Chapter 9: Institutions Matter (Cont’d)

Property and Contract Rights

[Note: This installment was initially posted on June 18, 2008 but it was lost, together with the accompanying readers’ comments, when my website was disrupted. I am reposting it here.]

If we plot the pace of economic development over time, the remarkable finding would be that economic progress within the last hundred years far overshadowed all previous developments over human history. Scrutinizing the graph further, we would note the paucity of economic activities during feudal times.11

If we were to plot the pace of development across societies within the last century, we would have an equally interesting finding. Countries that adopted capitalism or market-oriented policies (Western Europe, the Anglo Saxon world, Northeast Asia) made remarkable economic progress, while others (Africa, Latin America, the Soviet empire, Arab world) remained stagnant. The graphs of this second group of countries resemble those of medieval Europe.

Capitalism involves not only the trading of goods and services between people but also freedom and democracy. People are free to pursue trade. Medieval Europe did not progress because there was very little trading among the citizens, only among the lords. When the lords were not engaged in trading, they were preoccupied with trying to get by force what the other lords had, that is engaging in wars, a destructive and economically non-productive pursuit.

There was little trading among the peasants because they had no rights to their property or labor, hence they could not exchange or barter it. Even their bodies belonged to their lords. If there were some enterprising peasants who could engage in raising crops and animals on the side when they were not serving their lords, those peasants risked losing them all to their greedy lords. A definite disincentive!

For society to progress, its citizens must be free to engage in the exchange of goods and services. The farmer must be able to exchange his excess rice for a hoe from the artisan. In this way the farmer gets to cultivate more land and produce more rice, and the artisan now has the energy to produce even more hoes and other implements. Both benefit from the exchange. Multiply such exchanges a thousand times, and you get progress on a societal scale.

Before such exchanges could take place, another condition must exist. The farmer must have confidence that the hoe rightly belongs to the artisan, and the artisan in turn must be certain that the rice is rightly the farmer’s to sell. There must be clearly delineated property rights.

The Peruvian economist Hernando De Soto in his book, The Mystery of Capital, argues that capitalism fails in the Third World precisely because there is no respect for property rights, especially by those in power.12 In the old days it was the sultans who grabbed the peasants’ prized buffaloes; today it is a ruthless dictator seizing a flourishing enterprise. Even educated leaders are not free from this feudal lord mentality. Armed with their Cambridge law degree they would expropriate land belonging to the people without proper compensation under the precept of “eminent domain” or some other arcane legal doctrine, as happened in Singapore to land belonging to the Malay minority. Regardless of mechanism, the results are the same: the trampling of property rights.

We can appreciate property rights when they apply to tangible assets like land and property. Before you buy a piece of land you must be sure that the owner really owns it, and that after paying, the land would then belong to you. There must be reliable institutions to record these transactions to prevent that land from being simultaneously bought and sold by different parties. There would be unending chaos were that to happen. Resources would be consumed untangling the mess instead of devoting to economic activities.

Malaysia’s land office, the agency responsible for recording titles, is a mess. The process of transferring title that would take a few days in California would consume months if not years in Malaysia. There have been cases where the transfers were never recorded, giving rise to unending conflicts.

Property rights extend beyond tangible assets. If I were to discover a new way to plant rice efficiently, I should reap the gains of my discovery. Others who wish to benefit from it should compensate or at least share with me their added bounty. This is not only fair but would also encourage others to partake in new discoveries. If others simply sponge off on my discovery without compensating me, the damage would be as if they had stolen my property.

In the Third World there is rampant stealing of intellectual property. When Sheila Majid records her beautiful songs, and others freely bootleg them, they too are stealing from her.

Intellectual property rights and patent laws are especially important in the K-economy. On one hand are the concerns of innovators and creative talent that their contributions be adequately rewarded; on the other are the scientists and intellectuals who fear that too rigid enforcements would stifle innovation and research. New knowledge and technical innovations do not arise out of the blue; they are incremental, building upon existing knowledge, products and processes. Too restrictive a protection of intellectual rights would inhibit the diffusion and creation of new knowledge, and thus progress. The challenge is in striking a balance.

Property rights should also extend to the rights we have over the fruits of our own labor. Slavery and indentured labor represent the ultimate loss of these rights, and those practices are rightly condemned in civilized societies.

One would think that if we use slaves—free labor—costs would be lowered and profits correspondingly increased. Not so! China seems determined to resurrect the economics of slavery by using forced prison labor. Thus far none of the Chinese enterprises are world leaders either in quality or price. Companies like Microsoft and IBM that pay their workers handsomely produce premium products.

There is another economic aspect to paying workers well. Henry Ford intuitively knew this when he set about to lower the prices of his cars and simultaneously raise the pay of his workers so they could be among his best customers.

One aspect of property rights often overlooked is what ecologist Garrett Hardins termed the “tragedy of the commons.”13 He used the example of the free grazing of cattle on public land, a common practice in western United States. If every rancher were to think only of maximizing his own profit, he or she would simply increase the number of cows. That would not involve much additional cost, as the land is communally owned. However, if every rancher were to do likewise, soon the whole land would be overgrazed to the point of ecological disaster. Everyone would then lose—hence the tragedy of the commons. As the land belonged to everyone (publicly owned), it did not belong to anyone, and no one took responsibility caring for it.

The fallacy of socialism is exactly this. With the state owning everything, no one bothers to take care of anything. If something does not belong to you, you do not have the sense of pride of ownership, and behave accordingly. This is encapsulated in the pithy wisdom that no one ever washes a rented car. The wisdom of capitalism is this recognition of private property.

I recently visited a senior civil servant living in one of the old-style palatial government bungalows in a secluded area of Kuala Lumpur. He had been there for decades, yet in all that time he did not plant a single flower, fruit tree, or in any way tried to enhance the landscaping. The reason? The property was not his, even though he would get to enjoy the fruits of his labor. As for cutting the lawn, he depended on the Public Works Department even if that meant enduring overgrown weeds!

That civil servant’s behavior is no different from the tenant dwellers of the Council flats of Liverpool or public housing projects of Southside Chicago. They have no pride of ownership. Margaret Thatcher tried to eradicate this destructive mentality with her policy of selling those units to their dwellers, that is, encouraging private property ownership.

