The fundamental driver behind knowledge-led growth is the size of the pool of national talent. The enlargement of the national pool of talents and full utilization of this national pool are necessary to enable knowledge-led growth to begin and to be sustained. One ‘Bill Gates’ will generate 100,000 high-paying jobs for his fellow citizens.
To allow a ‘Bill Gates’ to blossom in Malaysia, leadership within the pool of talents has to be based entirely on merit. The global nature of the market for talented people means that a Malaysian-born ‘Bill Gates’ might not stay in Malaysia and create the 100,000 high-paying jobs if he has to suffer the incompetent leadership of mediocre talents.
Initiating and sustaining knowledge-based growth requires pushing talent to reach its potential, and this requires that
• education not be primarily used as a political instrument for nation building but be primarily used as an economic instrument for greater prosperity;
• the special nature of talent be acknowledged, and the international competition for it also be acknowledged, by making the deployment of talents race-blind; and
• the culture of excellence be clearly endorsed and promoted by the government (i.e. the true “Malaysia Boleh??? spirit be instilled into national life).
‘Getting the Macroeconomic Balances Right’ means that macroeconomic management should be guided by:
• fiscal balance
• investment balance
• balance in budget priorities
• external balance
Fiscal balance is the most basic element in preserving domestic price stability. Budget surpluses are the norm in the above-trend part of the business cycle, and budget deficits are the norm in the below-trend part of the business cycle. A zero net budget balance is generated over the entire business cycle.
If a substantial part of the budget revenue is obtained from the extraction of exhaustible mineral resources, then:
• there should be a net budget surplus over the entire business cycle so that a fund is available for the use of the future generations after the mineral resource is depleted.
• the mineral resource revenue should be used almost entirely for physical and human capital formation, i.e. the role of the budget is to transform the stock of mineral wealth into investments that generate high income streams. (Human capital formation refers to both investments in education and training and investments in health improvement.)
Investment balance refers to the private-public composition of investment. The engine of long-term growth is private sector investment, and public sector investments should be limited to investments in
• infrastructure projects that are too large for private capital to finance and that would enable a large amount of private investments to follow;
• poverty-alleviation projects that increase the income-generation capacity of the poor e.g. low-cost public housing when mortgage markets are still underdeveloped, provision of improved educational and health facilities, micro-credit schemes
• environmental restoration and protection
In the above table on the amount of investment by ownership, we note that:
• private investment = domestic private investment + foreign investment + investment by government-linked companies (GLC) like Petronas and Khazanah
• public investment = investment funded by the Malaysian government budget
The recent investment balance situation does not augur well for the sustainability of high growth. Over the 1990-2005 period, the share of private investment has fallen relative to the share of public investment. Private investment fell from 21.9 percent of GDP in 1990 to 12.8 percent in 2000, and 8.9 percent in 2005, before rising slightly to 9.3 percent in 2007. The respective figures for public investment are 12.0 percent, 12.7 percent, 11.2 percent, and 11.8 percent.
The three worrisome features of the above table are, in increasing order of worrisome-ness:
• the significant fall in the amount of total investment between the 1990-1995 period and the 2000-2007 period (a drop of 17.6 percentage points of GDP);
• the substantial fall in the share of private investment in the (declining) amount of total investment between the two periods (a drop of 11.9 percentage points); and
• the precipitous decline in the absolute amount of private investment between two periods (a drop of 17 percentage points of GDP).
In the 2000-2007 period, the amount of private investment was smaller than the amount of public investment – a rare situation in a capitalist economy! The private sector was already not playing the leading role in Malaysia’s growth before the global economic crisis hit in the second half of 2008.
The phenomenon of public investment being counter-cyclical and private investment being cyclical is understandable. However, because the 2000-2007 period is not a recessionary period in the global economy, the slowdown in the Malaysian growth rate1 and the continual rise in the share of public investment in this period are unhealthy symptoms.
They suggest an escalated use of public investment spending to deal with a slowdown in trend growth caused by a slowdown in private investment spending.
This use of public investment to make up for a permanent decline in private investment is not a sustainable macroeconomic strategy (otherwise, Japan would not still be in its state of prolonged economic stagnation). The real and only sustainable way to return to the high growth path of the past is for Malaysia to rekindle private investment spending.
Importance of race-blind criteria
Prime Minister Najib Razak’s announcement on June 30, 2009 of the relaxation of racial quotas on the ownership structure of firms is a step in the correct direction to boost private investment in Malaysia.
What decides the effectiveness of Najib’s measures, however, is not whether the investment regime in Malaysia in July 2009 is more liberalized than the investment regime in July 2000 but, rather, how much more business-friendly is the investment regime in Malaysia today compared with the investment regimes in Indonesia, Thailand, China, and India today.
The investment-strangulating Industrial Coordination Act (ICA) of 1975 is still untouched. Najib has only changed some interpretations of ICA by the government agency (Foreign Investment Committee) that implements the ICA.
To make a more credible change in Malaysia’s investment climate, Najib should also significantly relax the ICA (better yet, repeal it) in order to neutralize the twin developments that investment capital has gotten more mobile, and that the neighboring countries have greatly improved their investment incentives in the last decade.
