The Star: The mystique of national transformation... By TAN SRI LIN SEE-YAN

The mystique of national transformation

By TAN SRI LIN SEE-YAN

The Star, Saturday January 1, 2011

The challenge is to convince stakeholders to buy in and take ownership of the array of programmes.

I am often asked: What is this New Economic Model (NEM) all about; how is this related to the Economic Transformation Programme (ETP) and Government Transformation Programme (GTP); what has all this got to do with creating a high-income society; and what is this middle-income trap we are caught in; and why the urgency for national transformation.

Since the idea of NEM was first mooted by the Prime Minister in mid-2009, our vocabulary has been enriched (or debased) by a barrage of upbeat words (economic roadmap, transformational journey, squeezed-in-the-middle, social minefields, talent management, managed liberalisation, catalysing change, etc.) some of which boggle the mind, and new acronyms (NEAC, GNI, NKEAs, NKRAs, SRIs, EPPs, BOs, 10MP, IEB, Permandu and GOA, Greater KL/KV, etc.).

All enough to confuse most, let alone know what they stand for and to understand the complex web of inter-relationships among them.

No wonder the public seems confused. Many businessmen, investors, civil servants and even academics are not sure they understand enough to lend a deep insight into how the various parts fit together and how they relate to what they are doing. Let alone fully appreciate the whole scheme of things in order to be able to buy in.

After all, the entire framework, strategies and policies and the manner they are stitched together are rather complex. Going through the maze of close to 2,000 pages of inter-related technical reports and discourse, and understanding what they really mean in terms of practical implementation, was rather onerous. Unless stakeholders appreciate enough to buy in and take ownership of the array of programmes, no amount of political will and leadership commitment can see them through in practice. That's the challenge, I guess.

Middle-income trap
It is a fact that middle-income economies (MIEs) have grown less rapidly than either most rich or poor countries which account for the lack of convergence in the past 100 years. So, middle-income nations get squeezed-in-the-middle, between low-wage poor-nation competitors (that dominate in mature or old industries) and rich-country innovators (that dominate new activities based on technological change).
East Asian nations today face this challenge, especially Malaysia and Asean. Economic theory postulates that MIEs face three transformations as they evolve: (i) diversification slackens and then reverses as they get more sophisticated and specialised; (ii) fixed investment assumes less importance as innovation gathers steam; and (iii) quality of education shifts to enable workers to readily absorb new skills and technologies to increasingly add value to the production process.

These are observable outcomes as MIEs successfully shift their growth strategies.

But in the absence of economies of scale, East Asian MIEs will need to struggle uphill in their attempt to maintain previous high growth rates. Strategies based on continuing capital accumulation will deliver steadily worse results. Simply because the law of diminishing returns soon sets in.

Many nations in Latin America and the Middle East are examples of MIEs that have not been able to get out of this middle-income trap.

For East Asia, however, I see room for optimism. World Bank studies have shown that some MIEs in East Asia have successfully made this transition from middle income to rich under proper environments driven by private enterprise, and adopting correct policies. Studies show some MIEs (e.g. South Korea and Taiwan) have remained successful manufacturers even in rather mature industries. Also, China, Taiwan, South Korea and India have shown that success in knowledge-based industries and services can be had. For these MIEs, the tactic has been to straddle both strategies.

Clearly, exploiting economies of scale does offer a way out. The World Bank experience shows “the pattern of trade, the flow of ideas and innovations, the new financial architecture, and the performance of cities are all consistent with East Asian economies displaying a shift towards growth that is founded on economies of scale.”

However, it comes at a price: distributional consequences in terms of rising inequalities, widespread corruption, persistent crime and lack of social cohesion are symptomatic of this model. Be that as it may, transformational change is what is needed if we are to get out of the middle-income trap. There is no other way.

NEM, ETP and GTP
Hence, the NEM for Malaysia. Designed to provide a “concerted, holistic roadmap” to raise income and living standards over the next 10 years, its goals are anchored on strategies outlined in the ETP and GTP. It targets growth in gross national income of at least 6% a year. By 2020, income per capita is expected to reach US$15,000 (RM48,000), enough to become a developed nation.

To achieve this, the ETP identifies eight strategic reform initiatives (SRIs) to propel transformation and growth, namely, promoting a private-sector led economy; creating a quality workforce; instilling competition; strengthening the public sector; building knowledge-base infrastructure; enhancing sources of growth; ensuring growth sustainability through innovation; and implementing transparent and market-friendly affirmative action. Strategically, this makes a lot of sense. But, it's a tall order by any standard.

On the ground, the ETP roadmap identifies 12 National Key Economic Areas (NKEAs) in its drive to maturity these represent growth engines identified to bring about high incomes through constant value adding. They are: oil and energy; financial services; palm oil; wholesale and retail trade; tourism; electrical and electronics; business services, education, communications, content and infrastructure; health tourism; agriculture; and the Greater KL areas.

The ETP needs to be private-sector driven, with Government shifting its role from financier to facilitator. The implementation of the ETP complements the transformational push of SRIs. The outcome is expected to be a more balanced and more sustainable economy. Bear in mind that SRIs are intended to deal with foundational economic issues underpinning transformation and growth.

However, success of the ETP rests on four key underlying thrusts. The first involves the creation of an innovative and creative culture. To thrive, this needs an ecosystem that inculcates private enterprise and risk-taking which flourish best in a competitive and regulatory-friendly environment.

The second addresses the presence of a reliable flow of quality workforce incubating in a conducive workplace.

The third deals with a revamped Government able to transform its service delivery system. This requires a Government “embedded” in support of private initiatives, but not “in bed” with investors.
Only a quality civil service instilled with fiscal discipline can deliver this.

