On NEM...

Saving the NEM - Alex Paul

July 26, 2010

Source: http://www.themalaysianinsider.com/opinion/article/saving-the-nem/

JULY 26 — The New Economic Model (NEM) was conceived in earnestness and delivered with trepidation. Its birth was long overdue – much needed by a nation looking for a strong policy impetus from a new administration – but already it has been treated with neglect and, by some, with abuse.

This is a mistake. As policies go, the NEM must be lauded for its many merits. Put aside for a moment any political bias you may have, and you will find a framework that is noteworthy for its boldness but honest in its assessment of the challenges we face.

At the heart of the NEM is a fundamental choice. One the one hand is the option to do nothing and maintain the status quo. This would certainly be less disruptive in the short term. But it risks leaving Malaysia vulnerable to declining competitiveness, and with it, declining relative wealth.

On the other hand, is the choice for action. Action to restructure the nation’s economic and social fabric to enable it to compete and prosper in a quickly changing world economic order; action to grow the relative wealth of the nation; and action to create a more developed and mature society.

The NEM represents the second, more difficult option. In addressing the fundamental issues facing us as a nation, the NEM sets (much needed) ambitious and bold targets. Meaningful growth will not be achieved with half measures and incremental policy changes — but from a fundamental shift in priorities.

The NEM represents just such a shift. Its focus on growing long-term domestic demand, investing in targeted economic sectors where we have a competitive advantage (E&E, agriculture, tourism, etc.), GDP growth of 6 per cent p.a., a reduction in economically distorting subsidies, a better tax regime (the GST), and fiscal rebalancing, are all sound and realistic policy imperatives.

Why then has the NEM been greeted with such vocal criticism and so little support?

Its detractors have nothing to lose by being vocal. One source of discontent has been those who view the status quo as inextricably linked to their entrenched interests – both financial and political. They see the NEM as an attempt primarily to shift the balance of the social contract against them. They understand better than most that NEM was merely the start of a series laws and regulations. Sensing an opportunity to shape and influence the implementation of the policy, they seized the agenda with a well coordinated and much publicised movement.

Their arguments are not entirely misplaced and it is wrong to dismiss their views off hand. Instead, those that seek to defend the status quo must be convinced that the NEM is looking to grow the absolute level of wealth — such that everyone benefits — rather than simply to redistribute existing wealth. This task falls to the government. Its ability to do so will ultimately determine whether or not the NEM comes to fruition.

The second, less visible source, have been the opposition benches. Whereas the first group saw the lack of detail as an opportunity to shape policy, the second used it to attack the model for lacking substance and credibility.

They aren’t alone. Perversely, the lack of detail is also the reason the proponents of the NEM have been guarded in their support. In the days after the publication of the NEM, the international news wires and analysts were largely positive on the overall policy direction but cautious on the implementation risks. The implication was that this government may not have the political capital to pull this off.

But the lack of detail should not be confused with a lack of substance or political will. With a policy impetus as far reaching as this, both economically and socially, the government was right to chart the course with some degree of consultation. Giving stakeholders an opportunity to shape the policy details means that there is more likely to be buy-in of the eventual implementation. Political will alone is not enough – this government needs a reserve of political capital, which consultation should help them to build.

Sadly, the consultation period has been greeted with an active and vocal opposition, but as so often is the case in Malaysia, accompanied with a silent majority who are, or at least should be, in favour. The result is that the NEM is being held hostage by those who oppose change at any costs.

There is already evidence of this. The reaction at the town-hall style gathering on subsidies reform and to the Tenth Malaysian Plan (10MP) was overwhelmingly regressive.

The NEM should be supported because it chooses wealth generation over wealth preservation. By all means, we should debate the soon to emerge details. The opposition too should continue to scrutinize the implementation of the NEM. But as model the economy (one an underlying goal to double your wealth in 10 years), the NEM is difficult to oppose in-principle.

The next stage of this debate will occur in August this year, when a more detailed blueprint is due to be published. If the NEM is to have any hope of becoming a reality, its proponents need to start making their voices heard before then.

* The views expressed here are the personal opinion of the columnist.

Alex Paul is an investment banker in London. He advises emerging market companies on raising equity capital from international investors.