Related to and an integral part of property rights are contract rights, the freedom of individuals to enter into a contract with one another.14 This does not mean anyone can enter into any contract with anyone to do anything. There are issues of ethics, religious norms, and public good to observe. The freedom to enter into a contractual agreement with my fellow citizen does not extend to allowing my selling my kidney to him. It is for society, and thus the political institutions, to set such limits. In India such contracts are apparently quite legitimate.

Regardless, when people trade goods and services, such exchanges are often transacted over days if not months or years. There is the element of promise and trust. A homeowner may enter into contract with a builder over constructing a new house. The contract may specify terms and conditions that have to be executed by each party. If there is no mechanism to enforce and honor such contracts, there will be chaos. No meaningful trade could take place under such circumstances. Even under the best of conditions, disagreements do arise; hence the importance of having a fair, honest and inexpensive system to resolve them.

The K-economy, with its global and instantaneous connectivity, have changed the dynamics of intellectual property rights and put a new twist to the tragedy of the commons. ICT has transformed markets with the democratization and decentralization of information. In the medieval era, information was the exclusive preserve of the clergy; that was also the way the clergy effectively controlled the flock. The printing press upended all that. With the masses now literate and reading materials readily available, the controls wielded by the clergy soon gave way. That did more to end feudalism and brought in democracy and capitalism.

Capitalism’s success brings its own problems. With news and information now increasingly controlled by big media corporations, we are reverting to medieval times with corporate chieftains replacing the clergy. Their stranglehold seems unassailable, as the economic barriers for new players are prohibitive. While it would take only a few thousand dollars to start a newspaper a hundred years ago, today that figure would be in the hundreds of millions.

The good news is that ICT, specifically the Internet, is again upending the status quo. Today I am reaching more readers through my website and other Internet outlets like Malaysiakini and Malaysia-Today than when I was writing for the mainstream papers.

ICT is challenging traditional economics and business models with its decentralization, diffusion (thus lack of control), open platform, and open-source software. Linux, started by volunteers spontaneously collaborating via the Internet, is fast challenging Microsoft Explorer. Google is offering its most important and most widely used product, its search engine, for free. Wikipedia, again free with its contents contributed voluntarily by millions worldwide, is more widely used than the venerable Encyclopedia Britannica. And the latter is a subscription service! Wikipedia is as reliable as the Britannica at least with respect to its science entries, according to the journal, Nature.15

Whether such successes would herald a new way of doing business to challenge or even complement the traditional capitalist model remains to be seen.16

Next: Judicial System

Dear Readers:

I am pleased to inform readers that my website is now back and running after some unexpected interruptions for the past few days.  I could not retrieve only the last few postings, which I will re-post in the next few days.

M. Bakri Musa

[Please that that I will be away till July 1, 2008.  Postings during this time may be erratic. MBM]

Guest Commentary:  Farish A. Noor

There are ideas, and there can be stupid ideas; but to ban an idea simply because of its stupidity seems to be a rather stupid thing to do in itself.

            Among the ideas that circulate in the congested bowels of Malaysia’s public domain is the somewhat nebulous idea of ‘Islam Hadhari’; loosely translated at times as ‘civilisational Islam’ or ‘societal Islam’.  Others of a less charitable bent have dubbed it ‘theme park Islam’, ‘Crystal mosque Islam,’ and even ‘Badawi’s brand of Islam’.  Branding aside, it would appear that this brand of Islam has come under close scrutiny and admonition of late.  In May the Pakatan-led state government of Selangor announced that henceforth the state would no longer promote Islam Hadari and this was later followed up by a similar move on the part of the Pakatan-led state government of Penang.

            The rationale behind this prohibition leaves us with some unanswered questions that might as well be raised at this point.  Who called for the prohibition of Islam Hadari and on what grounds?  And if Islam Hadhari is to be banned by the Pakatan-led state governments, what does this entail for the Muslims and non-Muslims of Malaysia?  What, in the final analysis, was the objective of this ban?

            Now this academic would hardly call himself a fan of Islam Hadhari, as anyone who has read these columns would realise.  Time and again we have pointed out the shortcomings, contradictions, double standards, and downright hypocrisy between the ideals of Islam Hadhari and what has been put into practice.  Islam Hadhari – as a broad statement of inter-related intentions crafted in the form of a statist religio-political discourse – promised us the opening of the Muslim mind, the creation of a more open civil space, the protection of pluralism and difference, and the promotion of gender equality.

            Yet what we have seen thus far falls short (and very short, mind you) of the abovementioned objectives.  In Trengganu, I walked into the Islam Hadhari theme park that seemed more like a vulgar imitation of Disneyland than a concrete affirmation of rationalism and the spirit of enquiry.  The famous ‘crystal mosque’ that accounted for the whopping price tag of the whole theme park failed to impress and was certainly a pale mimic of what Islamic aesthetics could achieve.  And one wonders how such grand and money-devouring projects would serve the ends of opening up the Muslim mind when all we see are posters and banners celebrating the ego and image of the man said to be the mastermind of the grand logic of Islam Hadhari itself, Prime Minister Abdullah.

            Criticisms like these, however, serve to keep the powers-that-be in check and to remind them of their public commitments to ideas and values that they fail to practice in office.  How, pray tell, can you open up the minds of Malaysians when the very same government that preaches Islam Hadhari remains as a passive witness to the spate of book-banning and the narrowing of discursive space in the country?

            This, however, should not be taken as the license to simply ban Islam Hadhari – or any other ideas or interpretations of Islam – outright.  For if we were to say that Islam Hadari is wrong in toto simply because the people who thought it up don’t even understand it themselves, then would we not also be rejecting some of the better ideas and values that have been inculcated into the general framework of the project itself?  Islam Hadhari, on paper at least, calls for the respect of difference and pluralism as well as the promotion of gender equality.  Are these ideas to be rejected too, simply because they have been brought within the ambit of Islam Hadhari?  For my part, I am quite happy to see any party or politician, be they of the ruling parties or those in opposition, endorsing pluralism, democracy, and gender equality any time of the day….

