Saturday November 21, 2009

Geared for progress

By CECILIA KOK

The Malaysian economy is being reformed to tap innovation and new sources of growth. What will it take to build this new economic model?

WHEN it comes to charting self-sustaining and spectacular growth rates, the rules of the game have pretty much changed for most Asian countries, including Malaysia. After years of riding on fantastic sales to Western industrialised nations, particularly the United States, their economic locomotives were suddenly thrown off course late last year, as their customer-nations underwent drastic correction and entered into deep recession.

With their main customers still mired in structural weakness and unstable recovery, it is obvious that Asian countries can no longer go back to “growth as usual” using the same platform.

While the focus now is on rebuilding their economies, a new game plan is being planned by Asian economies to get back on the track of strong growth and sustain their rising affluence. They call it the new economic model – one that is focused on strengthening domestic demand and promoting greater regional economic integration.

As Economic Planning Unit director-general Datuk Noriyah Ahmad puts it: “We have to grapple with a global economy that is undergoing historic restructuring.”

“The relative weight of Asia in the global economy is set to become larger compared with the Western economies. China, Japan, India and even other large economies such as Indonesia and Vietnam are going to be the Asian leaders,” she explains.

What about Malaysia?

Well, Malaysia is already in a reform mode, says Noriyah.

New model, same vision

A new economic model for the country will be unveiled by the end of the year, as has been widely reported. Currently still a work in progress, the new growth paradigm is designed by a 10-member team, called the National Economic Advisory Council under the helm of Tan Sri Amirsham A. Aziz.

“Malaysia cannot depend on the old model; the country has to find its own niche,” Prime Minister Datuk Seri Najib Tun Razak said in an interview at the recent Asia Pacific Economic Cooperation summit in Singapore.

The new model, which will be “predicated more on innovation, high value searching for new sources of growth, strengthening domestic demand and the long-term goal of integration with East Asian economies” (according to Najib), is to help the nation achieve a balanced and sustainable growth for the long term.

Noriyah says the initiative to design the new economic model is not just a response to the global economic crisis, but its main objective is to create a “wholesome business and investment ecosystem” that provides equal opportunities for the benefit of the rakyat.

The new economic model, she says, is in line with the Government’s commitment to uphold the Vision 2020 that was birthed in 1991 by then Prime Minister Tun Dr Mahathir Mohamad. The vision states that by 2020, Malaysia is to become a high-income economy.

According to the definition of the World Bank, a high-income economy is one with a gross national income (GNI) per capita of at least US$15,000. Malaysia is currently categorised as an upper middle-income economy, with a GNI per capita of around US$7,000. (When Vision 2020 was first introduced, the GNI per capita to be a high-income economy was then set at around US$21,000.)

“The high-income economy that we envisage for 2020 will have a broader objective. Besides having a system that can chart high growth rates, there will also be strong emphasis on protecting and sustaining the nation’s nature and environment. This is to ensure a good quality of life for the future generations,” Noriyah says.

For fund managers like Yeow Kok Kien, a high-income economy is definitely an excitement. The CEO of MFC Global Investment Management explains that the rising per capita income will create multiplier effects via rising private consumption and investments, which will ultimately translate to higher corporate earnings; hence better investment opportunities.

Getting back on track

With only 10 more years left to Vision 2020, Noriyah says: “The nation is now in a very important transition period.”

World Bank in its first country report highlights the challenge of Malaysia to turn itself into a high-income economy. It says Malaysia seems to be caught in a middle-income trap, as it is unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain and achieve rapid growth by breaking into fast-growing markets for knowledge and innovation-based products and services.

The Government understands the country’s limitations, but according to Noriyah, Malaysia already has the “pre-conditions” to achieve Vision 2020.

“We just have to plan carefully and implement the right strategies in order to realise our goal,” she explains, as she refers to the crucial process of preparing the new economic model and the upcoming Tenth Malaysia Plan (10MP) for 2011-2015.

The 10MP, which will be tabled in parliament in June next year, is a critical step as it is the second last five-year blueprint before the 11MP to set the direction for Malaysia to become a high-income economy.

At a recent briefing by the Government, it was revealed that the 10MP would highlight six key strategic directions, namely a competitive private sector as an engine of growth; productivity and innovation through a knowledge-based economy; creative and innovative human capital with high skills; inclusiveness in bridging the development gap; quality of life as an advanced nation; and the Government as an effective facilitator of economic growth.

