East Asia Forum: Can Malaysia graduate?... by Hal Hill, ANU

Can Malaysia graduate?

East Asia Forum
January 19th, 2011
by Hal Hill, ANU

Malaysia is one of the developing world’s great success stories. Few countries outside of East Asia can match its development record. Since its independence over 53 years ago per capita incomes have risen more than eight-fold, and absolute poverty has been all but eliminated.

But it currently faces three key, interrelated challenges, some generic to upper middle income developing countries, others specific to Malaysia itself.

The first, how to graduate to the rich-country club, has been clearly articulated by the country’s Prime Minister, Tun Najib: ‘We are now at a critical juncture, either to remain trapped in a middle-income group or advance to a high-income economy … We now have to shift to a new economic model based on innovation, creativity and high value added activities.’

The second, shared by some of its Southeast Asian neighbours, is the country’s slower development trajectory since the Asian financial crisis of the late 1990s. Even before the current global financial crisis, which it has navigated quite successfully, economic growth in the 2000’s was about two percentage points below that of the decade 1986-96.

Particularly worrisome is the slump in investment, which has been stuck at little more than 20 per cent of GDP since the late 1990s. This is 10-15 percentage points of GDP lower than the country’s historic ratio. With savings remaining buoyant, the country’s external position has been transformed dramatically. In 2002, the country had net liabilities equivalent to 35 per cent of GDP. By 2008, this had been transformed to net assets of 20 per cent of GDP. Put simply, Malaysians have been finding overseas investment increasingly attractive, while foreigners have been less attracted to Malaysia.

The third challenge relates to the development of high-quality institutions to underpin a modern market economy in a country that has experienced continuous one-party rule for over half a century. Malaysia’s ruling United Malays National Organisation (UMNO) is in fact the world’s longest-serving governing party currently in power among all ‘quasi democracies’. Not surprisingly, elements of UMNO exhibit the problems of complacence and arrogance that one expects from entrenched one-party dominance.

Malaysia’s strengths are not to be underestimated. It has always been one of the most open economies in the developing world, to both trade and foreign investment. It has rarely had a severe macroeconomic crisis, in large part because of this openness. It derived a major early mover advantage from its adoption in the early 1970s of export oriented industrialisation through foreign direct investment, before it was fashionable to do so.

Among emerging economy manufactured goods exporters, it has progressed from 15th ranked and 1.2 per cent of the total in 1969-70 to 5th ranked and 5.2 per cent of the total in 2006-07. It is a major player in the global electronics industry. In 2006-07, it accounted for 3.8 per cent of global parts and components exports, in East Asia behind only the highly industrialised economies of China, Japan and Korea.

But Malaysia is struggling to shift out of low-skill activities, where it is no longer competitive with lower wage neighbours. These problems have been exacerbated by its vigourous promulgation of one of the longest running affirmative action programs in the developing world. Designed to redistribute employment and wealth to the dominant Bumiputera – principally ethnic Malay – community after the nasty communal conflict of May 1969, the so-called New Economic Policy (NEP) and its successors played an important role in promoting racial harmony in the country where there are large differences in living standards across racial groups.

But these programs have created a culture of entitlement, and they have resulted in institutionalised leakages that permeate practically every aspect of Malaysian commercial, social, political and educational life. The programs to advance Bumiputera development have benefited spectacularly the politically well-connected within this community, through preferential contracts, share allocations, and general commercial advancement, while all too little has trickled down to the general community. The programs can hardly be justified as anti-poverty programs when the principal beneficiaries are already egregiously wealthy.

As a result, some of the country’s industry policies have backfired. Malaysia might have been expected to be the leading Southeast Asian automotive producer, but Thailand has become the ‘Detroit of Asia’ owing to Malaysia’s disastrous national car program. In addition, the ‘spillover’ benefits from the large multinational presence in manufacturing have been limited by the fact that Malaysia’s small and medium enterprises (SMEs), that are predominantly owned by the ethnic Chinese community, prefer to stay small, below the threshold above which Bumiputera employment quotas become mandatory.

The country’s public universities, once among the region’s best, have also slipped in East Asian rankings owing to these ethnic quotas as well as heavy bureaucratic control. The civil service is bloated and in need of reform, while there is a very large state enterprise sector that functions in a non-transparent manner and subject to little public accountability.