            Which leads us to the actors and agents behind the prohibition of Islam Hadari in Selangor and Penang.  According to reports, the calls for the ban on Islam Hadhari have come from those who claim to be representatives of the Muslim community, and this includes members of political parties, Muslim lobby groups, Muslim NGOs, and former Muftis.  The justification for the ban, we are told, is that some of these individuals feel that “the teachings of Islam are perfect as they are” and that “there is no need for supplements”.  Their calls for the prohibition of Islam Hadhari, it would seem, is fuelled by the desire to “return to the true teachings of Islam”.  But this immediately leads us to the obvious question:  Is defending gender equality, promoting openness, and recognizing pluralism and difference (both among Muslims and between Muslims and others) not essentially Islamic anyway?  How, pray tell, does promoting gender equality amount to ‘supplementing’ or ‘deviating’ from the teachings of Islam?

            Despite assurances that this move to prohibit the promotion of Islam Hadhari is not political, we find it ludicrous to suggest that the move is void of any political motivation.  Islam Hadhari itself began as a political project – to politically engineer the opening of Muslim discursive space, though this did not happen – and the reactions to it have been political as well.

            Those who claim that any modern revisionist attempt to re-think Islam is deviant or dangerous, and that Islam is perfect as it is, are obviously missing the point:  We all know that Islam in its essential, fundamental, literalist form conjoins and promotes equality, freedom, and justice.  But a cursory overview of the normative religio-cultural and social praxis of Islam in the daily lives of Muslims the world over today will show that the Muslim world is riddled with the problems of sexism, racism, feudalism, communitarianism, and sectarianism.  The appeal to ‘return to the Quran’ or the fundamentals of the Muslim faith ring hollow when we look around us and see how the politicization of Islam has served only the agendas of elites who manipulate the sentiments of the majority, who have organized and led pogroms against racial and religious minorities, who have been the first to accuse other Muslims of being ‘kafirs’, ‘munafikin’ and apostates.  Why, all this talk of Islam being singular and perfect makes me glance to our neighbors next door in Indonesia where at this very moment the Ahmadiya minority are being labeled as deviants, apostates, enemies of Islam, etc., while the self-proclaimed ‘true Muslims’ are calling for them to be banned, their mosques burned to the ground, and their members harassed, attacked and murdered.

            So let us not kid ourselves with the worn-out cliché that Islam has not changed over the past fourteen centuries, or that Islam does not require a modernist interpretation that meets the needs and reflects the realities of the modern age.  For Islam to remain a meaningful and dynamic belief and value system today, it has to undergo a process of serious, thoughtful, objective and critical interpretation that allows it to reflect the complexity of Muslim social life in the present.  This means evolving a contemporary theology and orthodoxy that reflects the strides that have been made in promoting gender and racial equality, the advancement in Muslim thought, the openness of Muslim society today.  We do not need some conservatives telling us to go back to the Golden Age of Islam 1,400 years ago, because frankly I would rather live in Malaysia in the present, thank you.

            And if Islam Hadhari is to be criticized – and it deserves to be criticized constantly, too – it should be for the reason that those who have tried to promote it have failed to meet the standards they have set for themselves.  Cakap tak serupa bikin, as they say.  I do not need some tawdry crystal mosque to impress me about Islam, Mr. Prime Minister.  Lift the ban on the Ahmadis and recognize other Muslim groups like the Shias, and maybe my opinion of Abdullah might be revised somewhat.

            The Pakatan-led state governments, on the other hand, would do well to focus on real issues such as governing this country well; as the previous lot obviously had no idea how to do that.  The banning of books, ideas, belief and value-systems and alternative cults and sects should be relegated to the past and the dark ages of the Barisan Nasional government.  The March 2008 elections was a vote for a new Malaysia, one where pluralism and diversity would be defended.  Let us not let this vote be misunderstood as an endorsement for an Islamic state shaped according to the mold of UMNO, PAS or any sectarian Muslim party or organization.  Banning should be a thing of the past, like the BN; and if Islam Hadhari is to be dumped into the dustbin of history, it should be relegated there on account of its contradictions and mis-application by incompetent politicians, and not because some Mullah wanted it so.

The writer Farish A Noor is a senior fellow at the S. Rajaratnam School of International Studies, NTU, Singapore and affiliated professor at Universitas Muhamadiyah Surakarta, Indonesia. He is also one of the founders of the www.othermalaysia.org research site.

Dr. Farish (Badrol Hisham) Ahmad-Noor, Senior Fellow, Rajaratnam School of International Studies, Nanyang Technological University, Singapore.  Research Director for the Research Cluster ‘Transnational Religion in Contemporary Southeast Asia’, Nanyang Tech Uni, Singapore Tel (off) 6790 6128

Chapter 9: Institutions Matter (Cont’d)

Institutions of Law Enforcement

Peace and stability are prerequisites for prosperity. In times of war and turmoil, only criminals and arms dealers would be raking it in. As for investments, those with wealth would be concerned with preserving, not enhancing it.

The military is to ensure safety from organized threats from within (armed rebellion) and outside (war). Malaysia has had experiences with both. During the Japanese Occupation and communist insurgency, little economic development took place. The basic consideration was survival, with resources diverted to that sole function.

While no one has done a treatise on the economics of war, it is plain that all the death and destruction are not only tragic but also a colossal waste. The multiplier effect of civilian spending is many times greater than that of the military. Yet today the bulk of the budget of many Third World countries, Malaysia included, is being consumed by the armed services. The best and brightest are absorbed into the army instead of engaging their talent in economic enterprises and creating wealth for themselves and their country.

The power that has the stronger economy usually prevails. The military might of the old Soviet empire collapsed because of its rotten economy. The path towards military supremacy is not in buying expensive sophisticated warplanes that your illiterate pilots could not operate, rather to build schools and train teachers. That would also pave the way towards economic development, quite apart from producing smart soldiers.

Thankfully for most, war is a rare occurrence. The more readily identifiable threat to society’s security and stability comes from those who flaunt and break the laws: the criminals. The extreme of lawlessness is anarchy, which will bring us, economically, to the same conditions of war. At lower intensities of lawlessness, we see the wasted expenditures on private guards and obsessions with gated communities. If the Filipinos were to expend their collective resources on a good and efficient police force instead of each clan providing for their own private security and expensive alarm system, they would have a much more orderly and economically vibrant society. Those private guards could now be diverted to assembling computers, not weapons.

Crime imposes a huge cost on individuals as well as society. In some Latin American countries crimes consume up to a quarter of the GDP.

The rule of law is one of the most critical requirements for economic growth. It is the necessary incentive to work, invest, and innovate. Why partake in all those activities if the fruits of your labor would be taken away? It is immaterial who takes that wealth away: robbers or the state’s confiscatory tax.

