Malaysia's New Economic Model: Making choices

8/9/2019 Malaysia's New Economic Model: Making choices

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MALAYSIA'S NEW ECONOMIC MODEL: MAKING CHOICES

By Professor Dr Danny Quah

In June 2009, Malaysia's Prime Minister Datuk Seri Najib Razak asked if I would

serve on his council of economic advisers, the National Economic Advisory Council(NEAC). This council was to come up with a New Economic Model for the country.It would not be a group that got together every month to fine -tune the economy. Thiscouncil was not to sift through the entrails of inventory reports, and proposeeconomic policies to lean against the wind.

No, the task assigned by the NEAC was to put Malaysia back o n a high-growthpath, reinstating Vision 2020 that Malaysia would within these next 10 years achievethe status of a developed nation.

The council was to do this against a post -1997 background of annual economicgrowth having nearly halved; investment as a fraction of GDP having plummeted to50 per cent of what it used to be (private investment, to one third); with the economyrelying on a workforce of which four-fifths were educated only up to high-school levelwhile over one quarter of the local public university graduates remained unemployedsix months after graduation, and with the human capital brain -drain becoming freshlyre-energised (350,000 Malaysians in 2008 lived and worked abroad, half of themwith university education).

By 2007, Malaysia seemed as far from the World Bank's notion of a high -income economy as a decade earlier, in contrast to economies such as Slovakia, theCzech Republic, and Poland, all of whom had by 2008 broken through that high -income boundary but had earlier been roughly at level with Malaysia.

Yet, Malaysia had been previously identified by the Spence Commission onGrowth and Development as one of only 13 countries in the world that had for morethan 25 years grown at rates exceeding 7 per cent annually.

At different times since the 1960s, despite having a population not even one -third of the UK's, Malaysia had been the world's largest producer of tin, rubber, andpalm oil.

Today, 40 per cent of Malaysia's households earn less than US$15 a day(RM1500 a month), two thirds the World Bank's low-income threshold.

With Malaysia's domestic income distribution what it is, only one million peoplepay income tax at the highest rate of 26 per cent; there is no goods and services tax.

Oil and gas revenues have, on occasion, provided up to nearly half thegovernment's total revenues; although by 2014 Malaysia is expected to become anet importer of oil. As much as 20 per cent of the nation's public expendituresroutinely get spent on subsidies that keep prices of basic goods low but distort realityfor Malaysia's citizens.


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in 2007, while that for Malaysians overall, from 49 per cent to 4 per cent; Chinese, 26per cent to 1 per cent; Indians, 39 per cent to 2 per cent.

Wealth figures are widely disputed but most sources give Bumiputera equityownership of 2-4 per cent in 1971; official KL Stock Exchange statistics suggestBumiputera shares of 29 per cent by 1990 and 37 per cent by 1996.

That was the background when in August 2009 Najib delivered his keynotespeech at the NEAC's inaugural meeting, asking the counc il for ideas and directionto transform Malaysia into a developed nation by 2020.

Malaysia, having successfully drawn foreign investment as a low -cost producerwas populated with businesses that, at the margin, had neither incentive nor vision toclimb the quality ladder.

Infrastructure and expertise in key areas remained under -developed. ForMalaysia as a small open economy, the global trading environment has alreadyshown time and again how it could change suddenly, as it had just done during the

2008 global financial cri sis, and further looked set to change even more dramaticallybut less suddenly from longer-term global carbon considerations.

Reforms started in Malaysia by the Central Bank, the Securities Commission,and others were already liberalising capital markets and taking forward expertise andcomparative advantage in Islamic Finance. Government transformation work hadalready begun to introduce meritocracy and performance measurement in the publicsector itself.

What could the council do to help Malaysia relocate its strategic position in theglobal economy?

The New Economic Model

In the ensuing six months, the council met four times in Kuala Lumpur. At thesemeetings, council members listened to presentations, mapped strategic visions, anddebated subtle differences in emphases. Now and then, we would as a group takessuch a big-picture perspective that we would form a collective blind spot over thesingle largest difficulty in whatever we were discussing, completely missing the keyconcern.