Moreover, Malaysia has missed out on emerging service sector opportunities owing to the slow pace of liberalisation in that sector, itself a product of the very large presence of state-dominated firms and the NEP-preference schemes. And the country continues to experience a substantial brain drain as a result of the exodus of skilled professionals from the Chinese and Indian communities.

It is fashionable in Malaysia to attribute its current malaise to China, a country that is able to out-compete Malaysia in low-end and increasingly a sophisticated range of manufactures. While the ‘export similarity index’ (that is the composition of their exports) for the two countries is quite high, and thus there has some been some loss of market share to China from Malaysia in third-country export markets, the notion that the rise of China explains Malaysia’s current difficulties is untenable. That view overlooks the positive sum game for Malaysia from China’s rise.

As a resource-rich economy, Malaysia has benefited from the general China-fuelled rise in commodity prices, for example its exports of palm oil and oil and gas. Similarly, commercial opportunities in tourism and education have been rising rapidly, with two-way investments rising very quickly. And Malaysia is a central player in the increasingly China-centred East Asian production networks that export to the world.

Hal Hill is HW Arndt Professor of Southeast Asian Economies at the Australian National University. With Tham Siew Yean and Ragayah Haji Mat Zin, he is co-editor of ‘Graduating from the Middle: Malaysia’s Development Challenges’, forthcoming in 2011.

The Age, Austalia: Malaysia stumbling,,, by Eric Ellis

Malaysia stumbling

Eric Ellis
TheAge
Australia September 23, 2010

ONE of Australia’s key partners in Asia is struggling. Given the way its leaders have taunted Australia over the years, schadenfreude at its plight would be understandable. But this should be resisted, for if Malaysia stumbles, the effects may ripple across the region.

Erstwhile sponsor of the Carlton Football Club, a cash cow for the Australian education sector, Australia’s 10th largest trading partner and a champion of ”Asian values” – whatever they are – Malaysia seems to be brimming with sky-is-falling Chicken Littles. And their analyses are alarmist; ”failed state”, ”deep pit”, ”national decay”, ”ocean-going corruption”, ”useless mega-projects”.

While some of these could be used to describe the Delhi Commonwealth Games – a massive undertaking Malaysia successfully pulled off 12 years ago by the way – it is about a country oft-regarded as an Asian success, whose rampant economy inspired a cockiness among its leaders to take racially tinged potshots at the ”decadent and immoral” West, and at Australia in particular.

And then there was the International Monetary Fund and the World Bank to demonise, indeed anyone its mercurial then prime minister Mahathir Mohamad didn’t like on any given day. And there was 23 years of it, the Mahathir monopoly on Malaysian power.

So what’s prompted such painful hand-wringing from a tigerish economy that likes to boast how it ditched traditional models to virtually promise endless riches? The answer is some of the nastiest foreign direct investment (FDI) statistics an Asian economy has served up in a generation.

FDI into Malaysia slumped dramatically last year, falling a whopping 81 per cent. In 2009, Malaysia took in just $1.38 billion of new investment, barely enough to build a half-decent bridge in a land where pork-barrelling infrastructure projects are de rigueur. By contrast, India averaged almost double that in any given month. Malaysia’s FDI take was even less than that lured by the Philippines, long the region’s economic basket case.

This worries Malaysians greatly. For all of Mahathir’s bluster, he was careful to suck up to big business, and his less-poisonous successors since 2003 have done much the same. Foreign investment underpinned the Malaysian ”miracle”, transforming sleepy Penang into an Asian Silicon Valley and industrialising the Klang Valley that surrounds Kuala Lumpur to OECD levels, with $40,000 a year average incomes to match.

So has the sky fallen in? Some of the fall can be explained by the 2008 ”trans-Atlantic financial crisis”, as many like to call it in Asia. Malaysia’s reliance on foreign investment made it one of Asia’s most globally connected countries. So when Europe and North America tightened their belts after the subprime meltdown, Malaysia naturally was jolted. But the same external dramas affected just as connected Thailand – which endured a crippling political crisis to boot – and more so globalised Singapore, and both far outperformed Malaysia in ongoing FDI, as did Indonesia.