Crime, like war, imposes its costs directly through the damage incurred with the criminal activities, and indirectly by inhibiting legitimate economic and other activities. Even threats of crime can be devastatingly effective in discouraging investments.

Tourism in New York City rebounded only after the authorities cracked down on petty crimes. An interesting side benefit to this strict crackdown is that it discourages other more serious crimes. The sociologist James Q. Wilson termed this the “broken window syndrome,” that is, when law enforcement agencies crack down on such seemingly inconsequential crimes as vandalism and the breaking of windows, the real criminals would take note. (This is different from the broken window syndrome of economics discussed earlier, which refers to the income multiplier effect of spending to fix broken windows.

Malaysian police have yet to learn this. When drug addicts freely “mainline” on the streets in broad daylight or cars illegally double park with the cops blissfully ignoring them, the signal sent is that you can break the law with impunity. Another innovation from New York is community policing where cops become part of the community instead of being stuck in their cars or at their desks.10 They are busy on their beat, mingling with the citizens. The emphasis is on preventing crimes, in contrast to the usual pattern of reacting to them. Many cities also require their police officers to live in the city, again to increase their civic involvement so that even in their off hours they would remain as authority figures.

The colonial government knew a thing or two about community policing long before the concept was even acknowledged. The authorities recruited simple village folks with minimal education to be “special constables.” They patrolled the villages on their bicycles or on foot, and otherwise let the community know of their presence. They are aptly referred to as mata mata, the “eyes” of the authorities. These law enforcement officers must be seen as working for and not against the community. A major problem with big American cities until recently was that their police officers were predominantly white while the citizens non-white minorities. There was minimal identification between the two. Worse, these officers often lived away in the suburbs; they were seen more as an occupying force rather than part of the community. Today that is changing with enough blacks and other minorities on the force. Major American cities have not seen a major racial incident since this innovation.

A comparable problem exists in Malaysia. The police force, like other branches of the government, is overwhelmingly Malay. The police live isolated in their barracks behind barricades, with minimal interaction with the community they serve. This problem becomes acute when the community they serve is predominantly non-Malay. There is minimal opportunity to build trust and relationships. Absent both, and the relationship is akin to that of guards and their prisoners. The police force in predominantly Chinese areas should have sufficient Chinese presence, and I would make the police constables live among the citizens.

When we think of crime, we think of robbery and other violent crimes. We readily appreciate their negative impact on the economy and on our safety. No less injurious to the economy (and also to our well being in the long run) are white collar crimes: embezzlement, breach of trust, and outright corruption. I will cover these, in particular corruption, later.

Stability and security are prerequisites for economic development. To encourage development, a nation needs to go further. It must have in place institutions to ensure that citizens get to keep that which is rightly theirs; allow them to exchange freely among themselves goods and services (that is, to trade); and lastly, to adjudicate the inevitable conflicts.

Next: Property and Contract Rights

First posted in my column, SEEING IT MY WAY in

www.malaysiakini.com,  June 6, 2008

With Malaysia forced to end or at least reduce its petroleum subsidy, it is well to learn from the experiences of other oil-producing countries.

            There are enough lessons in the world today on how we should manage our precious God-given oil bounty.  Prudently done, as in Alberta (Canada) and Norway, it would bring peace and prosperity.  Anything less and it would be a curse; the new wealth would breed corruption and tear the socioeconomic fabric of society, as seen in today’s Iraq and Nigeria.

            I would rather that Malaysia emulates and enhances the Albertan and Norwegian models.  Malaysia should, like Canada and Norway, remove all subsidies on petroleum products.  This would encourage conservation.  It would also prod Malaysians into the global economic reality instead of being insulated from it.

            In order for this giant step to be accepted, the government must divert the savings into a separate trust fund for use by future generations when our oil would run out, with a small portion devoted for current use in subsidizing cooking gas for the poor, and users of public transportation.

The Lessons from Norway and Alberta

Norway, with a land mass slightly larger than Malaysia and a population only twice that of Perak, ‘sterilizes’ its oil revenue by diverting it into a separate trust fund for use by future generations.  The wisdom of that initiative is that the new wealth did not disrupt the social and economic fabric of Norwegian society.  There was no runaway inflation as in Nigeria, and the Norwegians did not become lazy profligate consumers dependent on their new oil wealth, as with the Arabs.

            The Norwegians pay the same world price at the pump for their petroleum, currently at about RM 7 per liter, nearly three times the new Malaysian price.  One consequence is that while they have one of the highest per-capita incomes, car ownership among Norwegians is one of the lowest in Europe.  To them, a car is simply a means of transportation, not for ostentation.  Everybody knows that they are already wealthy; they do not need to flaunt it.  Further, the cars on the streets of Oslo are mostly fuel efficient brands like Volkswagen rather than luxurious Mercedes.  In fact there is a stiff tax for gas-guzzlers.

            Among the many positive consequences are that their roads are not congested and their air less polluted.

            Today the Norwegian Petroleum Trust is the world’s second largest sovereign fund, and fast expanding.  It may have already exceeded half a trillion (500 billion) dollars.  When the oil wells run dry, as they inevitably will, the Norwegians could still enjoy their present lifestyles as the Trust Fund’s income could cover the country’s budget till perpetuity.

            Like everyone else, the Norwegians do not like paying high prices for petrol, or anything else for that matter.  However, they willingly do so because they see the direct and tangible benefits of such an enlightened policy.

            The Albertans too pay world price for their energy, with their government diverting the extra bounty into a separate Heritage Fund.  Unlike the Norwegians who invest in global stock markets, the Albertans invest in their schools, universities, and hospitals.  Consequently, as noted in the Economist and also from my firsthand knowledge, Alberta is the only place where the rich send their children to public schools!  The University of Alberta (which happens to be my alma mater) is now regarded as one of the finest, thanks to generous funding from the Heritage Fund.

Malaysian Petroleum Trust Fund

Malaysia can improve on the Norwegian and Albertan models.  We must commit to remove all subsidies on energy, and do so in a phased and predictable manner, perhaps over a couple of years.  This must be coupled with a properly thought out plan to protect the poor.

