by G.Sivalingam, Business Times, 15 July 2011
Malaysia has been identified by Nobel Laureate Michael Spence’s Growth Commission as one of those thirteen countries that were able to sustain relatively high levels of economic growth in the post war period. However, Malaysia’s sustained relatively high economic growth has not been sufficient to transform itself into a high income country. This is in sharp contrast to Singapore, Hong Kong, Japan, South Korea, Malta and Taiwan, whose sustained relatively high post war economic growth was more than sufficient for them to be transformed into high income economies. Malaysia by some accounts has been caught in a “Middle Income Trap,” since 1960 because it has not been able to transform itself into a high tech knowledge based economy.
Malaysia has not been able to transform itself into a high technology intensive service and knowledge based economy despite efforts to develop the Multimedia Super Corridor; increasing incentives and financial support for R&D and innovative activities and more recently liberalizing 27 sub-sectors of the service economy.
Malaysia’s ICOR (Incremental Capital Output Ratio) has increased over time implying that it takes more and more ringgit in capital investment over time to generate one ringgit of output. This is probably because growth has been dependent on increasing capital and labor inputs rather than on technology. In fact, compared to other high income countries, Malaysia’s Total Factor Productivity (TFP) contribution to growth is less when compared to the contribution of TFP to growth in the industrialized countries. This led Krugman among other economists including Young to come to the conclusion in 1996 that Malaysia’s stupendous growth rates in the 1990s was due more to perspiration rather than inspiration. The ICOR has increased due to investments in heavy industries and other rent generating capital investment projects. In fact, the returns to investment has been declining and as a result total investment as a ratio of GDP has been declining. For the half decade before the 1997-1998 Asian Financial Crisis, total gross capital formation as a percentage of GDP used to average above 40%. However, ever since the 1997 crisis it has hardly moved above 20%.
Since Najib became Prime Minister he has tried to engineer Malaysia away from a labor intensive to a high technology intensive economy through the formulation of the New Economic Model and its components, that is, the Government Transformation Program, the Economic Transformation Program and the Tenth Malaysia Plan. There was also a proposal by the National Economic Advisory Council (NEAC), which has since been disbanded, to end the New Economic Policy that explicitly favors the Sons of the Soil or the Bumiputeras in resource allocation, scholarships, business licenses, employment and places in the universities.
However, opposition has been mounted against the proposal to end the NEP and institutionalize the Equal Opportunity Commission. The resultant rise in ethnic tensions and explicit racial statements has done little to attract new investments. In fact, FDI inflows which are one of the lowest in ASEAN have hardly increased from 2009 to 2011. New pressure groups like PERKASA have effectively articulated and aggregated Malay nationalist interests in demanding that it should vet through all new economic policies proposed by the government reminiscent of UMNO’s role vis-à-vis the government when the NEP was institutionalized in 1970. PERKASA is very supportive of the NEP as it claims that the targets of the NEP have not been achieved as the Malays still lag behind in terms of achieving thirty percent ownership of the par value of shares traded in the Kuala Lumpur Stock Exchange or Bursa Malaysia.
PERKASA further claims that the goal of establishing a sustainable and healthy Bumiputera Commercial and Industrial Community (BCIC) that can be on par with the Chinese Captains of Industry has not been achieved. The Prime Minister who has been trying to push forward his own brand of economics called Najibonomics seems favorably disposed towards considering the views of PERKASA to further entrench his support base among the Malay nationalists, who believe that they have special privileges in relation to the non-Malays. PERKASA appears to have attracted the attention of the Prime Minister because of the growing inequality and income disparities between the bumiputeras and non-bumiputeras. An argument has also been made that poverty is still a problem and most of the poor are still Malays.
To catapult itself into a high income country, Malaysia needs highly trained and skilled manpower. However, the skilled manpower, amounting to more than a million, according to World Bank estimates, have migrated in search of higher paying jobs and careers overseas. The Diaspora according to a World Bank study also complain about the deep social injustice they have experienced as citizens of Malaysia. The government has started a Talent Corp to bring back the skilled to Malaysia but it appears that it might not succeed very well because of the perceived social injustice. The non-Malays who are skilled and merit oriented feel a sense of injustice but the Malays, who have benefitted from the NEP and Malaysians with close connections with the wealthy feel that the situation is fair and just. This puts the Najib administration in a quandary as it is not able to address perceived social injustices without hurting its power base in UMNO and PERKASA.
What the Najib administration has done is to require local universities to produce more employable graduates implying that the local universities can fill the knowledge gap. It is a challenge that the local public and private universities may have to respond to. However, if in the past they were not able to produce the graduates globally competitive employers require, they will probably not be able to contribute to the building of a knowledge based economy. Malaysia’s quest to become a high income country may then be an elusive one especially with the eruption of ethnic and political tensions on a frequent and regular basis. The recent episode and handling of the BERSIH 2.0 rally to cleanse the electoral system is a case in point. A knowledge economy and a high income country should be able to facilitate the free expression of thought even through street marches and demonstrations. It appears then that Malaysia is still on the march towards a high income country and a mature political system. It might be a very Long March.
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