Tuesday, March 09, 2010

Misplaced priorities in Malaysia

The persistent decline in Malaysia's economic performance since the East Asian financial crisis of 1997/98 and the government's mishandling of the global shocks that preceded the global financial crisis were key reasons for the “political tsunami” that hit Barisan Nasional in the 12th general election in 2008.

azlanTwo years on, the economy remains in the mud due to a sluggish global economy, ineffective stimulus plans and most importantly, the lack of political will to put the economy back on track through bold reforms.

Like many economies in East Asia, Malaysia evaded the direct impact of the sub-prime crisis but was caught in the after-effects - the collapse of its main export markets.

It suffered the worst decline since the regional financial crisis, as the economy contracted by 1.7% last year after recording growth of 6.7% and 4.5 % in 2007 and 2008 respectively.

The country was in recession in the first three quarters of 2009, recovering only in the fourth quarter as the RM67 billion stimuli announced in November 2008 and March 2009 kicked in along with the global economic recovery.

However, any suggestion of a turn-around would be premature as Malaysia's fundamentals are all on a downtrend.

Following the shock outcome of the 2008 general election, then premier Abdullah Ahmad Badawi fought prevent a revolt in Umno as well as Anwar Ibrahim's threat to takeover the federal government through defections of BN members of parliament.

This resulted in a populist RM205 billion Budget 2009 (an increase of 4.4% compared to 2008), geared to please the people in the event of a snap election. This exacerbated the fiscal balance but had little effect as Malaysia's key economic indicators began to deteriorate. It recorded its 12th straight year of deficit spending.

After much criticism for inaction on the global financial crisis, the BN government, with Najib as finance minister, introduced a RM7 billion stimulus package focusing on infrastructure in November 2008. The quantum was criticised as being too small (1% of GDP) and wrongly directed (focused on infrastructure which had long gestation period) to have any significant effect on the economy.

azlanNajib then announced a second stimulus package in March 2009, more as a strategy to strengthen his grip on the economy then to revive it.

At RM60 billion (approximately 9% of GDP), it was unprecedented in Malaysia. This was followed by a RM191 billion Budget 2010 in October.

None of these policy responses focused sufficiently on real problems (such as providing sufficient capital for small- and medium-scale entrepreneurs). These did strengthen the government's role in the economy either, since the Prime Minister's Department and Khazanah received the bulk of the allocation.

The main emphasis was on infrastructure projects and 'goodies' to make the people happy, notwithstanding the impact on the nation. Malaysia's fiscal deficit last year, at 7%, was the highest since 1987.

Fling with minor reforms

Unemployment increased to 4%. While a respectable rate, it masks the real impact of the global financial crisis on workers' welfare. The brunt of the problem is faced by Malaysia's migrant workers - estimated at about 20% of the labour force - who are often repatriated during a crisis and thus do not enter the official numbers.

Furthermore, changes in work arrangements - forced no- pay leave, shorter working hours, and change from permanent to contractual work - hide the real impact on workers.

Inflation reached a record high in 2008 as the government removed costly subsidies and the nation felt the impact of oil price hikes. The people countered, suggesting that BN first resolves corruption before removing subsidies. However, 2009 saw deflation as private sector spending collapsed.

Most interestingly, Najib's first move as premier was to introduce economic reforms to move Malaysia into a high income economy by 2020 (a downgrade from the developed economy envisaged under Vision 2020).

port klang 260209 01He correctly realised that Malaysia's economic problems are structural in nature. Export growth, GDP and income per capita have been declining since the regional financial crisis.

A flurry of announcements ensued, none of which were substantial, in the form of the Government Transformation Programme, NKRA, liberalisation of 27 services and the New Economic Model (NEM), among others.

Najib has since hit a brick wall in the form of the Malay Consultative Council, a coalition of Malay/Muslim opportunists and supremacists who are demanding that the NEM retains affirmative action for Malays, despite the consensus view that this is the main reason for Malaysia's deteriorating fundamentals. The NEM, due to be announced this month, has been postponed to mid-year after the council's protests.

The NEM, which focuses on the services sector, seems to be ill-advised as it is a shift away from Malaysia's backbone of manufacturing and resource-based industries. Najib's attempt to gain quick growth from 'mining' the services sector may lead to unintended effects of neglect, as happened to the agriculture sector under Dr Mahathir Mohamad's push for industrialisation while he was premier.

The NEM target of 5-6% growth remains elusive as drivers of growth such as the global economy remain sluggish. To achieve this, Malaysia will need to be a more efficient producer to both attract investment and remain competitive.

china economy 200404Inward FDI does not show signs of major recovery as Malaysia's reliance on a low-cost strategy is untenable. Malaysia is no longer a key destination for FDIs in the region as Vietnam, China, Indonesia and India are overtaking the country.

Only drastic liberalisation measures like removal of subsidies, affirmative action policies and retreat of government-linked companies - and improving the institutions - will allow Malaysia to return to pre-crisis level growth rates.

The two years since the 2008 general election has seen Najib return to business as usual, after a brief fling with minor reforms. It is also unlikely that the NEM will address the persistent decline in Malaysia's performance, as his attempts to test the waters of reform has have failed spectacularly despite his near-total control of the economy.

This only means that Malaysia will remain in the mud in the foreseeable future.

Written by GREG LOPEZ, who is a postgraduate scholar at the Crawford School of Economics and Government, Australian National University. Courtesy of Malaysiakini

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