Malaysian fingers point at Prime Minister Najib Tun Razak and his on-again, off-again will to reform a lop-sided economy Mahathir tilted to favour his bumiputra franchise, the ethnic Malays who comprise about half Malaysia’s 28 million people.

Mahathir advantaged Malays with an aggressive ”new economic policy (NEP)”. Mahathir’s thinking went that Malays were less commercially inclined than their compatriot Chinese and Indian Malaysians and thus needed the state’s help. The NEP’s affirmative action aimed to lift Malays out of poverty, but many analysts have likened it to economic apartheid, a meal ticket that many Malays have got too used to.

The NEP anchored Mahathirism and helped keep him in power for two decades. Malays were lifted but NEP side effects are many and cancerous; corruption, cronyism and an oversized sense of entitlement. Much of Malaysia’s economy is controlled by ethnic Chinese, who pragmatically chummed up to Mahathir. To some, the NEP meant simply installing well-paid and influential Malay placemen on boards to fulfil quotas.

Anti-NEP rancour has been building for years and in 2008, five years after Mahathir retired, voters registered disgust by handing his Malay-centric United Malay National Organisation-led coalition its worst result in history, losing its two-thirds parliamentary majority in a gerrymandered assembly. The UMNO faithful toppled Mahathir’s successor, Abdullah Badawi, and now, as support wavers, his successor, Najib, says he wants to replace the NEP with a ”new economic model”, which he pledges to ”execute or be executed”.

There’s a rising fin de regime tint about the UMNO empire, which has never been out of office and has absorbed Malaysia’s critical facilities of state; the civil service, military, media and the education system. Abolishing the NEP is a particular cross for the aristocratic Najib to bear; it was conceived in the early 1970s by his then prime minister father Tun Abdul Razak.

Najib has a big problem, and it is not just the allegations of corruption and even murder that swirl around his circle. Like Julia Gillard, Najib doesn’t have a popular mandate to govern. Also like Gillard, he got handed office when his party’s faceless men knifed an elected PM, Badawi, in office. Malaysians expect Najib to go to the polls soon to get that mandate, but he doesn’t seem sure it’s a good idea, as a confident opposition calls him to account.

In shades of Gillard’s Labor still, party hardliners are in revolt. While most moderate Malays accept the NEP needs tweaking, if only to keep UMNO breathing and in power, a virulent core of party heavies has organised under the banner of a movement called Perkasa, which means ”mighty” in Malay.

Perkasa claims to be defending the Malaysian constitution, which guarantees Malay ethnic primacy. It says it is fighting for Malay rights against the rising challenge of minorities. But Perkasa feels like a supremacist movement, something a Pauline Hanson might recognise. A former US ambassador to Kuala Lumpur has described Perkasa as ”militant”, while non-Malays condemn it for racial divisiveness. That’s emotive language in a country where people still define themselves by ethnicity over nationality and where the deadly race riots of the 1960s are never far away in thinking and policy – not just in Malaysia but among neighbours alert to ethnic tension.

As he dithers over rolling back the NEP and over an election timetable, Najib seems to think he can spend his way to popularity. Last week, he outlined a Mahathir-esque $500 billion investment plan to transform the economy with mega-projects. He appealed to foreign investors to help. But as China, India and Indonesia boom, they will need convincing it is money well spent.

Malaysian Insider: ETP: Malaysia to kickstart private investment

Malaysia to kickstart private investment

Malaysian Insider, September 21, 2010

 

KUALA LUMPUR, Sept 21 — Malaysia today outlined ambitious plans to double its national income (GNI) by stimulating US$444 billion (RM1.38 trillion) of investments over the next 10 years, mostly from the private sector.

A government think-tank has identified 133 projects with investments worth US$444 billion, of which 92 per cent will come from the private sector.

Private firms will invest US$266 billion or 60 per cent, government-linked companies US$144 billion or 32 per cent, and the public sector US$34 billion or 8 per cent. Seven projects worth US$37 billion are ready to go now with a “named investor and serious commitment”, according to Idris Jala, the head of the Performance Management and Delivery Unit.

Following are the key sectors:

OIL AND GAS: It will see investments of RM218 billion over the next 10 years, starting with liquefied natural gas facilities in peninsular Malaysia by 2013. A 10-million tonne regional oil storage hub will be built in Johor state, next to Singapore, by 2015 to turn Malaysia-Singapore into an Amsterdam-Rotterdam-Antwerp type hub.

