Business

Monday August 3, 2009

A new mode to make the great leap forward

By QUAH BOON HUAT


We need a transformational change in our mindset and value system

“You can’t change the wind. You can, however, adjust your sails,” – or so a saying goes.

The same can be said for economic development policies and strategies: economic winds of change necessitates a rethinking of policies and strategies.

Malaysia’s export-led growth model has been, up to a certain degree, a success. However, the export-led growth strategy, according to some, is no longer an optimal development strategy for developing countries. Continued emphasis on export-led growth will, among other things, increase the reliance of developing countries on the developed world and dampen domestic market growth.

Many export-dependent developing countries started tweaking their growth strategies especially after the external demand for their exports dried up on account of the current global financial and economic crisis. Although Malaysia’s growth strategy started emphasising domestic demand around a decade back, it still remains largely dependent on external demand for its economic growth.

We are still middle income

Malaysia seems to be stuck in a middle-income or high middle-income trap, depending on the definition. Tan Sri Nor Mohamed Yakcop, Minister in the Prime Minister’s Department, himself admits that Malaysia appears “caught in a high middle-income country trap,” as well losing some of its high growth momentum.

It’s easy to see that we have already been stuck for quite a while if we compare Malaysia’s economic performance with, for example, that of South Korea. Even though both countries started industrialising at around the same time, South Korea has pulled far ahead of Malaysia, both in terms of income and industrial capability.

In 1950, Malaysia’s real per capita gross domestic product (base year 1990) was US$1,696, nearly double that of South Korea’s US$876. By 1973, Malaysia (US$3,167) was already losing ground to South Korea (US$2,840). And by 1996, South Korea (US$12,874) was already far ahead of Malaysia (US$7,764), and had joined the OECD (Organisation for Economic Cooperation and Development) club.

South Korea’s formidable industrial base now produces high-quality goods with well-recognised brand names that can take on the best in the global market. There are many reasons why Malaysia has not been able to make the high-income transition. For one, it has not specialised more in selected areas where it can achieve economies of scale; neither has it achieved technological leadership.

It is becoming increasingly difficult to make the transition because of the tightening squeeze between low wage competitors (like China) and cutting-edge innovators. If we just sit back and remain complacent, our dream of making the high-income transition will just remain a dream.

New economic model

In the vernacular, an economic model is the framework used to create economic, social, and/or other forms of value in an economy.

The framework includes, among other things, policies and strategies, measures and incentives, infrastructure, institutions, organisational structures, trading practices and operational processes.

The recent series of announcements that the Government will introduce a new economic model to take Malaysia from middle-income to high-income has generated a lot of media buzz. The announcements indicated that the new model would emphasise domestic consumption, and creativity and innovation to drive productivity. There were also pronouncements about the need to move Malaysia towards a knowledge and innovation-based economy.

Though Nor Mohamed has said that the 10th Malaysia Plan (2011–2015) would be based on the new economic model, it appears that the Government has already started the ball rolling. For example, the Prime Minister’s June 30 announcement of a comprehensive deregulation of the Foreign Investment Committee guidelines is actually one instance in the evolution of Malaysia’s economic model.

It is realistic to say that Malaysia’s “new” economic model will have no “final form” because of the constant need to evolve, considering the rapidly changing global economic environment.

And looking at the challenges that Malaysia currently faces, we can more or less expect the kind of changes that will be made. For example, against a backdrop of low external demand, what can we expect the Government to say, except that Malaysia needs to emphasise more on domestic consumption?

This emphasis on domestic consumption is not new. In tabling Budget 2001, for example, the then finance minister said the Government would continue to “increase domestic demand, in particular private consumption, to generate growth …” and “implement a low-tax regime to encourage domestic consumption.…”

The buzzwords – creativity, innovation, productivity, knowledge economy, etc. – are also nothing new.

For example, according to the Eighth Malaysia Plan (8MP: 2001–2005), concerted efforts would be undertaken during the plan period to facilitate the development of a knowledge-based economy and key strategies would include enhancing productivity growth. It also recognised the need to urgently build a critical mass of creative and innovative manpower.

We can, therefore, envisage that Malaysia’s new economic model, as far as modelling goes, will not be revolutionary.

It may seem, at first, wise to want to create many more industries under the new economic model.

However, it may be far wiser to focus and specialise more in the areas that we have competitive and comparative advantages, where we can achieve economies of scale and technological leadership.

We will also need to tackle a lot of complex challenges, for example, raising the skills and innovativeness of the labour force, creating sophisticated financial systems and reducing corruption.

The external sector, however, will remain important because Malaysia does not have a large enough domestic market. Manufacturing will remain a vital sector and there will be a redoubling of efforts to move it up the value chain.

Efforts aimed at making the services sector the next engine of growth will continue, as will efforts to pump up domestic consumption.

We can also expect an increased sense of urgency to further develop and promote Malaysia’s resource-based industries – petrochemicals, pharmaceuticals, wood-based, rubber-based, palm oil-based and food processing.

Mindset and value-system

Our success at making the quantum leap from middle-income to high-income may ultimately depend on the Malaysian mindset and value system. In the foreword to the 8MP document, the then Prime Minister noted: “We will have to cultivate the right mindset and value system in order to develop a culture of high productivity and excellence and ensure that our success is sustainable.”

Former Prime Minister Tun Abdullah Badawi once complained that Malaysia has a “first-world infrastructure” but a “third-world mentality”.

So, even if Malaysia has a well thought out viable economic model, it won’t get us very far further up the economic development ladder if we continue to have a third-world mentality. And that’s expected because we remain our own worst enemy.

Of course, the right kind of mindset and value system can be cultivated. Japan has made it. Would anyone believe that a 1901 survey of Japanese factory workers found them lazy, unskilled, unspecialised and footloose?

The Prime Minister has said we need a transformational change, which is critical for Malaysia in its pursuit of a developed-nation status. Let’s not forget that we also need a transformational change in our mindset and value system. And this is probably more critical.

● The writer is a research fellow at the Malaysian Institute of Economic Research.

  • E-mail this story
  • Print this story