Tuesday, March 23, 2010

Creating a level playing field

By Ding Jo-Ann

(Silhouettes by mzacha / sxc.hu)

PRIME Minister Datuk Seri Najib Razak is all set to role out a new economic model for growth in Malaysia. The indications are that the subsidy regime and price controls will be abolished once the new economic model is in place. This would be in line with Najib's other efforts to promote competition and achieve "high-income" status. In April 2009, for example, the government abolished bumiputera quotas for 27 service sub-sectors. Two months later, it scrapped the 30% bumiputera equity ownership requirement in public listed companies.

These economic reforms, however, have rung alarm bells in certain quarters, who believe the reforms signal an end to preferential treatment for bumiputera established under the New Economic Policy. Member of Parliament Datuk Ibrahim Ali, for example, told Malaysiakini that Malay Malaysians were still "amateurs" compared to the premier-league Chinese Malaysian community. Therefore, according to Ibrahim, subsidies and government assistance for Malay Malaysians should continue until they have caught up.

But are Ibrahim's assumptions correct? Are all Malay Malaysians still lagging behind their fellow citizens economically? And is the continuing of subsidies the best way to help those who have less opportunities to improve their economic status?

With a limping worldwide economy, widening budget deficit, and increasing competition from our Asian neighbours, can Malaysia even afford to continue distorting the market economy through ethnicity-determined government handouts?

Learning to compete

Universiti Kebangsaan Malaysia economist Professor Dr Ragayah Mat Zin, who is with the Institute of Malaysian and International Studies (Ikmas), disagrees with the assertion that Malay Malaysians are not ready to compete. "Not all Malay [Malaysians] are poor," she says. "That's the problem. Whenever we talk about subsidies for Malay [Malaysians], whether it's scholarships or affirmative action, it's not the poor Malay [Malaysians] who benefit, it's more often the rich ones.

"We should 'give fish' only to those who cannot fish. For those who can, they must be made to fish. They cannot sit back and wait for government handouts. If we don't work for it, we'll not be able to improve and become a high-income nation," she says in a phone interview.

Denison Jayasooria
"We have to learn to compete," says Datuk Dr Jenison Jayasooria, principal research fellow at UKM's Institute of Ethnic Studies. He says that opposing liberalisation would only disadvantage Malay Malaysians. "If people really want Malay [Malaysians] to benefit, they need to help them build capacity and empower them to face competition in the open market. Don't assist them by isolating them."

Competing worldwide

Denison points out that the "enemy" is not within the country. "It is outside," he says, noting that Malaysia is already finding it difficult to compete with countries like Indonesia and Thailand, more so with bigger economies like China and India.

He argues that while the government can control the distribution of resources within the country, foreign investments are not beholden in any way, and will move on if our economy is no longer competitive. "Then what do we do?" he asks. "We have to enable positive competition. If not, we're going to see negative growth."

Ratings Agency Malaysia chief economist Dr Yeah Kim Leng agrees, saying we should no longer be fixated on distributing economic wealth within the country. "Instead, we should concentrate on attracting businesses through good government policies and regulations. This would help create jobs, enhance employees' skills, and result in positive spillover effects to suppliers and service providers. Only through growth and empowerment can we have sustainable distribution.

(Pic by juliaf / sxc.hu)
"By focusing on [internal] distribution, we may actually be missing the point and killing the goose that laid the golden egg," argues Yeah. "If the government sets the wrong rules, businesses and capital will migrate. The government must ensure we have an economy that is dynamic and continues to sustain growth and create jobs."

Benefiting the poor

Yeah adds that promoting market forces helps to bring out the best in people, so that every person's potential can be maximised. However, he says, enhancing greater market efficiency is not incompatible with assisting the poor and disadvantaged.

"Economics is not heartless. While we promote market forces and efficiency, we note that there are different inherent abilities and endowments.

"So there is a place for affirmative policies for the needy and disadvantaged. This is widely practised [worldwide], mainly to assist minorities and disadvantaged groups who do not have equal access to opportunities."

Ragayah, whose research interests include development economics and income distribution, says international statistics show that liberalisation is actually good for the poor. "When demand is stimulated, there is a multiplier effect which will benefit everyone. This will actually lift the income of the absolute poor," she says, adding that the poor would also benefit from cheaper imported goods.

Liberalisation would also lead to increased production in areas where Malaysia has a comparative advantage, she notes. This would lead to a more efficient use of resources, hence making us more attractive as an investments destination.

She says helping the poor doesn't necessarily mean implementing subsidies that distort the market, which is ultimately expensive and unsustainable. "In Malaysia, we subsidise everybody, the rich and the poor. Subsidies [for items such as toll and petrol] in fact tend to benefit the rich more than the poor, because they consume more."

Ragayah says that as the population increases, paying out huge subsidies is not sustainable and would be counter-productive. She says the government needs to target assistance at the poor, otherwise government expenditure would balloon. "We should just target the poor, regardless of ethnicity. If there is marginalisation, then affirmative action is needed."

She adds that the government should assist groups, such as poor farmers, to compete by helping them be more efficient in production and take advantage of the increased opportunities provided by liberalisation.

Indeed, liberalisation will not result in opportunities lessening, says Denison, who adds that the only people who should fear liberalisation are those who are unable to run businesses competently.

courtesy of Nut Graph

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