By 2017, Malaysia will be the number one oil services hub in Asia and by 2020, there will be 5 gigawatts (GW) of hydro capacity, 1.25GW of solar and a nuclear plant.

PALM OIL: It will see investments worth RM124 billion by 2020. This will help boost fresh fruit bunch yields to 23 pe rcent from 20.5 percent and there will be a move into oleochemicals and more downstream industry. This will be led by Sime Darby, IOI, Kuala Lumpur Kepong and state plantations agency Felda.

FINANCIAL SERVICES: This will see investments worth RM211 billion, mainly through leveraging Malaysia’s lead in Islamic finance to target markets like Turkey, Indonesia and Egypt.

KUALA LUMPUR: The city will see investments worth RM172 billion, mainly in the Kuala Lumpur Mass Transit which includes 141km of tunnels built in the largest infrastructure project in Malaysia.

TOURISM: It will see investments worth RM204 billion with plans to join up Kuala Lumpur’s shopping malls in an Singapore “Orchard Road” type development using walkways. There will be a “Malaysia Truly Asia” cultural centre to pull in the tourist dollar with “Broadway quality” traditional song and dance.

ELECTRICAL AND ELECTRONICS: It will see investments worth RM78 billion. Malaysia plans to become the world’s second largest solar panel maker by 2020 and to boost semiconductors, LEDs and industrial electronics.

AGRICULTURE requires RM22 billion in investment.

HEALTH will see RM23 billion of investments and will see a Kuala Lumpur suburb become a “health metropolis”.

RETAIL AND WHOLESALE will see investments of RM255 billion.

CREATIVE INDUSTRIES will add RM51 billion in investment.

EDUCATION will see RM20 billion in investment.

BUSINESS SERVICES will see RM41 billion invested. — Reuters

malaysiakini: A nation of failed economic development plans... by AB Sulaiman

A nation of failed economic development plans

AB Sulaiman
Sep 20, 10
1:45pm

COMMENT The world can be a nasty place especially in terms of planning, where your best and well intentioned plans can produce the worst unintended results. The country's numerous development plans is a perfect example of this.

Since Independence we have always strived to be a country with strong social, economic and political credentials: a strong healthy and united people, public safety and security, great infrastructure, mature democracy, clean human rights record, good education system, governed under rule of law, and of course, a justice-minded judiciary.

To top them all off we are to enjoy a per capita income equal to the peoples in advanced economies. We wish to be an advanced country in our own right.

The current realities are anything but. The people are fragmented while some are migrating to friendlier lands, our infrastructure while adequate is wasteful, our democracy is an ugly disguise for authoritarianism, our education system produces non-thinking graduates, the rule of law has become the rule by law, and the judiciary is an international laughing stock.

The latest world indices would confirm this. There are many but I'd mention just two. First, the 2009 figures for FDI showing an 81 percent fall from US$7.32 billion to US$1.38 billion. At this paltry level we now have joined investment-unattractive countries like Myanmar, Cambodia, Laos and Timor–Leste.

Not only that, apparently the FDI into Thailand and Indonesia have overtaken that coming into Malaysia, once the darling of international investors.

Two, as for per capita income we are at about US$7,000 while the advanced countries we wish to join are at US$30,000 and above. We are less than a quarter of the way to our self-proclaimed goal.

On looking back, we started well in the arena of economic development, but somewhere along the line we faltered and very badly.

Faltered from the start

I reckon we faltered beginning 1970 when we introduced the New Economic Policy (NEP). This was when we began propounding and experimenting economic development plans beyond the parameters of sound economic principles.

Specifically we made plans and projections not in the interest of the country, but in the interest of a segment of the population, namely the Malays.

Now this might be an explosive statement to make so I have to make my stand clear.

The fact of the matter is that the factors of production in an economic set-up are land, labour, capital, entrepreneurship, and in an increasingly knowledge-based world economy, on the ability to access and utilise knowledge. I 'borrow' these factors as principles for economic development.

For an economy to expand therefore, all scarce resources must be optimally channelled for the development of these principles.