In order to return Malaysia to the high growth path and realise Mahathir’s 2020 vision, Prime Minister Najib will go beyond just the relaxation of the investment component of Mahathir’s NEP framework. Najib will need to adopt a non-ideological policy framework that recognizes the importance of race-blind criteria in:
• promoting business expansion,
• fighting poverty,
• promoting regional development, and
• managing knowledge-generation centers and knowledge-transmission institutes.
To attain the knowledge-based economy, Najib must lead the country:
• first, to acknowledge the importance of knowledge spillovers in spurring growth and of economic trickling down in spreading growth. If Penang has good growth potential, its realization of that potential will benefit the rest of the country
through positive spillovers.
• second, to strengthen international competitiveness through merit-based criterion
in personnel selection and through fair economic competition among firms.
Otherwise, outstanding foreign and domestic talents who are needed to become a knowledge-based economy will not flow into Malaysia, and, if they do, will not stay put in Malaysia.
Malaysia’s place in world economy
It must be admitted in public discussions that ownership restructuring has not been without considerable costs. Malaysia’s internationally competitive manufacturing sectors are precisely those sectors that have been exempted from the ownership requirements and are dominated by direct foreign investors.
Local Malaysian firms, as is usually the case in most countries, have started by concentrating on the domestic market; hence they have been subject to ownership restructuring throughout their history. Some have grown and prospered under the requirements of laws such as the ICA, but the number of these firms that have grown to be truly international is not large.
Given the drop-off in foreign direct investment, Malaysia now needs to look locally for entrepreneurial talents to keep Malaysian industries internationally competitive. The problem is that the incentive structure in place to stimulate foreign direct investors is not available to encourage new sources of local entrepreneurial talent.
There exist fast-acting solutions to the present economic malaise and to the long-run problems of maintaining high growth and increasing international competitiveness, but considerable statesmanship and political skill will be required to overcome resistance to the quick-relief solution of jettisoning the NEP framework.
These are extraordinary times in Malaysia, and extraordinary political leadership is important. Part of extraordinary leadership is the political courage to assess objectively whether the continuation of the race-based programs and the industrial policies has more to do with ensuring political patronage than with providing ‘infant industry protection’ to ‘disadvantaged’ Malay professionals and businesses.
If holding onto political power is the real motivation behind these policies, then the economic costs from a rigid ICA are not serving the cause of social justice, which is the defensible motivation behind the race- based policies. A fast-growing and fiercely competitive economy will do more to enrich the Malay community than state-generated rents can ever hope to do.
Malays and meritocracy
Naturally, assessments differ as to whether the Malay professional and entrepreneurial classes are now able to compete with non-Malay Malaysians. On the eve of the 1999 elections, in a speech to government officials, Mahathir rejected the arguments for meritocracy advanced by some successful Malays:
“[With the implementation of meritocracy] the Malays and the bumiputras will become manual workers and will not be able to hold high positions they are holding today. ...Let us not think that we have reached this level because of our own ability. “
Although there is disagreement over the readiness of the Malays to compete, there is agreement that the government subsidies retard the progress of Malays toward parity in competitiveness with the non-Malays and, equally important, toward parity in competitiveness with the rest of the developed world.
The only way to become truly competitive is learn through competition. It is now time to throw away the crutches that are getting in the way of the Malay entrepreneurs and the economy advancing faster.
The NEP framework is, of course, not the only high obstacle to growth (although it is probably the most damaging obstacle).
Other areas of reform
Other key pillar economic institutions that need reform urgently include the judiciary system, the law enforcement bodies, the education institutions, and the public finance system. Some of the legal rulings of the Malaysian courts have been so “pioneering??? in nature (e.g. the buyer of a stolen property is allowed to keep the property) that the legal protection of property has been weakened in the eyes of investors.
The recent embarrassing incident of the anti-corruption agency and the commercial police division arresting members of each other call out for immediate implementation of the recommendations of the Royal Commission on Police Reform proposed in 2004.
The recent spate of mysterious deaths of people during their detention and interrogation by the police and the anti-corruption agency is suggestive of physical abuse and authoritarian arrogance that have gotten out of control. This seeming rule-by-terror supplemented by the continual deterioration in the maintenance of law and order (topped off by often capricious legal rulings) cannot help but discourage foreign and domestic investment.
The fiscal system has to be decentralized extensively to reflect the federalist nature of Malaysia. Fiscal federalism would empower local development initiatives, promote a growth competition amongst the states, and reduce the ability of the federal government to engage in white elephant construction projects.
The wisdom in the old adage that “two minds are better than one??? will be multiplied by seven times when the 13 states are unshackled in their courting of investment projects and in the protection of their local ecological systems.
A knowledge-based economy stands on many pillars. It requires the government to implement root-and-branch reform in many areas (most, notably, the civil service, educational and research institutions, the fiscal system, the state procurement system, the judiciary branch, and government-linked companies).
Only with the adoption of a new policy framework that puts the culture of excellence at its core, would Malaysia then have institutional pillars that would be strong enough to support the growth of a knowledge-based economy; and would there then also be the hope for Malaysia that the best is yet to be!
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1 Real GDP growth rate was 4.5% during the 8th Malaysian Plan period of 2001-2005
Related:
The Malaysian Economy: Recovery or Stagnation? (Pt.1)