            For example, there must be subsidized cooking gas for the poor, and only for them.  We can easily estimate the energy needs for the typical poor family, and limit the subsidy or even direct grants only for that amount, and nothing more.  It should be fairly easy to devise such a poverty-ameliorating program with minimal leakage.  We could model it after America’s “food stamps” program.

            Likewise, we should subsidize and thus encourage public transportation.  In British Columbia, season pass holders (rich and poor) for public transit get a rebate from the government.  There is a public good in this; for by not using their cars for commuting, the air is less polluted and streets less congested, and thus require less maintenance.

            The money saved from removing the subsidies should be diverted to a special Petroleum Heritage Fund.  The corpus (or principal) would be invested locally in a broadly diversified portfolio to include stocks, bonds, real estate, and venture capital.  The fund should be passive investor, concerned only with profit making.

            The Norwegians limit their holding in any company to no more than 5 percent, meaning, they are in it purely for the profit potential and not to seek control or management.  It is for this reason that unlike other sovereign funds (Singapore’s Temasek and China’s many funds), the Norwegians are the most sought after investors.

            Like the Alberta Heritage Fund, the income from the Petroleum Fund should be used to improve our schools and universities, as well as providing affordable housing and better health care.  Just as the corpus must be invested locally, the income too must be spent locally.  Thus no scholarships to send students abroad, instead the money should be spent to improve local universities so as to benefit the greatest number of students.

            The country now has many such trust funds, from Tabong Haji to Employees Provident Fund.  All too often they serve as nothing more than as sources of cheap funds for the politically well connected.  They are also not well managed.

            To sell this I dea, the Petroleum Fund must be professionally managed and free of political interference.  This is a very high but achievable order.  This means its governing board must have wide representations, including nominees of the opposition political parties and NGOs.  Anything less and it would be hard to sell the policy.

            Pakatan Rakyat’s leader Anwar Ibrahim rightly expressed the public fear and mistrust that the funds saved from reducing or abolishing the subsidy would be used to benefit Abdullah’s political cronies and family members.  Anwar and Malaysians generally have good reasons for this suspicion.

            I am not impressed with Abdullah’s proposal to provide tax rebates for car owners.  If they can afford to buy a car, then they do not need any subsidy or rebate from the government.

            Abdullah must also spend the petroleum dollars locally to benefit especially the residents of the oil-producing states.  It is morally indefensible and politically foolish to see residents of the three states where oil is produced (Trengganu, Sabah, and Sarawak) among the poorest in Malaysia.

            If Abdullah does not handle this petroleum subsidy issue wisely, it could prove to be the final straw to his downfall.  On the other hand, if he could learn (a big if) from the Norwegians and the Albertans, he could not only salvage his political future but more importantly, leave a significant legacy.

Guest Commentary

 Farish A Noor

Over the past months Indonesia has witnessed, once again, mass demonstrations and mobilizations on its streets. Throughout May, the campuses of the country spilled open with large demonstrations organized in almost every major city across the archipelago to raise awareness about the rising costs of living, in particular, the rising cost of oil and gas in a country that was once a major oil producer but which – over the past five years – has been reduced to being a net importer.

While the students of Indonesia’s universities and colleges have taken to the streets to protest on matters that are related to the political economy of their country, other groups have also taken to the streets in protest over issues that have less to do with the material well being of the nation. Since April, Indonesia has also witnessed a string of demonstrations led and organized by right-wing communitarian religious parties and organizations such as the Fron Pembela Islam (Islamic Defenders’ Front, FPI) on matters that have little to do with the economic welfare or future of the country.

One such protest came in late April when the FPI, along with several other allied right-wing conservative Islamist groups, protested over the ruling that the Ahmadiya Muslim minority community was allowed to exist in the country as long as they did not openly declare themselves to be Muslims. For more than a century the Ahmadis have been living in Indonesia and historians will point to the fact that the founding fathers of Indonesia’s nationalist and anti-colonial movement were educated and drawn from the Ahmadi community as well.

Yet, the theological disputes between conservative hardliners and the Ahmadis (the former regard the latter as deviants) have come out into the open and led to the eruption of violence and hostility in the streets. Right-wing groups like the FPI have called on the state to disband the Ahmadis altogether, failing which death threats have been issued to prominent Ahmadi leaders and intellectuals, and Ahmadi mosques destroyed by mobs of right-wingers.

Thus Indonesia today is once again in the throes of crisis as both external economic-structural factors now impinge on the already fragile social-cultural balance in this, perhaps one of the most complex, diverse and plural of Muslim societies.

The challenge now faced by the government of President Bambang Yudhoyono is to keep the country on an even keel while rising costs made worse by the global energy crisis and the rise of imported fuel prices are raising the level of domestic inflation to an unprecedented level. Massive unrest is brewing though this is not entirely due to the fault of the Indonesian government: for in neighboring Malaysia, Singapore and Thailand, the rising cost of fuel has also led to rising levels of inflation as well.

The danger, however, is this: Those familiar with the Byzantine world of Indonesian domestic politics will know that right-wing radical groups like the Fron Pembela Islam have never emerged out of a political vacuum without some degree of institutional and party-political support. One other group that attained world-wide recognition was the notorious Laskar Jihad, a right-wing paramilitary group that sent off its members to fight, kill and die as Jihadis in the religious war against the Christians in the Moluccas years ago. Later it was discovered – and admitted by the leader of the Laskar Jihad itself, Ja’afar Umar Tholib – that his paramilitary outfit had received support, patronage and protection of key figures in the political and military establishment of Indonesia itself. Which leads us to the obvious question: who, then, are the real power-behind-the-throne pulling the strings of groups like the Fron Pembela Islam?

This week the Indonesian security forces have finally begun to act against the FPI by arresting some of their members and leaders after storming the FPI stronghold in downtown Jakarta. Much to the relief of Indonesia’s mainstream moderate and liberal Muslims, this has come at a time when there is the need to keep such sectarian and divisive forces in check. However, analysts remain perturbed by the rise of such right-wing religious groups when Indonesia seems once again to be teetering on the verge of a major economic crisis, made worse by external economic and political variable factors it cannot control.

In the wake of the 1997-98 economic crisis that rocked Asia and crippled the economies of Indonesia, Thailand, Malaysia and South Korea; many an extreme right-wing group came to the fore to occupy the centre of the public domain in Indonesia. With hindsight it can be seen that the sudden mobilization of these sectarian groups that preached inter-religious hatred and conflict was one of the by-products of an economic crisis that had been badly handled. Others suggest that these groups were also useful in distracting public attention from real issues such as economic mismanagement and the failure of governance in the country.