I'd reiterate: develop land, inject capital optimally for investment, encourage entrepreneurship, enhance the level of knowledge through smart education. Only then can the economy expand and achieve sustainability.

This last element of sustainability is important – the developing economy must reach a level when it can sustain or regenerate itself without anymore support from any planning agency.
Anything less than this and we can see an economy not going anywhere, and could in fact regress, like our current situation. Lim Kit Siang sums it well – the economy would be a 'work in regress'.

What has gone wrong with our string of development plans? In my view there are several, and I mention them here despite being aware that many commentators have mentioned them constantly. Perhaps there can be some wisdom in saying the same things again, hoping somewhere along the line the decision makers can begin to listen.

Several hundred billion USD wasted

First, after 1970 we seem to divert the elementary formula for economic development mentioned above, into some non-optimal channels resulting in massive wastage. Our planners channelled land development mainly to the Malays. We made development plans for sectarian, not for national interests.

In this way the Malays gain comparatively easy access to scarce capital they cannot fruitfully use because of their lack in entrepreneurial skill and spirit. Their lack in education and knowledge have rendered their productivity level below that of their non-Malay counterparts.

I am aware of course that this resource misallocation was for a special reason and thereby meant to be implemented only for twenty years. But when this time was up the authorities would merely forget this proviso.

As events turn out, such allocations have proven to be below optimum level; even wasteful of scarce resources. External observers have noted that the NEP wasted several hundred billion US dollars!

Favouring race over economics

When the leaders saw that the Malays could not cope and the non-Malays restive they use race and religion to both spur the Malay on and to push away any non-Malay disgruntlement. In other words the leaders dismissed the traditional economic factors of national asset creation in favour of Malay racism and cultural hegemony under the banner of Ketuanan Melayu; and of Islam.

I might be out of academics but I have never known racism and religion to substitute economic factors in any country's asset creation efforts. Surely the planners have not forgotten that this new formula was experimental in nature and to last only for twenty years.

In any case, here we see the early unintended results of the NEP. On the part of the Malays we see a community of people developing a false sense of confidence that they have progressed ahead on the platform of race and religion; whereas in actuality they have not.

On the part of the non-Malays they see the wastefulness of the country's allocation of scarce resources in the interest of racism and religion as the sure way towards non-sustainability and regression.

And yet the authorities would prevent the citizens to even debate the issue.

No post mortem conducted

Come 1990 and the NEP report card had shown the recklessness of this development programme. Malay achievements were nowhere in sight.

Would there be some form of post-mortem analysis to see the good and bad points? To see whether the country should progress ahead in the same race-and-religion principles?

There has been no such effort, not to my knowledge anyway. It has been more of the same: more racism, more religion. And here we see the continuation of a string of failed development programmes.

Dr Mahathir Mohamad (left) announced the Vision 2020 stating that the country would join advanced nations by this magical year. It was well-intended perhaps, but with the economic principles remaining unchanged, that is in favour not of the country but of the Malays, the country began its slide downwards.

When Abdullah Ahmad Badawi took the reins of power, many people had thought that he might just do the right thing to put the country back on the right track again. But he used religious motives (remember Islam Hadhari) to lead the people forward – there was no change there either.

Now we have Najib Razak leading the nation out of the dangerous zone of falling into the steep precipice of a failed state. He has his own plans of course, and its called 1Malaysia: people first, performance now. Will he make any headway?

I just say this to him for whatever it is worth. Go ahead with your development plans based on the proven factors of production as mentioned severally above.

But do not be distracted by sectarian interests, nor for religious considerations. Go for optimum scarce resource allocation and economic sustainability.

AB SULAIMAN is an observer of human traits and foibles, especially within the context of religion and culture. As a liberal, he marvels at the way orthodoxy fights to maintain its credibility in a devilishly fast-changing world. He hopes to provide some understanding to the issues at hand and wherever possible, suggest some solutions. He holds a Bachelor in Social Sciences (Leicester, UK) and a Diploma in Public Administration, Universiti Malaya.

Malaysian Insider/Straits Times: An introspective Malaysia ponders its economic future

An introspective Malaysia ponders its economic future

Malaysian Insider: KUALA LUMPUR, Dec 29 — As the year draws to a close, there is a rare mood of introspection in Malaysia over its economic future.

