System Dynamics Advances Strategic Economic Transition Planning in a Developing Nation

Abstract

Macroeconomic systems are notoriously complex. Here can be observed myriad interactions between physical production, employment, finances and government policy. In addition there are likely exogenous effects which can impinge on the system and are driven by international market movements, political upheavals or even terrorism. The development of computers in the 1950's and 1960's, together with the systematic collection of national economic data, led to a pursuit of economic planning based upon models which attempted to make sense of this data with a view to forecasting the future of key economic variables. The emergence of econometrics as an adjunct to economic science was born. Nowadays hardly any developed nations lack an econometric model. If the central government itself have not built one, then one or more university or private research institutions will have. However, econometric models are not without their critics [Black, 1982]. The reliance on econometric models for macroeconomic management is common, but it is not necessarily the best methodology for exploring, evaluating and reflecting on policy options. Meadows and Robinson [1985] review a range of methodologies and include system dynamics (SD) amongst them. They make a cogent case for the usefulness of system dynamics in national economic planning. The application described below is one rooted in a developing economy. It derives from research conducted by the author from 2003-2005 as scientific director of a project team tasked with offering a more scientific base on which to formulate future economic and social policy in Sarawak, East Malaysia. The State of Sarawak, which lies on the northern coast of the island of Borneo, was a former British colony which joined the federated nation of Malaysia in 1963. The project is important in the sense that it is another contribution to empirical macroeconomic modelling using SD. Moreover, the project has exposed and hopefully convinced government officials as to the merits of SD as a methodology in this sphere of application. Some of the material described has been made available already whilst the research was a work-in-progress [Dangerfield, 2005]. Examples of systems-based approaches to developing economies are available in the broader operational research literature (see for instance Parikh, [1986] and Rebelo, [1986]) but it is only relatively recently that SD has begun to acquire a prominence in development planning [Barney, 2003; Chen and Jan, 2005; Morgan, 2005]. 1.2 The purpose of the model The determination of a purpose for an SD model is well grounded in the literature (see, for instance, Forrester [1961 p.137] and Sterman [2000 p.89]). The overall purpose of the Sarawak project was to provide the state with a tool to aid their future economic and social planning. But this is too broad an objective. A specific purpose needed to be defined and a period of time was spent after the commencement of the research in reviewing the various strands of thinking in the state government and, in particular, reading the key speeches of ministers to see what was preoccupying them. There would be no benefit derived from the creation of some grand planning tool if it was not consonant with the interests and ambitions of the primary stakeholders. A proposal was eventually tabled and agreement secured to develop the model with the following purpose: How and over what timescale can the State of Sarawak best manage the transition from a production-based economy (p-economy) to a knowledge-based economy (k-economy) and thereby improve international competitiveness? There had been concerns raised in ministerial speeches that the resource-based economy, which had served Sarawak well in over two decades of development, was coming under pressure from other