Business

Monday July 6, 2009

Making sense of liberalisation

Policy Perspective - By Tan Sri Abdul Rahman Mamat


The argument for liberalisation in economic development is that a freer flow of goods, services and people leads to greater efficiency, and efficiency leads to cost reduction and competitiveness.

LIBERALISATION means different things to different people, not only in application, but also its implications.

In the context of economic development, liberalisation means the removal of restrictions to allow “a free flow of goods, services and people across border.”

The argument for liberalisation in economic development is that a freer flow of goods, services and people leads to greater efficiency, and efficiency leads to cost reduction and competitiveness. Competitiveness leads to increased sales/exports which contribute to a bigger economic pie or economic growth. Economic growth creates jobs.

Factors that can impede the drive for efficiency or increase the cost of production include excessive taxes, import restrictions, poorly-trained workforce, bureaucratic delays, licensing or restrictive licensing requirements.

Owners of resources or “factors of production,” usually seek the best place to employ their resources to achieve maximum gain. In today’s “borderless” world, the owners of resources have a greater choice as to where to deploy their resources, not only at home but also abroad.

This is evident from the increasing flow of global foreign direct investments (FDIs). To remain globally competitive in producing goods and services or in attracting investors, more and more countries, such as China, Vietnam and India, have pursued the path of economic liberalisation.

More options and choices

Liberalisation, or opening up of the market, gives wider choices of goods or services for consumers which contribute to their satisfaction. The consumer has a choice of whether to buy an expensive but high-quality product or service, or a value-for-money product or service that gives satisfaction, without burning a big hole in the pocket, or cheaper goods or services that match the budget.

The entry of foreign goods or producers in the market intensifies competition. Foreign products or producers can generate competition due to better designs or improved technology. Competition, in turn, leads to further efficiency as it prompts innovation and creativity among other players in the market. Efficient producers who are competitive can create more jobs for a nation, which in turn will stimulate economic growth.

Why have restrictions?

It must be recognised that a free reign of market forces may not be effective in serving the various goals of development. Hence, some restrictions are necessary. Usually, these restrictions are in place to promote certain development objectives, such as protecting infant or strategic industries, creating job opportunities for locals or attainment of certain development goals. Although these objectives are valid, governments all over the world are faced with the difficult choice of putting scarce resources to the most efficient and effective use.

With adequate preparation, liberalisation need not be a disaster. Domestic industries must be assisted and prepared for competition from more established competitors. However, this protection and assistance cannot be open-ended as it will breed complacency. Some form of competition has to be introduced so that industries can be competitive and consumers can have better choices. Malaysia believes in an orderly form of liberalisation with progressive liberalisation as the key.

Malaysia’s measures

Malaysia has benefited from liberalisation measures undertaken in the past. Its liberal and open-market policies in the manufacturing sector have contributed to Malaysia being one of the most attractive destinations for FDIs in the region. Over the past 20 years Malaysia has attracted US$91bil in foreign investments in the manufacturing sector. However, the situation has changed as other countries in the region are also opening up their markets, and with low labour costs, they pose severe competition for Malaysia.

It is noted that the trend in global FDI flows is increasingly skewed towards services investment. The United Nations Conference on Trade and Development’s World Investment Report 2004 indicated that the structure of FDIs has shifted towards services.

In the early 1970s, the services sector accounted for only 25% of the world FDI stock. In 1990, this share was less than 50%. And by 2002, it had risen to about 60% or an estimated US$4 trillion and that of manufacturing fell from 42% to 34%.

On average, services accounted for 66% of total FDI inflows during 2001-2002, valued at some US$500bil.

The report also indicated that as service industry players become more transnationalised, there is scope for a further shift towards growth of services FDIs.

The recent Government announcement on the liberalisation of 27 services sub-sectors is in line with the strategy of progressive liberalisation. Among the reasons for the liberalisation is to explore an area of new economic growth for the nation. The move to liberalise the sector will attract FDIs and bring technology and technical skills into the country.

The presence of foreign players can help boost the capacity of Malaysia’s services industry. Other benefits attached will be in the areas of employment opportunities, local and foreign partnerships, and the creation of export opportunities.

Local services providers are being assisted by the RM100mil Services Sector Capacity Development Fund to better equip them in facing the open market. The fund may be used for training and outreach programmes, enhancement and modernisation, accreditation, and mergers and acquisitions.

They are also being assisted through the Services Export Fund to promote their services overseas. In short, with adequate preparation, the move to liberalise the services sector will be beneficial to the economy and the people at large.

Malaysia’s industries too need to export, for our market of 27 million cannot consume all the goods and services produced in the country. If we want to sell in other markets with minimum impediments, then producers from those markets expect the same from us.

The calls by leaders for all nations to refrain from protectionist measures at this time of economic slowdown is a clear indication that all parties need to be mindful of their responsibility in contributing towards an open-trading environment. When the global market becomes restrictive, not only will industry be affected but consumers will also suffer from the lack of options.

  • The writer is the secretary-general of International Trade and Industry Ministry.

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