The main focus of the 10MP is to put the country’s economy right back on the path of strong growth.

“There is an urgency to speed things up. We need to grow faster to regain lost ground,” she says.

Since the birth of Vision 2020, two major crises – the 1997/98 Asian Financial Crisis and the 2008/09 global financial crisis – have struck the country’s economy and cost it some years of growth.

“We are giving more emphasis on implementation now. Whatever we have planned must be implemented, otherwise it will just be another statement,” Noriyah says.

Towards this end, the Government has set up a dedicated project management team to speed up strategic decision-making processes and ensure the smooth implementation of all the planned projects.

Also, the Government will adopt an outcome-based approach for every project that it wants to undertake. In other words, the focus will be on the outcome or impact of the project, and not just the inputs. For instance, in building a school, before the Government puts its resources to construct the building, it will want to weigh factors that can make sure that the end result of the project will be an institution that is functioning well and delivering desirable results.

And as part of its efforts to encourage more private investments and healthy competition, which breeds efficiency, innovation and creativity, the Government will continue to liberalise the economy. The objective of the liberalisation initiatives is to make the business environment conducive for the private sector to thrive, so that the Government can roll back its involvement in the economy and keep to its role as the facilitator and enabler to support the private sector as the main driver of economic growth.

On the ceiling of RM180bil for total development expenditure under the 10MP, which is 21.7% lower than the 9MP’s allocation of RM230bil, Noriyah says, “the objective now is to get more value for the same amount of money”, because the country needs to ensure that the Government’s debt is at a manageable level.

“Value management is the direction that the Government is going to take from now. The concept has been widely practised by the private sector for many years, but it is a new discipline to the public sector,” she explains.

Realistic target

To make up for lost ground and realise Vision 2020, the Government has set the target of achieving an average gross domestic product (GDP) growth rate of 5.4% per year for the next 10 years.

Too idealistic?

Not really. After all, that’s almost on par with the country’s potential output growth of 6%, according to most economists.

“It is not impossible. It is just challenging to achieve that targeted growth rate over the near term, especially if the global economic environment were to remain soft,” explains Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias.

The Government does not deny that the task ahead is challenging, given the turbulent global environment. But it is optimistic about achieving the growth target that it has set, as the weak external environment is expected to improve in the next few years as developed economies return to their growth trajectories, while the strong growth performances of the Asian economies would continue to support the country’s exports growth in the years ahead.

According to Noriyah, Malaysia’s economic activities is set to be increasingly regionalised and networked with large Asian economies, notably China, India, the Middle East, as well as the developed ones such as South Korea, Japan, Singapore and Australia. This is a major shift from the present state of being orientated towards large Western consumer markets.

Noriyah explains the need for the country to remain export-oriented: “We cannot look inwards because our domestic market is too small.”

(Malaysia’s population, which currently stands at 28 million, is expected to grow to only 35 million by 2030.)

“We need to leverage on our close ties with other Asian and Middle Eastern economies to boost our exports,” Noriyah says.

So it is believed that Malaysia’s growth prospects are so much better now.

Noriyah points out that even the World Bank acknowledges the growth potential of the country. The global financial institution over the week set its forecast of Malaysia’s GDP growth for 2010 at 4.1%, which was significantly higher than the Government’s projection of 3.2%. The World Bank also believed that Malaysia’s GDP could grow 5.6% in 2011 and 5.9% in 2012, underpinned by a sustained economic recovery in the United States and other countries as well as an acceleration of the Government’s structural reform initiatives.

Meanwhile, the Government has also identified some strong emerging clusters that can be mobilised as new sources of growth. These include tourism (especially in the area of medical and education), Islamic finance, biotechnology, renewable energy, logistics and information and communications technology.

The Government believes that the strategy forward is to further enhance those new areas of growth in order to stay ahead in the changing economic environment, while retaining and promoting the country’s existing strength, especially in the manufacturing sector, which represents about 30% of the country’s GDP.

While there has been a lot of emphasis on boosting the services sector, which currently represents 55% of the country’s GDP, to 66.5% of GDP by 2020, the manufacturing sector is not about to be neglected. The Government aspires to bring change to the manufacturing sector by moving it up the value chain from the present labour-intensive and low value-add category to one that is capital intensive and based on high technology.

Then, what about the risk of a double-dip recession as warned by some economists?

Noriyah says: “The global recovery may be fragile, but the Government does not foresee a double-dip recession. We believe such risk is low.”

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