What is new in Malaysia’s New Economic Model?


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Malaysia's New Economic Model proposes a number of strategic reforms.

Prime Minister Najib has announced the broad outline of the proposed New Economic Model (NEM) at the Invest Malaysia conference.

The objective of the NEM is for Malaysia to join the ranks of the high-income economies, but not at all costs. The growth process needs to be both inclusive and sustainable. Inclusive growth enables the benefits to be broadly shared across all communities. Sustainable growth augments the wealth of current generations in a way that does not come at the expense of future generations.

A number of strategic reform initiatives have been proposed. These are aimed at greater private initiative, better skills, more competition, a leaner public sector, pro-growth affirmative action, a better knowledge base and infrastructure, the selective promotion of sectors, and environmental as well as fiscal sustainability.

The next step of the process will be a public consultation to gather feedback on the key principles and afterwards the key recommendations will be translated into actionable policies.

The NEM represents a shift of emphasis in several dimensions:

  • Refocusing from quantity to quality-driven growth. Mere accumulation of capital and labor quantities is insufficient for sustained long-term growth. To boost productivity, Malaysia needs to refocus on quality investment in physical and human capital.
  • Relying more on private sector initiative. This involves rolling back the government’s presence in some areas, promoting competition and exposing all commercial activities (including that of GLCs) to the same rules of the game.
  • Making decisions bottom-up rather than top-down. Bottom-up approaches involve decentralized and participative processes that rest on local autonomy and accountability —often a source of healthy competition at the subnational level, as China’s case illustrates.
  • Allowing for unbalanced regional growth. Growth accelerates if economic activity is geographically concentrated rather than spread out. Malaysia needs to promote clustered growth, but also ensure good connectivity between where people live and work.
  • Providing selective, smart incentives. Transformation of industrial policies into smart innovation and technology policies will enable Malaysia to concentrate scarce public resources on activities that are most likely to catalyze value.
  • Reorienting horizons towards emerging markets. Malaysia can take advantage of emerging market growth by leveraging on its diverse workforce and by strengthening linkages with Asia and the Middle East.
  • Welcoming foreign talent including the diaspora. As Malaysia improves the pool of talent domestically, foreign skilled labor can fill the gap in the meantime. Foreign talent does not substract from local opportunities--on the contrary, it generates positive spill-over effects to the benefit of everyone.


Overall, the New Economic Model demonstrates the clear recognition that Malaysia needs to introduce deep-reaching structural reforms to boost growth. The proposed measures represent a significant and welcome step in this direction. What will matter most now is the translation of proposed principles into actionable policies and the strong and multi-year commitment to implement them.



Join the Conversation

Greg Lopez
June 05, 2010

Good day Philip,

As you may have been following, Najib's strongest opposition is coming from PERKASA, a right wing Malay group.

Najib will need advice on how to neutralise PERKASA and the vested interests that are hiding behind PERKASA.

Would it be useful for WB to proide Malaysia with actual case studies on how other countries have neutralised opposition to reform.

I would recommend the following:

1. Request NEAC to formally collect the various opposition to the NEM. Then a group can categorise the opposition based on type. I assume it would generally fall into two categories - (i) based on genuine concern and (ii) smoke-screen to hide vested interests.

This should be publisiced so that Malaysians can view the position of different groups transparently.

2. Formulate adequate response to the stated oppostion publicly.

This allows for better quality debate.

As example, most Malays (bumiputera) and poor Malaysians are concerned about employment opportunities going to foreigners.

A government commitment to equalise wages between local and migrants among those with the same skill will encourage employers to hire more Malaysians.

By allowing trade unions to be formed, workers welfare will be protected. Firms that are not competitive can than either choose to relocate overseas (to cheaper locations) or improve productivity through technology.

A strategy such as the above will allow Najib to out flank the emotive but baseless arguments provided by PERKASA who are riding on genuine fears of poor Malays/bumiputeras.

The WB in collaboration with different academic institutions and think tanks can provide a broad based intellectual argument against the likes of PERKASA.

Philip Schellekens
June 16, 2010

Thanks for your comment, Greg. It is certainly our aim to provide the best possible advice. But what good is even the best possible advice if it is not implementable? So agreed that any strategy also needs to incorporate features that facilitate implementation.

Some further thoughts on this:

International best practices - as often propagated by places like the World Bank - offer common principles that may be useful in various settings, but in the end implementation will need to be heterodox. Helicoptering in external advice without regard to local circumstances generally doesn't work and may lead to paper reforms that copy the form but don't accomplish the function.

It helps to zoom in on the few critical binding constraints to growth rather than trying to implement an endless list of reforms. Prioritization on reforms that deliver the best bang for buck ensures that scarce political capital is spent wisely -- else reform fatigue may set in quickly.

Proper sequencing of reforms may help alleviate transition costs and hence opposition to reform. For example, ensuring a pro-growth safety net is in place will assist with the implementation of competition policy and labor market reforms.

Experimentation and experiential learning are key to ensure that early success, where demonstrated, can be amplified and failures can be corrected early on. Bottom-up feedback throughout the process of reform implementation can make a big difference to outcomes in this way.

Greg Lopez
June 25, 2010

Thanks Phil,

Your points noted and agreed.

In Australia, the Productivity Commission comes out with "facts/evidence based studies" which the legislators (politicians) take seriously and use as debates in Parliament and policymakers use in formulating policies.

This is absent in Malaysia. There is a lack of "independent" institutions capable of providing "facts/evidence based studies". The WB reports meet this end but unfortunately the politicians are not taking it up (as you noted - not implementable).

What is most interesting is that the Malay rights group have not come up with their own studies to support their arguments.

Is there a strategy that can be ustilised to bring differing groups to the table and discuss based on facts/evidence?

Put more simply - is there a way to define the "national interest"