Business

Saturday September 5, 2009

New model to spur growth


IT has already been widely reported that the Malaysian Government is currently formulating a new economic model for the country. The move, announced in April, is in response to the global economic crisis, which has affected the country’s economy through a drastic slowdown in global trade and a sharp outflow of capital.

In line with the Government’s plan, the National Economic Advisory Council (NEAC) has been set up to drive new growth strategies in transforming the economy and moving it up the value chain. High on the agenda of this special action council are the formulation of a high-income growth model and the promotion of domestic consumption as key economic driver. However, details of the plan are expected to be unveiled only before the year ends.

The director-general of the Institute for Strategic and International Studies Malaysia, Dr Mahani Zainal Abidin, who is one of nine experts appointed to head the NEAC, declined to provide any details of the proposed new economic model before the official announcement, as discussions among the council members are still ongoing.

But when asked what is the ideal model for Malaysia, she says, “balanced growth.”

“Being a small and open economy, we need international trade. We cannot just rely on domestic demand; otherwise, we cannot achieve high growth,” Mahani explains.

High ambition

Over the week, Prime Minister Datuk Seri Najib Tun Razak said Malaysia needed to achieve high growth rates of more than 8% annually for the next 10 years to realise its Vision 2020 to become a developed nation.

“Anything less will delay our goal of attaining it,” Najib, who is also the Finance Minister, said.

According to the World Bank’s definition, Malaysia falls under the category of an upper middle-income group based on its gross national income (GNI) per capita of US$6,540 last year. A high-income nation is defined as one with GNI per capita of more than US$11,905.

The goal set by the Prime Minister seems like a tough feat, especially since the world is still recovering from a major slump. But what’s more important, according to economists, is that the country needs to make the right strategies to counter the future challenges in an uncertain world.

ASLI-Centre of Public Policy Studies chairman Tan Sri Ramon Navaratnam, for one, reckons that there are many ways that Malaysia could make itself stronger and more competitive to face the challenging road ahead. But he says that would involve the Government making some brave and drastic changes for the betterment of the country as a whole.

“The new model should strive for growth and income distribution to benefit the society as a whole and not the privileged few. Just aim for that strategic goal and all the strategic issues will fall into place, and we will succeed,” he explains.

“The question is, do we have the political will strong enough to make changes,” he adds.

“Any kind of dynamic change will definitely hurt certain quarters,” says Malaysian Institute of Economic Research executive director Prof Datuk Dr Mohamed Ariff Abdul Kareem.

“There will be winners and losers in the game, but losers perhaps can be pacified through some sort of assistance from the state, so that they can find other activities in which they can specialise or excel,” Ariff suggests.

Bigger role for services

Nevertheless, Ariff commends the Government’s recent effort to liberalise some parts of the country’s economy. “The leadership is on the right track … there are many more areas that need to be opened up for competition, and we need to do that through proper planning.”

The recent liberalisation of the 27 services sub-sectors such as health and social services, tourism, transport, business services and computer and related services reflects the Government’s seriousness in promoting the services sector, which currently contributes about 55% to the country’s gross domestic product (GDP).

While the manufacturing sector, which currently contributes about 30% to GDP, will still play its role as an engine of growth for the country’s economy, the Government recognises that the services sector should assume an increasing role in the new economic model. The aim is to have the services sector represent more than 60% of the country’s GDP by the end of the Third Industrial Master Plan (2006–2020).

With that, it is hoped that liberalisation measures would result in increased investments, inflow of specialised expertise and technology into the services sector. However, those measures are not expected to bear much fruit until the global economy fully recovers.

Investment downtrend

Foreign direct investment (FDI), for instance, has dropped drastically over the past one year, due mainly to the global economic crisis.

According to the Malaysian Industrial Development Authority, total FDI for this year is expected to fall by half from RM46.1bil recorded last year. For the first five months this year, only about RM4.2bil of FDI had been approved by the Government.

Viewed positively, the drop in FDI is partly because Malaysia is more selective in approving projects proposed by foreigner investors, opines Ariff.

“We are not in the same league as other developing countries … we want FDIs in skill-intensive industries, not labour-intensive ones, because we want to move up the value chain,” he reasons.

Nevertheless, he acknowledges the fact that Malaysia may have some impediments to foreign investment, one of which is the race-based quota system, which he thinks could unnerve investors.

“There is too much politicisation in many of our systems,” Ariff says.

Former Bank Negara adviser Tunku Abdul Aziz Ibrahim concurs. He argues: “To the outsiders, it is an unfair system. They do not understand why we are discriminating our own community. So, such impediments should be dismantled gradually.”

Already, Malaysia is facing tough competition from other countries that have been moving up the ranks of competitiveness. These countries, on top of offering more attractive incentives for investors, tend to have bigger domestic markets. Standing out as favourites among investors are China, India, Indonesia and Vietnam.

According to the United Nations Conference on Trade and Development, Malaysia accounted for only 2.6% of the total FDI inflows to developing Asia in 2007, compared with around 8% in the mid-1990s and more than 10% in the 1980s.

Mahani thinks Malaysia can respond to the growing challenge from the regional countries, particularly China, by looking at how it can tap into the benefits of their rise.

“We cannot counter their rise, but we can find ways to grow along with them. For instance, we can strategise towards supplying products and services to meet their rising demand, or we can add value to what they are producing in their countries,” she explains.

Tax system

Meanwhile, some economists have been arguing that a new tax scheme is necessary for Malaysia to reduce its dependence on oil revenue, which accounted for 44% of the Government’s total revenues in 2008. Oil revenue, as we know it, is volatile and fluctuates according to global crude oil prices.

A new tax system is also necessary to counter the country’s growing fiscal deficit, which is expected to be at 7.6% of GDP this year, compared with 4.8% in 2008.

Ariff sees the risk of the country’s fiscal deficit exceeding the official estimate this year, and touching 10% next year. This could have a negative implication for the country’s sovereign ratings and the ringgit.

So, to counter the declining trend of Government revenue, while its expenditure is rising, Ariff says it is necessary to overhaul the country’s tax system to ensure a more sustainable stream of revenue.

“We need to move away from corporation and personal income taxes, and gradually build a tax scheme that leans towards consumption and expenditure based,” he argues, adding that corporation and personal income taxes can be incentives to boost investment and employment in the country. — By CECILIA KOK

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