CPI Writings

 

I have a trusty little crystal ball and gazing into it, this is what I see: Dominant state participation in the economy and little evidence of private sector-led growth.

The 10th Malaysia Plan has rolled out optimistic macroeconomic growth targets. Of its expenditure allocation, 55% or RM126.5 billion is allocated for the economic sector. The blueprint indicates a Malay-cum-Umno agenda that is largely protectionist with huge direct public investments – including through GLCs – in selected economic sectors.  

Although the allocation earmarks a RM20 billion ‘facilitation fund’ to boost private sector investment, no clear strategy has been revealed to promote competition across and within sectors to revive private investment and market dynamism. Nor is there any indication that the Najib administration is keen to adopt internationally accepted standards for his economic reform.  

One major question that must be asked is whether the 10th Plan has set realistic targets? It wants to raise per capita income to RM38,845 by year 2015. The figure last year was RM23,841. Is the projected growth rate of eight percent per annum credible to yield an income increase of a whopping RM15,000? And this to be achieved within a span of the next five years?

The Plan also predicts GDP growth rate of 6.0% as against 4.2% between 2006 and 2010; exports to expand by 10.1% as against 3.6% during the 9th Plan period; and private investment to grow at 12.8% versus 2.0% during the previous Plan.

Key Indicator	9th Malaysia Plan	10th Malaysia Plan
GDP	4.2% p.a.	To grow at 6% p.a.
GNI per capita	Expected increase to RM26,420 (USD8,526) in 2010	Expected to increase to RM38,845 (USD12,139) in 2015
Federal government budget expenditure	RM230 bn	RM230 bn
Private Investment Private Consumption	Growth of 2% p.a. Growth of 6% p.a.	To grow at 12.8% p.a. Expected to grow 7.7% p.a.
Public Investment Public Consumption	Growth of 6.2% p.a. Budget deficit: 5.05% of GDP	To grow at 5% p.a. Target: 2.8% 2015
Exports	Growth of 3.6% p.a.	To grow at 10.1% p.a.
Overall deficit of the federal government	To reduce to 5.3% of GDP in 2010.	To reduce to 2.8% in 2015.
Overall debt	RM405.1 billion or 52.9% of GDP.	To reduce to 49.9% in 2015

 

Readers might make their own predictions drawn from observation, analysis and logical inferences. Already in the public eye is the frequent whistle-blowing about exorbitant consultancy fees, commissions and bribes that plague our system of government.

Apart from visible corruption, less open to scrutiny are the suspect transactions involving unsecured loans, multiple directorships and interlocking shareholdings and nominee companies. This cleverly concealed set-up in effect enriches an overlapping elite, multi-racial membership. Their convergent interests are linked to the kinship, business and professional relationships of the powers-that-be.

Benefiting the select has caused much of state money and resources to go to least four identifiable distributional coalitions tied up with trusteeship of the NEP.  

‘Distributional coalitions’ are small, powerful and influential groups, organized as cartels, seeking rewards through collusion, transaction costs and other forms of non-competitive bargains. Think Umno, MCA, MIC, PBB, other BN parties and the rest; the bureaucratic circles (PNB, GLICs, SDCs); and also the military top brass who are holders of Tan Sri and Datuk titles if not the religious coterie too. Think also of the professional elites that have jumped on the Crony Express.  

An end result of the nice racket they have is a privatization process which prompts asset concentration, and ultimately the privatizing of gains and socializing of losses.

Barriers to growth

We’re told that to generate economic growth of six percent, the private sector has to take the lead in the key areas of private-public partnerships (PPP) and foreign direct investment.  

However, what is clear is that the 2009 FDI is less than half of the annual average FDI inflow between 1995 and 2005. In 2008, we accounted for 15.5% of FDI flowing into South East Asia; in 2009 it was down to 3.7%.  

Meanwhile, Malaysia recorded an outflow of local funds amounting to RM50 billion between 2007 and 2009. In fact, domestic-owned investment approvals fell to RM10.5 billion or a 37.1% decline from 2008.  
 
