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.

 


Authors

Philip Schellekens

Senior Economic Advisor, World Bank Group

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