And the fourth tackles the issue of inclusiveness and the need to reduce disparity often collateral damage from unfettered laissez faire private participation, in the absence of checks and balances. This thrust is critical for social cohesion in the face of a strong push for growth. For without growth, there will not be enough to redistribute.

The GTP in conjunction with the ETP form an integral part of the NEM. The GTP is intended as the implementation roadmap to improve performance of the government engine. Here, six National Key Result Areas (NKRAs) have been identified as critical: reducing crime; fighting corruption; transforming education; reducing poverty; improving rural infrastructure; and providing modern urban public transportation.

To me, as a matter of priority, early outcomes must be measured against the goal of zero tolerance of corruption and crime, and building a modern education system. To retain talent and to attract more, you need to transform the fight against corruption and crime in order to create liveable cities to act as “talent magnets” which are open, tolerant, safe and liberal with attractive living lifestyles.

A lesson from history
European renaissance started first in Italy in the 15th century. It rapidly spread to western and central Europe. Outcomes were centred on (a) absorption of knowledge (mathematics) from India and Arabia; (b) notion of good living; and (c) rapid transmission of ideas through the advent of printing. But undesirable social conditions (poverty, strife and corruption) deteriorated in the midst of a golden age of plenty. What's happening in East Asia mirrors the renaissance swift absorption of knowledge from the United States and Europe, focus of living well now, and widespread dissemination of ideas emanating from information and communications technology and the computer. The lesson is clear: transformational changes must be accompanied by greater social cohesion to avoid problems from the worsening of social maladies.

Important how the public feels'
The Prime Minister declared that success of the ambitious blueprint hinges on its effective implementation: “Execution needs to be flawless.” As I see it, discernable progress in four areas of priority concern to the rakyat and investors needs to come early enough to build confidence. They are corruption, crime, education and private enterprise.

It is not enough to show that in the first nine months of 2010, crime fell by 16% (but still have 132,355 unresolved reported cases) and street crimes fell 38% (18,299 unresolved reported cases) or that 648 people were arrested for corruption.

The public and investors (with ears on the ground) have to “feel” any improvement. Raw and biased statistics cannot tell the real story, and don't impress. At this time, it would appear the rakyat and investors don't “feel” any material improvement in the crime and corruption situation. That matters. But they don't rush to judgement. What they want to “feel” is for today to be better than yesterday, and tomorrow to be better than today; and come tomorrow, their expectations are fulfilled.

Incidents from personal experience reinforce this. Damansara Heights (DH) is rated as a top spot to work and live in greater KL. I stay there and my office is in nearby busy Plaza Damansara. Last week my car was parked three doors away from my office, and within 10 minutes (no joke) the car was gone stolen (sophisticated anti-theft gadgets didn't help).

Although a police pondok is nearby, I still had to go to report at a police station far away and took altogether three hours just to get a police statement taken. Many more steps still have to be made before I can file an insurance claim. That's another story. Because my car was a popular brand, we were told that four such cars were stolen in DH in recent days.

Not so long ago, my associated office in DH was broken into and computers were stolen. When friends and neighbours learnt of my predicament, I had an earful of equally unfortunate incidents nearby, including muggings, holdups and handbag snatching. The point is simple: crime remains a problem of serious concern, even in the most liveable area in KL. People and investors just don't “feel” safe whatever the data may show.

Human capital and innovation
Key to NEM's success is ready availability of quality human resources. At its foundation is the education system and how it can be made to deliver. So far, none of the SRIs, NKEAs and NKRAs points to confidence that this will be done comprehensively any time soon.

Time is of the essence. The competition for talent is getting more intense worldwide. Bear in mind it takes at least a generation to finish one cycle of “production”.

On math, reading and science tests given to 15-year-olds in 65 countries in 2009, Shanghai teenagers topped all three worldwide. Near the top were: Singapore, Taipei, Finland, South Korea and Japan. Malaysia was not on the radar screen. The United States was, once again, in the middle of the pack in science and reading, but below average in math.

The Organisation for Economic Cooperation and Development (which runs these tests) attributed Shanghai's success to being a “leader in reform”, citing the city's near universal education system, its competitiveness in admissions, high level of student engagement, modern assessment system, ambitious curriculum, and a programme to assist weak schools. Until now, China has not even surfaced as a threat!

Human capital lies at the core of innovation and the taking of risks. Raising productivity requires a labour force of high calibre committed, motivated and skilled enough to drive transformational change based on excellence over the long term. Only private initiative can deliver this. Lest we forget, there is a big difference between incremental improvements and transformational change.

French President Nicolas Sarkozy says it best: Invention of the light bulb did not come about from incremental improvements to the candle. Make no mistake, transformational changes necessarily involve the taking of risks.

Tom Watson (founder of IBM) once said: If you want to succeed, raise your error rate. As I see it, a government that takes no risk in promoting innovation is one that is likely to make the bigger error of not trying hard enough. Getting private initiative back as the engine of growth is hard but critical.
Bold steps need to be taken. Incremental changes like getting government-linked companies (GLCs) to sell down equity, etc. won't get us there. Private investors need to get their Schumpeterian “animal spirits” fired up enough to squeeze out their entrepreneurial juices.

To be serious, the Government needs to get out of the business of doing business. GLCs and other federal and state enterprises are unfair competition. They only work to hold back the prompt re-emergence of real private initiative.

I should end with a quotation from my favourite poet, E.E. Cummings:

America makes prodigious mistakes,

America has colossal faults, but one thing cannot be denied:

America is always on the move.

She may be going to hell, of course, but at least she isn't standing still.

This is no time to stand still in undertaking bold transformational change. In the end, that's what statesmanship is all about.

Former banker Tan Sri Dr Lin See-Yan is a Harvard-educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest.