Business

Thursday April 2, 2009

New model needed to spur economy

COMMENT By Dr MAHANI ZAINAL ABIDIN


DEPUTY Prime Minister Datuk Seri Najib Tun Razak’s call for Malaysia to create high-value industries and an innovation-led economy is timely, not least because of the global downturn.

Challenging as the latter is, it is an opportunity for us to move our economy forward. In doing so, we should also take cognizance from the past.

The Asian financial crisis of 1998 was a severe shock – our gross domestic product (GDP) contracted by 7.4% and our economic growth, which averaged 8.1% from 1990-1997 has only managed a 5.5% in the 2000-2008 period. In many ways, we are still feeling its after-effects.

Some may say that Malaysia is in the same boat as many other countries. South Korea, for instance, only enjoyed a 4.9% growth between 2000 and 2008. But such comparisons are simplistic – Malaysia recovered but we lack our once high-growth path.

Our private sector’s economic role is much smaller now. Private investment in 1995 increased by 25.4% but in 2008, it only grew by 1.5%. The ratio of foreign direct investment (FDI) to GDP has also been on a steady decline. Between 1992 and 1997, FDI inflow was 7.3% of the GDP while in the 2002-2007 period, it was only 4.2%.

Also, our services sector is playing a much smaller role than it should be, despite the progress in tourism and new industries such as education and logistics. Its share of the economy stands at 55%, which is small given our desire to become a knowledge economy.

Exports, which continue to drive our growth, have similarly decreased. Our total exports expanded at about 15.1% a year between 1996 and 2000. In the 2001-2008 period, this was reduced to 5.2%.

In terms of competitiveness benchmarking, Malaysia has remained in the middle-level range since 2000. Based on the World Economic Forum Growth Competitiveness Index, the country ranked 21st of 131 countries in 2008, slipping from 19th in 2007.

It is also telling that the economic gap between Malaysia and countries like Taiwan, Hong Kong and Singapore, which was narrowing in the 1990s, is now widening instead. We are losing out to them in terms of per capita income growth, technological capability and human capital development.

All of these are signs that Malaysia needs a new economic model in response to the structural bottlenecks. It is not enough for us to simply weather the latest crisis – we also have to ensure that our recovery and subsequent growth will be long-lasting.

The previous analysis shows that Malaysia appears to be caught in a middle-income country trap and is finding it difficult to move to high-income status by climbing the global value chain.

We face strong competition in our areas of traditional strength and also in new fields that could be sources of future growth.

The logical thing to do would be to shift to a high-income, high-skilled economy. Malaysia has the capacity for this – our per capita income in 2008 was US$8,068. We wisely invested in infrastructure and human capital, and developed good governance practices.

Our economic structure is balanced with viable manufacturing and agriculture sectors and a potentially-strong services sector.

Yet, Malaysia remains a low-wage, low-skill and resource-based economy. Retaining this template without transforming into a high-value economy will only produce low-growth in the future.

Malaysia is in danger of not meeting its own target of being a developed country by 2020. There is an urgent need for us to address critical economic issues, particularly human capital, technology and innovation and our approaches to it, as well as the pricing system.

Enhancing human capital is an astute move but we must look beyond education and into our labor market policies. If the supply of human capital is not matched with industries’ needs, there will be unemployment and under-employment.

Technology and innovation are essential for an economy to move up the value chain. Hence, a culture of innovation is essential if competitiveness is to be sharpened. Many measures to develop technological capacities have been introduced, with only modest success.

Malaysia needs to combine technology- and market-driven innovation approaches to be ahead of other countries, lead in strategic technologies and capture market shares in growth products and services.

We should continue to invest in technology-driven innovation by supporting research and development works. At the same time, Malaysia should acquire technologies and improve them to meet market demand.

Furthermore, our price system needs to be revised to reflect market signals. Price controls and subsidies have supported production and alleviated the lot of the poor. Lately, however, they have negatively impacted our resource allocation and competitiveness.

The quest to turn the country into a high-value economy is made more challenging due to the current crisis, which may see a realignment of global economic players and industries. For Malaysia, the challenge is in retaining its exports industries and positioning itself in this new environment.

Nevertheless, Malaysia cannot escape the need to progress to a flexible and competitive economy that can provide its citizens with a good standard of living.

This will mean high-value activities and maintaining our competitiveness through increased productivity. This requires innovation, technological capability, building human capital and higher-quality products and services.

Malaysia needs the same sort of bold, unconventional spirit that served it so well in the past in meeting these challenges. We should not be shy to embrace a new economic model, especially one driven by an innovation-based economy, or risk being left behind.

● Dr Mahani Zainal Abidin is director-general of ISIS Malaysia. We welcome your feedback on this article. Please e-mail to
starbiz@thestar.com.my

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