson only seldom appears to be used by policymakers with growth in mind. Rather, the idea of penalties is often used to halt economic behaviors judged as harmful, while the idea to use incentives to promote profit expectations does not often appear in policy agendas, in particular in the Western world, where profits are often seen as something to punish rather than to promote.

Malaysia, therefore, played a very smart move with the principal hub regulation, trying to develop itself as an attractive hub for multinationals ready to develop a business unit in Southeast Asia. The incentives for the companies are not limited to the tax rate, but they also involve measures for importing raw materials, starting local productions and building offices and warehouses.

If I praised Malaysia for what it has done so far, a black dot remains on the background: the idea that the government, not the market, decides what is strategic, how to create incentives and how to promote growth while promoting investment. Like all the centralized plans, this one is also subject to the classical risks of corruption, inefficiencies and, above all, wrong identification of the real priorities for the countries, which can be properly understood only in a free market system. Still, the idea to promote profit opportunities, rather than punish them, looks in the right direction and deserves greater attention.

Dr. Ferlito is also adjunct professor at INTI International College Subang in Subang Jaya, Malaysia.

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