Now and then, we would micro-drill down and heatedly argue over whether theappropriate punctuation should be a comma or a semi -colon. But all of us remained

energetic and enthusiastic and committed, and sometime during the 15 hours ofmeeting each day, or in seemingly interminable rounds of emails 24/7, we wouldcorrect course and converge on the right balance.

We agreed our report had to be in two steps: First, to identify, propose, andpersuade on the over-arching framework and strategic vision; Second, to steer fromthat vision, its delivery to be led by the executive branch and implemented by thecivil service.


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Without successfully convincing on the first, the second would never beexecuted. Without successfully executing the second, the first would have been invain.

The single big-picture vision was that Malaysia had to become an advancedeconomy by 2020. Sure that included the Malaysian economy generating sufficiently

high income. But that vision also included a subtext of inclusiveness - so that thepoorest and most vulnerable in society would be taken care of and one ofsustainability, so that higher economic growth would continue into the future, not atthe expense of degrading the environment for generations to follow.

The council concluded many of Malaysia's malperforming situations were inter-linked. Underperformance in one setting was the rational response tounderperformance in the next: Why work hard in school if you're convinced it doesn'tbenefit you afterwards? Why work hard in your job if your produc tivity is held back byso many unskilled people around you? In these circumstances, what is needed is abig push to break out of that vicious circle of under -performance.

But disruption would be needed not just in your own circle of school -mates andcolleagues, but everywhere in the economy. Hence, we emphasised the big push ofeconomic transformation needed to break the logjam of entrenched, specialinterests. We sought to build momentum and confidence in the mindset of citizensthat more positive changes would continue to emerge but all of us needed to keeppushing.

This economic transformation would come with reform along eight strategicinitiatives - slightly more concrete but only slightly:

Re-energise the private sector so it could lead the process of economicgrowth;

Develop a high-quality workforce;

Create a competitive domestic economy;

Streamline and make efficient the public sector as facilitator for privateenterprise, when in the past large government -linked corporations(GLCs) had been viewed as competitors instead;

Move to affirmative action that is (a) transparent, (b) market-friendly, (c)merit-based, and (d) conditioned on need ;

Build infrastructure for a knowledge base;

Enhance the sources of growth; and

Ensure the sustainability of growth.


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Early on, the council decided it couldn't be swayed by arguments aboutwhether it was doing something truly novel or new or different. The only thing thatmattered should be whether a proposal for implementation was likely to succeed andwhether it would bring the highest benefits to the greatest number. Good ideas arehard enough to come by generally; why straitjacket oneself to not look at certain ofthem? This isn't an exam: why not copy good ideas however and wherever you find

them?

Nonetheless, having come to the end of putting in place the over -arching vision,we nonetheless could see several ways where our approach differed from earlierones.

First, we focused on growth through enhancements in productivity, not thesheer brute force of capital accumulation. It's not that we ignored the latter - if wehad, we wouldn't have expressed concern about the sharp fall off in Malaysia'sinvestment.

Instead, it is that we figured it would be innovative processes and cutting -edge

technologies that would provide the surest platform for Malaysia's producing highvalue-added goods and services in the future.

Second, we envisioned economic growth being private sector -led and market-driven, no longer dominated by large public investment through G LCs in selectedeconomic sectors.

Third, we described the benefits of the government moving towards localautonomy in decision-making. State and local authorities needed to be empoweredto develop and support more of their own growth initiatives - without unnecessarilyduplicating function or project. While flat -out competition to produce identical publicgoods, over and over, would be obviously wasteful, a little competition between localauthorities is healthy.

Fourth, we wanted to encourage local geogr aphies to emerge - whether inclusters or corridors - as long as they exploited economies of scale andconcentration, and thus raised productivity over the long term.

Fifth, we saw the need for continuing government support of private industry, aslong as that support was geared towards innovation, entrepreneurial risk -taking, andhigh value-added goods and services. It would be those general principles thatguided support, not past principles of picking winners.

Sixth, we welcomed talent and skills from everywhere: as long as anyone, localor foreign, is able to contribute to Malaysia's transformation to an innovative, high -value added economy, they would be accepted and welcomed.

Finally, we emphasised how the global economy was changing, and we figuredMalaysia's strategic position within it needed to re -orient as well. For the entire 20thcentury, the world's strongest economic powers have been the US, Western Europe,and Japan.


