My Say: Industrial Revolution lessons for Malaysia’s National Recovery Plan

This article first appeared in Forum, The Edge Malaysia Weekly, on August 9, 2021 - August 15, 2021.
My Say: Industrial Revolution lessons for Malaysia’s National Recovery Plan
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I recently saw an Aesop Fable come to life. Well, by “saw”, I mean I “watched it on YouTube”. A group of people decided to stage one of the greatest and most famous races of all time, pitting a rabbit and a tortoise against each other. As the race started, the tortoise did what it always has, ambled along steadily. And, true to reputation, the rabbit started out great, but instead of taking a nap halfway through the race, it inexplicably decided to stop. The tortoise continued and won the race, making Aesop look more like a seer than a storyteller.

Six years ago, I wrote in an article for this newspaper that, in thinking of economic development, we should always remember that the tortoise won. Dani Rodrik, a Harvard economist, puts it aptly, “Countries that rely on steady, economy-wide accumulation of skills and improved governance may not grow as fast, but they may be more stable, less prone to crises, and more likely to converge with advanced countries eventually.”

I argued for a national focus on three fundamentals — acquisition of skills and education, improvement of institutions and governance, and structural transformation from low-productivity economic activities to high-productivity ones.

Malaysia needs a lot of work on all three fundamentals. Moreover, we cannot afford to do it sequentially; we need all three to progress simultaneously. Covid-19 has, just like in so many other countries globally, laid bare the structural weaknesses in our society and economy.

At present, the government is carrying out a National Recovery Plan, with an impressive array of external advisers from multiple perspectives — healthcare, economy and social welfare. The plan must focus both on immediate-term solutions to the challenges faced by Malaysians and micro, small and medium enterprises, as well as a longer-term path to socioeconomic sustainability. For this, the plan needs to be ambitious, bold and imaginative. But it also needs to be patient.

In January, Nicholas Crafts, Professor of Economics and Economic History at the University of Warwick, published a paper surveying the literature of the Industrial Revolution in Britain. On page one, he wrote, “While [the British industrial revolution] was once seen as a period of dramatic ‘take-off’, it is now generally accepted that it was an episode of gradual acceleration in labour productivity growth which eventually led to sustained increases in living standards”. The Industrial Revolution may have therefore been better called the Industrial Gradualism.

Macroeconomic estimates bear this out. In the 500 years before the mid-18th century, GDP per capita trend growth was approximately 0.2% per year. Following the Industrial Revolution, this peaked at about 1.25% per year in the mid-19th century. Nothing to sneeze at, for sure, given the historical time period, but nothing we would write home about in present-day times as well.

In terms of industrial production growth, several researchers have put together estimates of between 2.7% and 4.4% per annum growth in the early 1800s; this is far higher than the estimates from a century prior, which were between 0.7% and 1.0% per annum, but in today’s terms, this would be seen as rather lacklustre.

One could argue that perhaps today’s cutting-edge technologies could have a far greater impact on either industrial or per capita income growth than the technologies of the Industrial Revolution. Indeed, today’s Industrial Revolution 4.0 — a term that I actually abhor — is rife with technologies that connect everything, allowing us to take advantage of galaxies of data to improve everyday life. There are two main counter arguments to that.

First, the data just does not bear this out. A 2019 Massachusetts Institute of Technology report on the future of work finds that digitalisation has not delivered the gains in productivity that earlier types of technologies did in the first six decades after World War II. Indeed, productivity growth has been “remarkably sluggish since the mid-2000s, both in the US and the European Union”. The authors then pose precisely the question, “How do we reconcile this lacklustre growth with the dazzling new technologies we see around us?”

Difficulties in measuring digital productivity do contribute to this, but the authors argue that much of the technology we may see nowadays, albeit not all, are what economists Daron Acemoglu and Pascual Restrepo label “so-so” technologies. These are technologies that may disrupt employment and displace workers via greater digitalisation without generating much of a boost in productivity. What if most of the “IR4.0” technologies are merely so-so technologies too?

Second, during the Industrial Revolution, at the microeconomic level, it took plenty of time for technology to diffuse as well. For instance, from 1760 to 1800, the contribution of the steam engine — a no-brainer for a revolutionary technology if there ever was one — contributed just 0.005% to total factor productivity (TFP) growth. When the engine became widespread and efficient enough to be deployed in factories and on rail engines, the number rose to 0.2%.

As such, about a century had passed between James Watt’s initial patent — the first revolutionary “general purpose technology” (the opposite of a so-so technology) — and its maximum TFP growth. Today’s technologies may spread a lot more quickly, but that does not matter as much if those technologies are merely “so-so”. It may take time for truly “general purpose technologies” to be recognised as such, and therefore distributed widely enough throughout society.

Where does that leave us? The macroeconomic numbers and technology dispersion at the microeconomic level do bear out a view of industrial gradualism. However, that does not mean there was not actually a revolution in other ways. Davis Kedrosky, an economic historian at UC Berkeley, puts forward three propositions in support of this notion.

First, industry was indeed transformed — slowly but steadily, like the tortoise — from small-scale handicraft to mechanised factory production. Second, the Industrial Revolution’s technological legacy is undeniable — despite the slow dispersion rate, the century between 1760 and 1860 was an “Age of Invention” with patenting volume growing at 3.63%, as opposed to 0.54% prior to 1760. As Kedrosky puts it, “Britain just needed time”. Third, the Industrial Revolution allowed Britain to sustain its soaring population growth, avoiding the types of famines that had previously been associated with such rising population growth.

Putting it together, what the episode of the Industrial Revolution tells us is that these things, rightfully, take time. Britain got modern before it got rich. Our National Recovery Plan must chart a path towards a more sustainable and inclusive prosperity. We must be ambitious, bold and imaginative. But most of all, we have to be patient.

Even if we had per capita income growth that was, say, 2% per annum adjusted for inflation, over the course of 60 years, that would still mean more than a trebling of incomes today. More rapid growth rates that cut off halfway, like the rabbit, are less important than persisting and sustaining even relatively lower growth. We should never forget that the tortoise won.

Nicholas Khaw is an economist at the Khazanah Research division

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