Business

Monday September 14, 2009

Redefining Malaysia's growth model

Policy Perspective - By Tan Sri Wan Abdul Aziz Wan Abdullah


Services sector will have to play a more prominent, aggressive role

WHY are some countries rich while others remain poor? Why are some countries converging and some diverging from the richer nations? More ink has been spilt on these issues than any other in development economics.

The Washington Consensus has long deliberated on these issues but to date has not reached a common consensus to explain the divergence and suggest viable policy prescriptions.

For analytical convenience, economists have come up with growth models, a simplified representation of an economy, which helps one understand how the economy functions. These models provide insights into issues that remain uppermost in the minds of policy makers when formulating growth strategies.

Malaysia has evolved from a low- to medium-income economy. Post independence, the economy was heavily dependent on primary commodities, namely rubber and tin. Between 1957 and 1960, agriculture was the largest sector, providing employment for about 58% of the labour force and accounting for about 47% of total output.

Rubber alone accounted for over 25% of national income, nearly 30% of employment and about 60% of exports. During the same period, the mining sector, predominantly tin, employed 3% of the labour force and accounted for 25% of exports. With rubber and tin accounting for 85% of total exports, the entire economy was extremely vulnerable to fluctuations in commodity prices.

Human capital is the key ingredient in the new growth model

During the commodity-driven phase between 1957 and 1970, per capita gross national income in nominal terms increased at a low annual rate of 2.4% from RM788 to RM1,070. In addition, there was wide disparity in income and poverty was prevalent.

Thus, the Government felt strongly for the need to diversify the economy and reduce dependence on rubber and tin to enhance income and wealth generation. The emphasis was, therefore, on developing other suitable agricultural crops and embarking on downstream manufacturing activities.

That started the industrialisation process in Malaysia beginning in the early 1970s. To promote industrial expansion, special assistance and incentives were provided to new and expanding industrial establishments. To provide a new dimension and intensify the structural shift, the Government introduced the First Industrial Master Plan (IMP, 1986-1995), Malaysia’s first industrial blueprint.

This plan put together a coherent and structured framework for industrial development with specific targets and timelines. Over the years, concerted efforts were taken to promote and accelerate the expansion of the manufacturing sector. This was also the time when the Government embarked on an aggressive privatisation strategy with the ultimate aim of reducing the burden on Government in financing development. During the period between 1970 and 1987, per capita gross national income in nominal terms grew rapidly at 8.9% per year increasing from RM1,070 to RM4,537.

In 1988, for the first time, the manufacturing sector became the leading growth sector, when its share of gross domestic product rose to 21.1%, surpassing that of agriculture at 18.6%. This signalled a structural shift from agriculture to a manufacturing based economy.

With the successful implementation of the First IMP, the SecondIMP (1996-2005) was introduced to bring about a transformation from assembly-intensive manufacturing to an integrated, industry-wide approach encompassing both manufacturing and related services.

To further propel manufacturing and modern services into higher value added and technology driven sectors, the ThirdIMP (2006-2020) was introduced in 2006. During the period between 1987 and 2008, per capita gross national income increased further by 8.6% per year from RM4,537 to RM25,784.

As a result, Malaysia emerged as one of the most dynamic and vibrant economies in the world. Between 1971 and 2008, Malaysia was among the fastest growing countries in the Asean-5 economies.

Malaysia’s growth rate during this period was more than that of the world economy, even surpassing the advanced economies. Notably, growth was accompanied by low unemployment and inflation. The input driven model, focusing on the intensification of investments, enabled the economy to leap frog from a low-income to a middle-income nation. We got it right then. We had a winning formula with the right ingredients and we were ahead of the curve among countries in the Asean region.

Now, we are at a critical juncture in our economic development path. While the input driven model was successful in transforming the Malaysian economy, there are now signs that export value-added is stagnating and investment by and large, is not contributing to the widening nor deepening of the product mix.

Depending too heavily on the external sector now is no longer an option. It is also not serving to increase domestic value-added through backward and forward linkages. Furthermore, investment is not building research capacity and domestic innovation capability.

In addition, companies operating in Malaysia are too dependent on cheap and low-skilled foreign labour, especially in the manufacturing and services sectors. Private companies are still reluctant to innovate and invest in labour saving technology and new production techniques. These conditions have led the our economy into the middle-income trap.

