Some fundamental problems in estimating the effects of NEP

Here is a simplistic view of some problems facing an empirical and objective study of the NEP (New Economic Policy). I would dare say that the biggest problem facing any researcher is information. In this regard Malaysiakini’s New Year wishes for transparency is highly relevant. It is only with good information that an objective study on NEP can be conducted. It also follows that good information is vital for a truly objective debate on the usefulness of the NEP.

There are also other issues. And the remainder of this entry will discuss (some of) them.

See figure 1:
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To accurately measure the success of an economic policy, the researcher must be able to control other factors that may influence economic welfare.

But there is an equally big issue that researchers need to consider. How does one define economic welfare? Will it be GNP, GDP or PPP (Purchasing Power Parity)?

People also need to understand that economic welfare is also a subset of social welfare. And there are cases where economic welfare can reduce social welfare. A good example is the effects of pollution. One may rightly assume that building more factories increases economic welfare; however the costs of pollution from those factories reduce social welfare.

Figure 2 illustrates another issue

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Comparing economic welfare between country M and country S is not a good way to measure the welfare effects of NEP because of the obvious reason that country M ≠ country S.

In the case of Malaysia, can we think of another country which is similar to Malaysia?

Ideally one need to obtain the effects of NEP whilst controlling other factors. This is known as the ceteris paribus assumption. In other words to evaluate the welfare effects of NEP, the researcher should be ideally be able to have an almost laboratorical conditions.

The effects of economic policy also have a time dimension. The effects of a policy may be staggered throughput a number of years.

This is shown in Figure 3

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The Conclusion:
The conclusion should be obvious: It is very difficult for economist and social scientists to evaluate the effects of the New Economic Policy

Figure 4 is the combination of all the figures above.
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I suppose readers can make their own conclusions.

See this post for a more concrete discussion – The effects of NEP to Malay and Bumiputra Women in Higher Education.


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