Now that Southeast Asia seems to be on the verge of yet another economic crisis instigated by the global energy crisis, will there be a repeat of the scenario of 1997-2000, when right-wing religious and communitarian groups came to the fore to add to the chaos? Indonesia’s battle to retain the plural spirit of its secular constitution continues, and all eyes are on the government of Yudhoyono to ensure that the fiery tempers that led to the burning of the Ahmadi mosques across the country in April are not reignited again, with a vengeance.

Dr. Farish A. Noor is a senior fellow at the S.Rajaratnam School of International Studies, Nanyang Technological University of Singapore and one of the founders of the www.othermalaysia.org research site

Chapter 9:   Institutions Matter  (Cont’d)

Institutions In a Modern Society

As society becomes complex, we need new mechanisms to guide social relationships; hence the need for institutions. In the words of economist Douglass North, institutions are the rules of the game; they are the humanly devised constraints that shape human interactions.1

With the right policies and institutions, we can take full advantage of whatever attributes a nation has. A generation ago, the Yucatan Peninsula of Mexico was nothing more than the sleepy villages of poverty-stricken fishermen. Today, it is a major tourist destination. The right policies, leadership, and institutions made that possible.

With misguided policies and inept institutions, even sand could be made scarce in Saudi Arabia. Malaysia has over 100 inches of rain annually, yet the taps are frequently dry. In Las Vegas, in the heart of a desert, homes sport fountains and swimming pools.

Humans are social beings; we interact with each other. One manifestation is our propensity to trade, to barter and exchange goods and services. Trading is not a pleasure and an end in itself, unlike sex (also another basic human instinct), rather each party feels that he or she would benefit from the transaction. When the ancient hunter bartered his excess hides for the farmer’s surplus barley, each felt that he was better off after than before the exchange.

Adam Smith philosophized whether the “propensity of men to truck, barter, and exchange one thing [or service] for another be one of the original principles in human nature, or whether it be the necessary consequence of the faculties of reason or speech,” or some other causes, but he was certain that this attribute is common to all men and found in no other specie.7

The insight of modern economics is nothing more than to maximize this primordial of human instincts, to create institutions to facilitate this exchange, reduce its costs, and have mechanisms to resolve and minimize the inevitable conflicts such interactions would generate.

The first such essential institutions would be concerned with public safety and security; another would be conflict prevention and resolution. There must be a reliable, fair and just institution, respected and trusted to adjudicate disputes. The bane of many Third World countries is their inefficient and corrupt judiciary. The decline in direct foreign investments in Malaysia is in part related to the lack of faith in its judicial system

Before people can engage in trade, they must be assured that what they have is rightly theirs and that the ownership can be transferred. Meaning, there must be a mechanism to establish property rights, and the concomitant right to enter into contract with one another—contract rights.

Property and contract rights alone would not be sufficient. There must be mechanisms to facilitate the various parties coming together. Of particular importance are institutions to connect owners and users of capital—the financial intermediaries.

Overseeing all these would be the political institutions to provide for the orderly selection of leaders, or their removal should they prove wanting. To ensure accountability of institutions and to act as their effective checks and balances, the public must be appropriately informed and apprised. This means a free press and a vibrant civil society.

Many countries have well meaning policies and established institutions, but they exist only on paper; the reality is starkly different. The World Bank found that 90 percent of firms in developing countries report gaps between policy and reality. Policies must be effective in their content and in their execution.4

Next:  Institutions of Law Enforcement

Kosovo’s Independence and Pak Lah’s Impotence

[First appeared as my column Seeing It My Way in Malaysiakinini.com on February 24, 2008.]

The inexplicable and highly noticeable silence of the Organization of Islamic Conference to Kosovo’s declaration of independence on February 17 reflects the organization’s irrelevance in contemporary world affairs.  It also reflects the impotence and incompetence of its leader, Abdullah Badawi.  Not that we need yet another demonstration of those glaring deficiencies!

            As an association of Islamic political entities, OIC should be concerned and engaged with Kosovo.  This after all is an organization that counted the Palestinian Liberation Authority as its member even before there was a Palestinian state.  More importantly, considering what the people of Kosovo suffered while under the rule of the dominant Serbs who were intent on “ethnic cleansing,” international organizations like the OIC should take the lead in liberating Kosovo.

            While secular (and non-Islamic) Western states like America and the EU are supportive of Kosovo’s independence, the OIC chooses to remain silent, an irony that defies my comprehension.  OIC’s silence and non-involvement means only one thing:  It condones or at least remains blind to the demonstrated atrocities of the Serbs.

            OIC specifically and the world generally should support Kosovo’s independence even if the Serbs were Muslims and the Kosovans, Christians.  Injustices and tyrannies recognize no religion or race; they should be universally condemned regardless of the race or religion of the oppressors and victims.

            The largest Muslim country, Indonesia, joins China and Russia in opposing Kosovo’s declaration of independence.  They do so not on the merits or demerits of the issue rather because of their own fear of secessionist movements within their borders.  They are assessing Kosovo based on their own selfish political considerations without any regard to the greater overriding humanitarian issues.  China is burdened by problems in Tibet and elsewhere; Indonesia still has unresolved matters in Aceh.

            Kosovo is not the only glaring blind spot for OIC.  This organization under Abdullah Badawi’s leadership is deaf to the crying tragedies plaguing the Muslim world.  From the continuing humanitarian catastrophe in Darfur to the endless ravages of war in Afghanistan and Iraq, OIC’s silence is reprehensible and morally indefensible.  It goes contrary to everything our Holy Quran holds supreme, and to the teachings of our Prophet Muhammad, s.a.w.

            It is yet another irony lost on the greater Muslim world that most of the charitable and humanitarian relief works undertaken in Darfur and elsewhere in the Muslim world are being done by Western non-governmental entities.

The Appropriate Lessons from the Balkans

Since Tito’s death in 1980, the old Yugoslav Republic had been fractured, violently and repeatedly.  Countries like China and Indonesia that oppose Kosovo’s independence are drawing the wrong lessons from the Balkans.

            Ethnic, religious, language, and cultural differences are not unique to the Balkans.  Today as a result of globalization, as well as previous mass migrations as a consequence of wars and economic dislocations, few countries have culturally or racially homogenous populations.  Such diversities are fast becoming the global norm.