We need to get the economy out of this impasse. We have to re-examine our growth model and adopt one that will enable us to double our per capita income in the next phase of development and join the ranks of high-income economies. Recent growth theories postulate that policies, which embrace openness, competition, change and innovation, will promote growth. Growth strategies formulated under the new economic model must take cognisance of this view. The world is now more open and integrated.

With a small population of 27.7 million, Malaysia’s domestic demand is rather limited and our companies must strive to make the world their market. This will enable our companies to benefit from the economies of scale and in turn enable the rakyat to consume quality products and services at lower prices.

At the same time, policies need to be put in place to encourage more Malaysian companies to embrace and adopt new ideas, technologies and know-how from the rest of the world. This will enable us to optimise output from existing resources of land, labour and capital.

There is no doubt that competition is a vital part of a vibrant economy. Towards this, strategies under the new model must be designed to attract the entry of new firms and encourage the emergence of new industries. Countries that have elevated themselves from middle- to high-income have relied on change and innovation.

Towards this, we need to focus on R&D and applied technology development in niche areas. This will create critical masses of research talent in centres of excellence and generate findings that give rise to technological spillovers for industry.

The private sector should complement and supplement efforts of the public sector and subsequently play a pivotal role in generating economic activities and be the engine of growth. We are into this together. The role of the Government shall be limited to facilitating private sector initiatives and in those areas where market conditions fail.

The new economy also requires our companies to re-examine their business models. In conventional models, maximisation of shareholder wealth is seen to be the ultimate. Men’s insatiable wants have resulted in companies pursuing wealth at the expense of benefits and well being of the people.

Companies should be held responsible for their own actions and/or inactions without Government interference. Such responsible companies will create lasting relationship with customers and stakeholders. Ethics and integrity should be their guiding principles.

Human capital is the key ingredient in the new growth model. As we progress in the new economy, there will be a greater demand for high skilled jobs and if the supply is not available domestically we have to source and pay for such talents elsewhere.

This is the challenge for the education institutions in Malaysia. Our schools, skills centres, polytechnics and universities must play a proactive role and expose our students to the state of the art technologies. In addition, our students should be inculcated with good working habits, suitable soft skills and the yearn for continuous improvement. This long-standing issue must be addressed immediately.

In the new model, the services sector will have to play a more prominent and aggressive role in generating economic activities. We have comparative advantage in various services sub-sectors. For example, we are at the forefront of Islamic finance. We are also at the forefront in tourism. Therefore, every effort should be taken to further strengthen and elevate our position.

We have the advantage in many other sub-sectors such as education, information and communications technology, and professional services to name a few. If we are successful, the services sector will account for 70% of the nation’s gross domestic product as in many developed economies.

We must also bear in mind that we have a responsibility to hand over a healthy and environmentally sustainable Malaysia to our future generation. This is the legacy that we have to fulfil.

In this context, the new model should promote those activities that meet the needs of the society without endangering or depleting our natural resources. This requires a high level of consciousness and awareness among economic players to adopt and adapt green technology in their production processes and daily activities.

Having said all these, the architecture of the new model must be structured on the two pillars of Malaysia’s inherent strengths, namely political stability and racial unity. The political stability that we continue to enjoy enables us to plan ahead with greater certainty and enhances investors’ confidence, both domestic and foreign. We must also continue to build on something that is very dear to us, and that is racial unity.

In this respect, the 1Malaysia concept initiated by our Prime Minister is an avenue through which we can further strengthen solidarity among all Malaysians, irrespective of race, religion or culture. We have to capitalise on these basic fundamental strengths to our full advantage.

The transformation of the above thoughts into its physical dimension requires a paradigm shift and a change in mindset. The only constant in life is change and change we must. Again, to quote our Prime Minister: “It is not that we must choose to change – we have no choice but to change”.

We have a vision to be a fully developed nation and join the ranks of high-income economies by 2020. We don’t have the luxury of time. We need to act fast. When we eventually arrive at our destination, the rakyat including our children and grandchildren will be able to share the fruit of our labour. The onus is on us to make it a reality for a better tomorrow.

● Tan Sri Dr Wan Abdul Aziz Wan Abdullah is the secretary-general of Treasury, Ministry of Finance, Malaysia. He welcomes comments or feedback.

  • E-mail this story
  • Print this story