Market-based reforms are best for the poor

By Wan Saiful Wan Jan. First published in The Edge 23 December 2013

When 2013 started, I was hoping that we would see a more rigorous attempt by the government to implement their own New Economic Model (NEM). Unfortunately we were disrupted by the 13th General Election, and then the UMNO party elections.

The period prior to the GE13 saw how creative politicians are when it comes to spending money that does not belong to them. From Perlis to Selangor to Putrajaya and Sabah and Sarawak, we saw how millions if not billions were promised or given to voters, in order to get their votes.

In the run up to the UMNO party elections, more promises were made. This time, it was announced that another stash of money taken from the taxpayers of various ethnicities are being allocated specially for the Bumiputera group. And the government’s role in the economy was strengthened too, not reduced.

Jeffrey Singer, an adjunct scholar at Cato Institute, recently wrote an article in, and he brilliantly summarised Nobel Laureate Milton Friedman’s views on how people spend money. Let me quote Singer in full here.

Singer says, “Milton Friedman, in his masterpiece ‘Free to Choose’ wrote of four ways to spend money:

Category I—You spend your money on something for yourself. Here you are very careful, because it is your money, and the good or service you are buying is for you.

Category II—You spend your money on something for someone else. Here you have the same incentive as in Category I to economise, but since you are buying something for someone else, you are not quite as meticulous when it comes to the purchase meeting the needs or values of the recipient.

Category III—You spend someone else’s money on something for yourself. Here you are not concerned about how much you spend, because it is not your money. But because you are spending on yourself, you make sure you are getting what you want.

Category IV—You spend someone else’s money on something for yet another person or persons. (This is what we ask our legislative representatives to do every day.) Here you are the least incentivised to economise, or to buy something that meets the needs or values of the recipient.”

It is obvious why politicians are very generous when it comes to “helping” people. They are in Category IV – giving away our money to other people. At all time they pretend that they are the ones being generous, and then they reap all the political benefits from dishing out our money. Very clever, aren’t they?

All the redistributionist actions and policies introduced over the last 12 months show how Tun Mahathir was not joking when he said “Melayu mudah lupa” (Malays forget easily). The NEM is just three years old, and this Malay dominated government has almost completely forgotten it.

Perhaps now, as we come close to the end of the year, we should remind ourselves about the NEM. The key characteristics of the NEM are (1) a market-led economy, (2) a well-governed nation, (3) a regionally integrated country, and (4) an enterprising and innovative society.

I am a big fan of the NEM and I have always praised Prime Minister Najib Razak for this policy. In the NEM, he has articulated many things that the country really needs in order to move forward. If implemented properly, many of the ideas could potentially take us out from the middle-income trap that we are now in.

Unfortunately there have been times when I feel like I have become a broken record, repeating the same thing over and over again about the NEM. The government, the very entity that launched the NEM and is now supposed to be implementing it, has become senile.

It is the drive to make Malaysia a market-led economy that holds the key to prosperity for everyone in the country. The government must continuously be reminded that they are not helping people if all they do is just giving out more and more handouts.

For the last few years, IDEAS have participated in the production of the ‘Economic Freedom of the World Annual Report’. The latest one was released in October this year. The study measures the degree to which the policies and institutions of 152 countries around the world are supportive of economic freedom.

The findings are very telling, and reaffirms why the desire to create a market-led economy in Malaysia is the right one.

If we divide the 152 countries into four quartiles based on how free their economies are, these are what the key findings tell us:

There is a clear correlation between economic freedom and GDP per capita. Countries in the top quartile (i.e. the most economically free) has GDP per capita of almost USD40,000 while those in the bottom (i.e. the least economically free) has less than USD5,000. The lesson here is, if we want our people to be more prosperous, then we should focus on pro-market reforms, not giving handouts.

Countries in the top quartile shows average GDP growth of 3.5 percent compared to less than 1 percent in the bottom quartile. The lesson here is, if we want growth, then pro-market reform is the answer, not an increase of government intervention.

Citizens in countries in the top quartile enjoy more than double political and civil liberties compared to those in the bottom quartile. Understandably so. How can we expect people to exercise the political and civil liberties freely when they still have to worry about how to pay for their children’s school uniforms?

Countries that stick to market-principles have less corruption, and they scored more than twice better than countries in the bottom quartile. A market system is rules-based and the rules are enforced within a framework of strong rule of law. Obviously this is different from countries in which the government can change the rules whenever they want.

Perhaps most importantly, the data also shows that it is the poorest that benefits the most from pro-market reforms. The poorest 10 percent in countries in the top quartile has an annual income of just above USD 10,000, whereas their counterpart in the bottom quartile earns just about USD 1,000 per annum.

We will always have relative poverty and there will always be a gap between the rich and the poor (unless you prefer communism, where other than the ruling elite, everybody else can be poor together). But the data is telling us that it is much better to be poor in a country whose economy is market-driven, compared to being poor in a country where the government is dominant.

Dr Steve Horwitz, an academic at New York’s St. Lawrence University, once explained that a study from the University of Michigan shows how the poorest in America have actually showed tremendous income mobility between 1975 and 1991.

In 1975, the average annual salary of the top 20 percent was USD 50,077 while the poorest 20 percent was only getting USD 1,263. By 1991, the wealthiest 20 percent was getting paid USD 54,431 but the average salary of the poorest 20 percent jumped by almost USD 28,000 to USD 29,008.

This means, if we take the path of market-based reforms, the rich will indeed get richer, but the poor will get richer much faster than the rich!

The government has correctly captured the right vision for the country in the NEM. They don’t have t start from scratch in charting out how to ensure economic resilience in the future. For the sake of everyone in this country, especially the poor, all the cabinet ministers have to do is to go to their dustbins, and take out the NEM.

– – –

Wan Saiful Wan Jan is chief executive of the Institute for Democracy and Economic Affairs (IDEAS). The ‘Economic Freedom of the World Annual Report’ together with all its data can be accessed from

Image Credit: Foundation for Economic Education

2017-03-15T06:46:13+08:00 23rd December 2013|News|Comments Off on Market-based reforms are best for the poor