            States that refuse or have yet to accept this reality are sitting on a political time bomb.  They are the Yugoslavias of the future, their fate sealed in inevitable brutal Balkanization.

            Those countries that tolerate – and merely tolerate – the diversity within their midst will survive, but merely survive.  Only the few enlightened nations whose wise leaders embrace this new reality of plurality and leverage it as an invaluable asset will thrive, and thrive well in this increasingly globalized world.

            The lesson from the Balkans is not to try to homogenize or “purify” your society.  The more efficient and disciplined Germans tried it under Hitler, and they paid a horrific price on themselves as well as on their victims.  Decades later and not far away, Milosevic and his band of bearded thugs too tried it in their own barbaric ways.

            In contrast to the old Yugoslavia, America and Canada have many minority groups, including aboriginal natives who have yet to join the economic mainstream.  America counts many prominent minorities among its elite.  Indeed America is currently looking to vote for its first black president.  That aside, visit Washington, DC, and you see many black and brown faces in Congress as well as in the permanent establishment.  There is no secessionist sentiment in predominantly black Washington, DC, or the Virgin Islands.  Indeed, Hispanic Puerto Rico is clamoring to be the 51^st state of the union.

            Likewise, Canada was once afflicted with a secessionist movement in its predominantly French province of Quebec.  Today with the whole of Canada embracing bilingualism and biculturalism, as well as economic and other developments in Quebec, the once powerful Parti Quebecois that advocated for Quebec’s separation from the rest of Canada, is now an irrelevant force.

            Then consider Canada’s aboriginal populations.  While Australia has merely apologized for the maltreatment of its first citizens, Canada has gone further.  It has granted greater autonomy to its northern territories so that now Canada has legislative and other bodies run almost entirely by the native population.  Rest assured that they have no desire to separate; they feel very much a part of greater Canada.  They are also very proud of that fact.

            Yugoslavia was once united and peaceful under Tito’s brand of communism.  With the fall of communism and the emergence of democracy, the country quickly disintegrated.  Milosevic may have given democracy a bad rap; more accurate however is that he and many other despotic leaders are merely wrapping themselves under the cloak of democracy and freedom.  They view democracy not as a system that would guarantee freedom for their people rather as a license to inflict the tyranny of the majority upon the hapless minority.  In short, their brand of democracy is nothing more than a pseudo sophisticated mob rule.  Mob rule is still mob rule regardless whether it has been sanitized through the ballot box.

            As per the Quran, our freedom is our God-given right.  It is definitely not the gift from some enlightened colonialists or our benevolent leaders.  It is ours to begin with, our inherent rights.  In a democracy we willingly give part of that up to the state for the common good, and only for the common good.  We certainly do not give up our freedom so our leaders could oppress us.  Only through freedom could humans come together.  We cannot be coerced to come together; Tito’s success was only a mirage.

            Malaysia is a plural society.  The relevant lesson from the Balkans is that we should embrace and leverage our diversities to our common advantage.  Malaysia also has much in common with other plural societies like America and Canada.  There is much that Malaysians can learn from these two countries.  I just hope that Malaysia – its people and leaders – would draw the right lessons from the Balkans as well as from America and Canada.

            It is already too late to demand this of our present generation of leaders as exemplified by Abdullah Badawi.  However with the many new young faces as candidates from all parties in the upcoming general election, it is appropriate for us to ask them the lessons they have learned from Kosovo.  Even if they were to respond that they have never heard of Kosovo or the Balkans, that in itself would be highly revealing.

Farish A. Noor

(www.othermalaysia.org)

[Reposted with permission]

A quick look at the troubles in the predominantly Muslim-Malay provinces of Southern Thailand – which has been a troubled spot for the past four years at least – would point to a fundamental flaw in the line of thinking of the powers-that-be in Bangkok. Having disregarded the historical factors that make the four provinces of Patani, Jala, Satun and Narathiwat unique compared to the rest of the country, successive governments in Thailand have tried to make the Malay-Muslims of the south think of themselves as Thais, who are an ethnically different people with a language, culture, religion and history of their own.

            Since the late 19th century following the conquest of Patani, Jala, Satun and Narathiwat by the Thais, and compounded by the Anglo-Siamese treaty of 1909, the four provinces have experienced what can only be described as a policy of cultural assimilation. During the 1930s and 40s Thai leaders like Phibun Songkram have tried to force Thai culture and cultural norms on the Malays by any means possible: From forcing them to speak Thai to adapting Thai dress and manners as their own.

Needless to say, this has alienated the Malay-Muslims even further, and has only helped to fuel the resentment they feel against the Thai political elite. Over the past four years this resentment has boiled over to the point of violence, leading to the needless and senseless slaughter of innocent Malays and Thais all over the south.

            But looking further to the other countries of Southeast Asia we see a similar pattern at work too. The government of Indonesia tried, in the 1950s and 1960s, to force the Chinese minority of the country to adapt and adopt Indonesian cultural norms as well. The Chinese language was cast as a foreign language, Chinese culture was deemed alien and the Chinese were forced to assimilate by taking on Indonesian names and thereby losing their identity. This was done for the sake of national unity and integration, but it was well known that the driving factors behind this were really the conservative and racist elements of the ethno-nationalist right who wished to eliminate all traces of difference in the country. Sukarno was not able or not willing to defend the cultural identity of the Chinese minority, and the net result was the denial of the fact that the Chinese (like the Arabs, Indians and other migrant communities) had settled in the Indonesian archipelago for at least five hundred years.

            In Malaysia the elites of the country have likewise been hard at work promoting the ideology of Malay dominance following the racial clashes of 1969. Time and again successive Malaysian politicians have harped on and on about the racial violence in May 1969 and used that as the leitmotif for a cultural assimilationist policy that has only alienated the other communities and which has denied them the right to make their cultural mark on the country.

            But while successive generations of right-wing Malay-Muslim politicians in Malaysia have talked at length about the race riots of May 1969, they conveniently overlook that Malaysia has always been a nation of migrants and itinerant communities, and that the so-called ‘foreign’ Indians and Chinese have likewise settled in the land for at least five hundred years. So how long does a migrant have to stay in any country before she or he is accepted as local?

