Aligning Private Aspirations with Public Good

by M. Bakri Musa

Bravo to Negri Sembilan Mentri Besar Mohamad Hasan! In awarding RM25,000 to each first-class honors graduate of local public universities, he clearly demonstrated where the priorities should be. He went further and forgave the students’ loans if they were given by his state agency.

To put that cost in perspective, at a total of about RM300,000 it is less than the inflated cost of one corrupt school laboratory construction project. Yet the benefit far exceeds that of any school computer lab, even if it were well built. As a bonus, unlike a poorly built building, this award program poses no danger to anyone.

Malay leaders, especially those in UMNO, continually lament on the generally backward status of our people despite decades of ever increasingly generous preferential treatment. Unfortunately that is all they are capable of doing – lamenting. Occasionally a bright leader might emerge who in a show of bravado would chastise and upbraid us by degrading our cultural heritage and questioning our biological endowment.

Only very rarely would a leader like Mohamad Hasan do something right, like having an appropriate mechanism in place and aligning the incentive system that would encourage the development of those qualities that we desire in our people. My complimenting Hasan would I hope encourage other leaders to follow his fine example.

Mechanism Design Theory

It is instructive that this year’s Nobel Prize in Economics was awarded to three economists whose collective intellectual contributions under the rubric of “Mechanism Design Theory” help us understand better the real world in which we humans interact. Their insights could help us create our own institutions that would encourage the development of desirable behaviors and traits in our people by realigning our private and public incentives accordingly.

To purist disciples of Adam Smith, the open marketplace, guided only by the omnipresent “invisible hand” that would smack those who make the wrong decisions and pat those who had the right ones, is the best mechanism to ensure this. However we all know that competition – and thus the marketplace – is hardly ever “pure.” Unrestrained, the human tendency is to collude and conspire. Unrestrained “pure” capitalism would produce only conscienceless capitalists of Dickens’s era. We still see those characters today, in such places as China, resulting in millions of children being poisoned by their cheap but dangerous toys.

Malaysia too, under its “world’s happiest Prime Minister” Tunku Abdul Rahman, was enamored with unrestrained free enterprise, at least as understood by him. The result was disastrous, and no sane Malaysian would want a repeat of the May 1969 tragedy.

To economists of that era, like the eminent Ungku Aziz, the problem of poverty, specifically Malay poverty, would be solved if only we could remove the stranglehold of the monopolists and monopsonists. Broke them we did, with Pernas, Petronas, and other ‘Nases in the form of the various government-linked corporations. We also legitimized the “natural monopolies” in providing essential public services like utilities.

Unfortunately, those monopolists, whether state-sponsored or guided by individual greed, behave essentially in the same manner. Meaning, the public is ill served by them. It turned out that nothing improves service as much as competition. This applies to air travel as well as healthcare. Witness the improvement in air travel with the approval of Air Asia to compete with government-owned Malaysia Airlines. The healthcare of Malaysians is also much better served with the presence of a vibrant profit-making private sector.

Preference Falsification

Mechanism design theorists recognize the world as it is and take humans as we are. That is, we are neither saints nor satans and that we respond to incentives in what we believe to be in our best self interests, our public declarations notwithstanding. What we consider as incentives however may vary. To capitalists, interest income is a powerful incentive to save; to devout Muslims, an invitation to a life of sin and thus a definite disincentive!

A more monumental problem is that what we profess publicly may at times be at variance to what we believe or want privately, a phenomenon economist Timur Kuran refers to in his book, Private Truths, Public Lies, as “preference falsification.” This is the greatest barrier to formulating sound public policy.

The insight of mechanism design theory is in implicitly recognizing this and designing institutions that would best align public and private goals. This could be reconciling the seller wanting to maximize his profit and the buyer demanding the cheapest product; to universities upholding meritocracy and admitting only “top” students over the demands of influential alumni in “legacy” admissions favoring their children. On a broader public order, it could be the government wanting the greatest revenue from its broadwave spectrum to making sure that the public is well served.

In my book An Education System Worthy of Malaysia, I suggest ways how we could encourage excellence among our students by guaranteeing them scholarships when they manage to secure admissions to elite universities of the world. Not only that, we would give them the freedom to choose whatever field of study they wish in order to pursue their dreams. They and Malaysia would benefit from such a policy, a congruence of public policy and private aspiration.

In a later book, Towards A Competitive Malaysia, I suggested that public contracts be preferentially awarded to companies whose work force reflects the greater Malaysian society regardless whether the company is foreign or locally owned. It matters not whether the company is a subsidiary of Temasek or Guandong State Development Corporation, if its workforce reflects the greater Malaysian society, which in a practical sense means enough Malays at all levels, it would get preferential treatment.

This would align the public goals of attracting foreign investments, getting the best contractors, and integrating the private sector work force with the private one of encouraging Malays to pursue practical subjects so as to make them employable. We thus effectively align incentives such that private gains are compatible with the pubic good, or to use the language of the mechanism design theory, “incentive compatibility.”

Locally, our leaders may want to groom “glokal” Malays, but they unhesitatingly “protect” their children and even in-laws, a clash of stated public goals with individual’s private agenda! By rewardingly generously those who excel scholastically, Mohamad Hasan is attempting to reconcile public policy with private aspirations by designing his own mechanism or institution albeit on a very tiny scale.

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