The debate was sparked by senior officials, who highlighted in unusually blunt terms the country’s economic stagnation.

Leaders as diverse as Second Finance Minister Ahmad Husni Hanadzlah, former minister-in-charge of macro-economic development Effendi Norwawi and respected economists have aired highly critical views.

What’s more surprising is the prominence local newspapers have given to these unvarnished views. To Malaysia-watchers who track these things, the change in tone has been quite remarkable.

The government rarely highlights downbeat economic news.

Even as the world went into a tailspin last year, it put on a brave front. The ‘Malaysia Boleh’ (Malaysian Can) spirit of the boom years of the 1990s seemed hard to shake off.

The current debate was stirred by the government’s promise to create a “new economic model” to haul Malaysia out of the middle-income league in which it has been stuck for 15 years.

Prime Minister Najib Razak last week said the model would be disclosed by February next year, two months later than the original deadline.

It is intended to raise Malaysia to a high-income economy with a per capita income of at least US$15,000 (RM51,450). Malaysia is now classified as an upper middle-income economy with a per capita income of US$7,000.

Very little is known about this new model as the government has spoken about it only in vague terms so far. But the little that has emerged suggests that the government agrees with the expert views now being aired.

Economic experts say Malaysia’s rapid growth in the 1990s will not return without intensive reforms, for the growth was not driven by productivity gains, which would have made it sustainable.

Instead, it was driven by cheap foreign labour, with little effort made to move the country up the value chain to higher-level economic activities.

Malaysia lagged as the world raced ahead, and there is now fear that it may not be able to pull itself together.

Here is a sample of recent views:

Professor Mohamed Ariff, executive director of the Malaysian Institute of Economic Research: “Ironically, the long-term vision was undermined by a short-sighted growth strategy, which was pursued single-mindedly with a high premium on short-term growth at the expense of long-run goals. Malaysia had inadvertently shot itself in the foot.”

Former Cabinet minister Effendi Norwawi: “Our economic survival and competitiveness are at risk. We must try new ways to get new results and overcome the haunting problems of implementation with the same old people, systems and processes.”

Oxford-educated Umno Youth chief Khairy Jamaluddin: “We spent the last two decades of the last century piggybacking on growth in the region, benefiting from massive investments especially from Japan and created local conglomerates via privatisation. It created a solid base for us to take our economy to the next level, up the value chain and all that jazz. Except we didn’t.”

Recently-released economic data paints a bleak picture.

A paper published by the Economic Planning Unit shows a 26 per cent gap between Malaysia’s current national wealth and the set target. By next year, Malaysia should have a gross domestic product of RM694 billion, but it is estimated to come in at around RM514 billion.

Private sector participation has fallen to below 10 per cent of GDP, compared with 30 per cent before the Asian financial crisis in 1998.

The good news about such government-led pessimism is that it usually heralds the rollout of painful reforms. That is a time-tested way of preparing the ground, and was artfully utilised before fuel subsidies were slashed.

But the bad news, as Effendi noted, is that Malaysia has had too many “new ideas” that have never gone the distance.

“Our history is littered with glaring examples where great ideas just didn’t take off from the drawing board,” he said.

A major problem is the political risk that comes with economic reforms.

Rebuilding an economy based on competition, merit, transparency and productivity will mean cutting some of the cosy links between politics and the economy.

Malaysia’s economy is very closely tied to the government and politics. Reforms will, thus, be seen as a zero-sum game to some.

As Khairy noted in an article for the Edge weekly: “...reactionary voices dominate the debate with emotional blackmail and heightened racial rhetoric.

“Yet, this is the single most important transformation that needs to take place —for the Establishment, in its entirety, to embrace a new world view of competition, merit, transparency and diligence.”

So far, Datuk Seri Najib has been cautious. He has taken a big risk in abolishing quotas for Malay ownership of public-listed companies so as to encourage private firms to grow and to woo foreign investment. But transparency, including the lack of open tenders, is still lacking in vast sectors of the economy.

Many ideas have been floated about Malaysia’s comparative advantages — notably in oil and gas, and agriculture — and on what the new economy should focus.

We’ll have to wait till February for the details, but the government could seize on the country’s rare introspective mood to get its message across now. — The Straits Times