            The simmering ethno-cultural and ethno-religious tensions that threaten to rip apart the countries of Southeast Asia thus all have the same factor in common: The desire on the part of the dominant group to impose their cultural-ethnic-religious stamp on all other minorities. Hence the dominance of Burmese culture in Burma, where the Burmese are in fact one of many communities; and the dominance of the Thais in Thailand where there are other communities too. Likewise in Malaysia and Indonesia the nation-building process has been overtaken by the exclusive agendas of the dominant communities despite the fact that these are really multiracial and multi-religious polities that are plural and diverse.

            How do we get past this impasse of our own making then? Perhaps the biggest failure of the postcolonial states of Southeast Asia is the fact that most of them took off on an integrationist, assimilationist footing and were foregrounding a national agenda that was sectarian and divisive from the outset. In Malaysia, Indonesia, Thailand and Burma, the concept of universal citizenship remains a distant abstract notion when in fact it ought to have been the foundational pillar to the nation-building process itself.

            But nations are all works in progress and thankfully it is never too late to change tack and take on a new trajectory. Part of the solution to the woes of Southern Thailand would be to recognize that the four provinces of the south have a history of their own that demands and requires respect and recognition. The plight of the Malay-Muslims in Southern Thailand is no different from the appeal of non-Malay and non-Muslim minorities in Malaysia and Indonesia: ‘Listen to us, respect us, recognize our culture, language and identity. And then we will be citizens like any other.’

            But can the political elite of Thailand, Malaysia and Indonesia listen to the appeals of the marginal and the minorities? Or will the same cycle of denial, assimilation, forced integration and ultimately violence and rebellion continue to repeat itself, and become the defining feature of the failed nation-building process in all these countries?

Chapter 9:   Institutions Matter

We have to demand from our institutions the impossible, and the

possible will emerge.

—Abdul Kalam, President of India

The visible manifestations of a culture are its traditions, rituals, and customs. These bond members of that culture and strengthen their sense of identity. As societies become more complex and diverse, those elements are no longer adequate; hence the need for modern institutions. Institutions are a subset of culture; they reflect it. In this chapter I focus on institutions of the law, financial intermediaries, civil society, and the media. They bear directly or indirectly on economic development.1

A common misconception is that a society is economically backward because it lacks capital and thus cannot partake in economic enterprises. As the economist Lord Bauer wisely observed, “It is often nearer the truth to say that capital is created in the process of economic development than that development is a function of capital accumulation.”2

This misconception has profound consequences. In Malaysia it leads to such follies as the founding of Bank Bumiputra and other state financial enterprises, as well as the pumping of billions of careless credits and outright grants to Malay entrepreneur wannabes. Internationally, this misconception contributes to the squandering of foreign aid. The legacies of those noble endeavors were bloated Swiss bank accounts of Third World leaders, and the creation and perpetuation of corrupt politicians and institutions.3

Had a fraction of the funds been used to foster an environment conducive to investments and economic activities as with creating and strengthening the appropriate institutions, it would have made a significant impact on poverty reduction. Capital will flow from within as well as abroad if there were profits to be made. Investments now pour into China, not because the world is suddenly feeling charitable towards the Chinese, rather that there are profits to be made there. Chinese leaders consciously nurture this favorable investment climate. No more chanting of silly socialistic slogans; their new mantra is, “To be rich is glorious!” This simple change in mindset resulted in a phenomenal social and economic transformation, uplifting literally hundreds of millions of Chinese from the clutches of poverty.

China is finally learning, albeit belatedly, the importance of creating a climate and institutions conducive to businesses and investments. Many Third World countries are still blissfully ignorant of this important insight. According to the World Bank, it takes only a couple of days to secure a business permit in Singapore, over 30 in Malaysia, and a tedious 151 in Indonesia.4 The reality for Malaysia, as any businessman will tell you, is much worse. The Internet publication I write for, Malaysiakini.com, applied for a printing permit. More than two years later, the government has yet to even acknowledge let alone approve the application.

Then there are the costs, official and unofficial; in Sierra Leona, a permit would cost over twelve times the average annual income (not counting the grease money!); in Denmark, zero.

A good investment climate, to quote the World Bank, plays a central role in growth and poverty reduction, which in turn is essential in creating a more inclusive, tolerant and peaceful world. This is true of the world as it is for Malaysia.

There is no such thing as an ideal investment climate; it is more a process than an event. A favorable policy for China may not work for Malaysia, or what may be workable in Penang may not be so in Kelantan. One must be aware of and be sensitive to local nuances. Similarly, what once worked may no longer be so today. Times and conditions change, and policies have to be continually updated. We have to learn from past experiences, both the successes as well as the failures, and to emulate the accomplishments and avoid the fiascos of others. To paraphrase Porter, the path to an optimal investment climate is a marathon, not a sprint.

Creating a hospitable environment for economic activities does not require grand visions or revolutionary reforms. Indeed often such grand gestures flop miserably. Malaysia’s much-heralded NEP falls far short of its targets. Its earlier little successes were overshadowed by its subsequent grand corruption. The fate of the even more ambitious Vision 2020 remains to be seen, but if past performance were any indication, you would need a magnifying glass to ascertain the policy’s successes.

China’s current remarkable transformation was not through the effort of its “Great Leader of the Revolution” Mao Zedong, rather through the quiet and tireless effort of his diminutive successor Deng Xiaoping.5 It began with a simple change in mindset and attitude, beginning with Deng’s. He continually reinforced on his followers that he could not care whether the cat is black or white, as long as it catches the mice. Meaning, he could not care less whether a policy is socialistic or capitalistic as long as it produces results. No stirring slogans, and no frantic waving of the magical Red Book. On such small incremental changes are great successes built.

A recent insight of economists is that what separates countries with robust economic performance from those perpetually struggling is the quality of their institutions.6 In traditional feudal society where everyone knows or is related to everyone else and where cultural bonds are strong, there is little need for formal institutions. When you get old, your children will take care of you, there is no such thing as Social Security. Your family and your tribe are your security. Similarly, if your hut gets blown away in a storm, the village will come around to help you, gotong royong (barn raising) style, and build a new one. There is no Federal Emergency Management Agency. If a young man were to misbehave, the strong peer pressures from his family and fellow villagers would keep him in line. Their disapproval is punishment enough; there is no need for Juvenile Hall.

Next:  Institutions in a Modern Society