The outflow of domestic investments appears to be a recent trend. This suggests that the country is unable to develop new industries or sustain existing ones to prevent local funds from leaving our shores. Also, it suggests a precipitous loss of confidence by local businesses in the economy and politics of the country.  
 

Talk by the authorities about introducing merit-based and market-friendly approaches remains just that. Not only that, Prime Minister Najib Razak appears to have backpeddled on his earlier position on the New Economic Model.

He now says it was all a misunderstanding and he never proposed for the bumiputera equity target to be dropped. “I did not promise for the affirmative action to be abolished. I only said the affirmative action policy would be made market-friendly and based on merit, better than before,??? he was quoted as clarifying after chairing a Barisan Nasional supreme council meeting.  

Although Najib signaled a major policy shift, he does not see any conflict between the expectations he raised and the damp squib following pressure applied by the Malay ultras. “We must understand the presentation by NEAC was their report. The presentation in Parliament was the government’s position.???

A quick survey of the deficiencies preventing us from moving forward include the over-reliance on a cheap labour market that creates distortion and curtails productivity; the education sector failing to deliver required talent to the economy and such talent as we have insufficient in numbers to drive growth; and pervasive rent-seeking and patronage as well as perception of massive and widespread corruption; not to mention the outward migration of at least close to a million Malaysians as they lose hope in the system ever being reformed. The more things change, the more they remain the same.  

It will take a lot to remedy the bloated and ineffective public sector that impedes investment; to alter the mindset of the short-sighted private sector and their silo business outlook, and reinvigorate the low income group (households earning under RM3,000) who are unable to realise their potential contribution.  

Meeting key development challenges  

Global investment is focusing on larger scale markets, not small economies. Yet at the same time, for Malaysia to break-out of the middle income trap, the income of the lower class must increase. The country is thus alarmingly falling between two stools.  

Both the rulers and the ruled realize that we cannot continue as we are and must act before our position deteriorates further … easier said than done.  

To bite the bullet means restoring market prices for goods and services to eventually improve economic efficiency. But this may initially raise consumer prices and the cost of doing business. Practices that promote fair and equal opportunity will inspire market confidence and create a competitive economy. But doing this will entail political repercussions affecting vested interest groups that have milked the system for many years.  

Reducing dependence on foreign labour will encourage firms to move up the value chain or embrace automation. But those that cannot will go out of business. Flexible hiring and firing reduces entry and exit costs for start-ups while wage levels will better reflect skills. But the unions will object to the diminished job security. Greater decentralisation in decision-making will achieve speedier implementation and effectiveness. But this may require some delegation of authority.  

The “Yes, but…??? catch that bedevils us will stymie the tough decisions that have to be made.  

There is intense competition in our new sources of growth, for example, medical tourism, ICT, and Islamic products and services. The strong position we used to have in commodities and manufacturing has been eroded. Mis-governance has allowed undervaluation of resources, the outcome of which is gross misallocations for grand government schemes. There is no political will to prevent misuse and abuse of public development funds.  

However, it may be just whistling in the wind to urge fiscal prudence and cutting back on – say, defence spending – wasteful and white elephant projects as well as downsize the civil service. A call to dismantle quotas, preferences, approved permits (APs), closed tenders and other non-competitive procurement systems including margin of preference likewise seems to have largely fallen on deaf ears.  

I see the 10th Malaysian Plan as merely a throwback to the other Plans. It is built on unsustainable targets, and outmoded and failed strategies. Subsidies for the rich will chug the gravy train of public-private partnerships, mega projects, and the extension of bumiputera policies to all other sectors.

The Plan will fail to mitigate the impact of rising prices and is unlikely to generate new opportunities for improvement of work and livelihood. Hence, the socio-economic condition of the bottom 40 percent of the population and middle class will likely worsen. This may provide tinder for racial and religious extremism rather than class-based concerns and solutions.  

My crystal ball foretells that there will be need for a wholesale revision when the Plan is reviewed. But you do not need a fortune teller to tell you that the government must drop its Malay dominance and Malay unity line. All the races are in the same sinking boat, and must paddle together.
 
 

Note: Dr Lim Teck Ghee will be giving a public talk on NEM and the 10th Malaysia Plan tomorrow. For details, click here.