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The winds of change are blowing in Malaysia

Philip Schellekens's picture

The winds of change are blowing in Malaysia, as the government is taking on an ambitious agenda of structural reform. The objective is to climb up the income ladder and join the league of high-income economies. This is a difficult challenge – one which not many countries have successfully met in the post-war period.

Against this backdrop, the World Bank’s launch of a new report on the Malaysian economy (full disclosure: I lead the team who authors the report) is timely. The Malaysia Economic Monitor, which will be published twice a year, aims to provide context to the challenges facing Malaysia and serves as a platform for discussion and the sharing of knowledge.

Knowledge-sharing is a requisite for the innovation- and knowledge-dependent economy which Malaysia aspires to develop. In this spirit, the Malaysia Economic Monitor is accompanied with a major outreach effort to policymakers, private sector leaders, market participants, civil society, think tanks and journalists.

What in a nutshell are some of the key findings of our report?

One finding is that the recent crisis was to some extent a distraction from Malaysia’s fundamental challenges. Yes, Malaysia was hard hit in terms of headline GDP figures and yes, the fiscal deficit rose to levels that raised investor concern. But Malaysia was spared the financial impact of the crisis that crippled advanced economies and the crisis remained very much a manufacturing-for-exports crisis with only moderate spillovers to the rest of the real economy. The fiscal deficit is also much lower when looking beyond headline numbers and including the entire public sector.

Malaysia’s fundamental challenge – simply put – is the need to revitalize the dynamism of its economy. Epitomizing this challenge is the anemic performance of private investment, which fell with the Asian crisis from 30 percent to some 10 percent of GDP and – unlike other countries in the East Asia and Pacific region – remained at that level and never recovered. The flipside of this is the large current account surplus, which indicates that the Malaysian private sector is voting with its feet.

National savings have increasingly gone to finance opportunities abroad, which by revealed preference seem to attract greater returns. Looking ahead, with the emergence of China and India on the global stage, this trend is unlikely to be reversed. In addition, as the global economy rebalances, competition for export market share and foreign direct investment will likely intensify. These external factors make it all the more necessary for Malaysia to revitalize the dynamism of its economy, so that national savings can find their way back into the country.

Revitalizing the dynamism of the economy boils down to, among other things, energizing the role of the private sector, building an internally competitive economy (which is different from ensuring external competitiveness), and making sure that along the way no one is left behind. To put these general thoughts into practice, our report recommends a four-pillar strategy that rests on greater specialization of the economy, better education and skills formation, effective and well-targeted social safety nets and insurance programs, and solid public finance. The report contains ample details on each of these suggestions.

But let me say no more and, much in the  spirit of the purpose of this report, ask for your perspectives about the challenges and opportunities facing Malaysia. Focusing on the all-important million-ringgit question, what do you think it will take for Malaysia to make the next step up the income ladder?

Comments

Submitted by Anonymous on
The Malaysian economy will fall shortly.There is no way that this country will be able to move up the ladder.I forcast that there will be religious and racial disturbances soon.Institutions that were meant to protect the citizens have been taken over by a government who has lost credibility.Malaysia is failing fast in my view! I wont want to invest in that country-another Zimbabwe with the Chinese moving their money out of the country and high immigration!

Dear Mr. Philip Schellekens, Thanks for your blog posting. As you may know, it did make quite a lot of news over here in Malaysia, but its always good to get the full context of what you said. Warm Regards Wenger J Khairy

Submitted by Greg Lopez on
Thank you Dr. Schellekens, Your report and an earlier analysis by Yusuf and Nabeshima (2009) confirm what many other economist and even ordinary Malaysians know - we're (I'm a Malaysian) not living up to our potential - the need to revitalize the dynamism of its economy as your report puts it. However, your report and many other institutional commentators do not identify the key bottleneck - which is Malaysia's political structure. In order to maintain political dominance but often crouched as infant industry argument - the government has has dominated vast segments of the national economy. The national interest is defined narrowly focusing on maintaining political dominance and not national competitiveness. I know that the Malaysian government would not have supported this report if it was critical of the Malaysian political system - but I do hope that privately, you and your team have pointed this out to them. My points are further elaborated in the following article: http://asiapacific.anu.edu.au/newmandala/2009/11/19/malaysia%E2%80%99s-economic-future/

Your reflections are greatly appreciated. As our report argues in some detail, progress on the structural reform front holds the key to Malaysia’s medium-term growth prospects. The breadth, depth and speed with which structural reforms are implemented will in no small way determine Malaysia’s growth performance for the years to come. The pathways to a high-income economy will of course be fashioned by political considerations about what is feasible and what is not, but overshadowing these are new economic realities that are posing a tremendous challenge - and opportunity. The external environment has changed significantly and continues to change rapidly. Export and FDI competition has picked up dramatically and is likely to intensify as the world economy completes its adjustment. Meanwhile, countries in the region are moving up the value chain and encompassing ever-greater chunks of the regional supply chain. The new economic realities are likely an important driver of Malaysia's reform momentum, as the fall-back option of the status quo may afford limited breathing space. It is also in this context that the formulation of the New Economic Model can be placed, as a way to seize the opportunity to reposition the Malaysian economy for growth.

Submitted by Greg Lopez on
Dear Sir, Your report, and many other reports since the early 90s have indicated that Malaysia will need to undertake structural reforms (especially moving away from low wage labour intensive industries). I realise that a key problem in Malaysia is the policymaking process. Under the Mahathir regime, the Westminster style of accountability (i.e. civil servants accountable to Minister's and Minister's accountable to Parliament and Parliament accountable to the people) has been severely undermined. Policymaking is now a function of kitchen cabinet of a limited individuals within the United Malay National Organisation. You noted that the winds of change are blowing. Within this context can the WB play a role to improve the quality of policy making (especially transparency, accountability and inclusiveness) in Malaysia?

Submitted by Anonymous on
How can a country move forward when the basic structure of the country is faulty.Why do economists only address the problem academically.Everything you say will go out of the window if the Malaysian government to stay in power decides that Islamic law previals over British Common and Civil Law.ost of the land in Malaysia belongs to the Malays ( Malay Reserve Land), the Institutions are filled with only one race with no oversight leading to inefficiency and corruption.There is a strong resentment by all races-Malays, Chinese and Indians that a certain group of people ( Bumiputras, Elite Malay and Royalty) are in control of the government-AND all economic plans/policies are made for their benefit.There is a class war, a religios war among the Malays. There is an new young Muslim group that wants and demands change but to be pinned donw by the Government to prevent any democractic change.When teh whole staructre in Malaysia is so faulty with the essential point about who is a citizen still in question-all what you say is academic/conjecture.There will be no progress until Malaysia recognizes that "All Malaysians are Equal".

Submitted by Greg Lopez on
Dear Anonymous, Pardon for the later reply. You are absolutely correct. However, different individuals and organisations work within different spheres of influence. The World Bank as an inter-governmental organisation can only assist a country if the country allows it. Malaysia has a long tradition of working with INGOs that are supportive of the official line. However, even within these context, the WB can do something - as this report points out to the world - how weak our economic footing is. As for recognising that all Malaysians are equal - this is something that Malaysians must collectively do. Regards Greg

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