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Malaysia, like many others, tuned production and supply networks to serv icethose markets. While we weren't arguing that policy should be based on theeconomic centre of the world suddenly shifting tens of thousands of kilometers east,we felt that it was reasonable to acknowledge the change in that global landscape,and to develop further new regional networks centred on the fast -growing, Asia-

focused emerging economies.

In a nutshell, that's it. That's the New Economic Model (NEM).

After, for now

For a relatively technocratic problem and solution, the NEM announcement onMarch 30 by Najib attracted unexpectedly heavy attention from the internationalpress. All the major world press worked in discussion of Malaysia's affirmative actionprogramme, both historical and prospective.

The New York Times (March 30 2010) described the revision of Malaysia's

policy to focus on need, not race.

The Wall Street Journal ran articles on two successive days (March 30 and April 1 2010), talking about the recalib ration of Malaysia's decades-old affirmativeaction and asserting how "the New Economic Policy has hindered Malaysia'scompetitiveness in recent years. The US and European Union have singled outMalaysia's insistence on maintaining preferences for ethnic Malay-owned businessesin government procurement contracts for stalling the development of free -tradepacts".

The Journal's Opinion Asia column (April 1 2010) contextualised Najib's speechby observing how "A few years ago it was inconceivable that a Malaysian premierwould express dissatisfaction with the 'rent -seeking and patronage' inherent in thecountry's four-decade-old affirmative action policies and call for a more 'transparent'system based on merit and need. Former Prime Minister Tun Mahathir Mohamadused to label people with such ideas 'extremists'."

Great cynicism continues to be expressed by some of my friends, Malaysianand otherwise, who say they have seen over the years many politician promisesmade only to be broken subsequently.

Personally, however, I see great optimism instead. Why? I contrast Najib'sMarch 30 speech with what I imagine someone wanting an easy ride through life

might have said, in light of both the general scepticism and fervent fear -mongering inthe run-up to the event.

Two days before the NEM announcement, Kevin Brown wrote in the FinancialTimes (March 28 2010) how there was "widespread doubt" that Najib would take anypolitical risk at all of dismantling Bumiputera special privileges, not least in a neweconomic model that might greatly dilute that historical affirmative action.


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James Hookway's Wall Street Journal article of March 22 2010 gaveconsiderable space to Datuk Ibrahim Ali, a right -wing Malay MP, and to Perkasa, theNGO that he founded devoted to defending Malay rights, reporting how "Ibrahimreckons Najib is misreading the depth of anger many Malays feel towards anychange in a policy that has given many a leg up and helped to build a large middleclass."

The Economist (March 11 2010) extrapolated from their interview with Najiband with others to sub-lead their article, "Najib wavers over undoing affirmative -action policies".

Not least, of course, there is the now-infamous interview Ibrahim Ali granted Al -Jazeera on March 29 2010, the eve of the launch of the NEM, where he getsbleeped three times speaking, with some vitriol, on the position of other races inMalaysia.

Domestic reporting too emphasised the emerging political tensions.

Now, contrast what Najib actually said with what all these observers predictedhe would say. Think of the political onslaught, the wavering, the self -protection goingon around him.

If Najib had wanted an easy way out, he could have taken it and no one wouldhave been surprised. He didn't. He continues along that diffi cult but worthwhile path.

One final comment. In this international reporting, by far the greatest attentionhas gone towards Malaysia's New Economic Policy and its possible adjustment. Inthe council's work, we knew this was important, but so too were all other sevenstrategic initiatives.

Affirmative action matters. No significant advanced country in the world gets bywithout affirmative action programmes of some kind - it is in human nature to takecare of the weakest and most vulnerable in our society .

So too for the members of council, where that bottom 40 per cent of theMalaysian population is targeted to receive significant help and attention. But fixingall the other problems matters too: it's one big push for all of them.

The council has now finished Step 1. Step 2 starts. Everyone likes to say, Nowthe hard work begins - as if I've never heard that one before. But I am energised. Icontinue to do this work (and, for the record, for practically no pay compared to

outside options) because I think things actually are looking up in Malaysia.

The writer is an NEAC council member & professor of Economics at Department Of

Economics, London School Of Economics & Political Science.

New Straits Times,Wednesday 14 April 2010

Malaysia's New Economic Model: Making choices

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