Thursday, December 10, 2009

Malaysia Should Learn From Past Economic Lessons

TEN years ago, as the Asian financial crisis was wreaking havoc and countries in the region were engaged in some serious economic firefighting, I had a heated discussion with my fellow journalists discussing the once-in-a-generation turmoil before us.

There was considerable pride in how we tackled the crisis compared with other countries which were in worse financial shape and badly hit by the ensuing trail of economic problems. The conversation eventually reached the all-too-familiar “at least we are better than them” comment.

But here’s the thing. It is pointless to compare Malaysia with countries that are worse off. Progress should be measured against what we hope to become. In other words, we ought to compare Malaysia with countries that are better off than us.

Fast forward 10 years (today) and the self-glorifying comment above seems far less realistic.

Thailand and Indonesia, the two countries that the journos were comparing Malaysia with then, paid a tremendous social cost from the International Monetary Fund aid package which was accompanied by a market liberalisation agenda; but they have rebounded strongly.

For Malaysia, failure to vigorously improve the economy through market and economic liberalisation initiatives in the aftermath of the Asian crisis is rearing its cost today.

The Government has signalled it will act but what is likely forcing its hand in this matter could be the decline of the private sector’s role in the economy today.

Prior to the Asian crisis, the country’s ratio of gross domestic capital formation as a percentage of GDP was over 40%, hitting 43% in 1997 compared with 34% for Thailand and 32% for Indonesia. Right after the crisis in 1998, the ratios for all three countries plunged with Thailand and Indonesia falling much more than Malaysia.

But over the years, gross domestic capital formation as a percentage of GDP for those two countries started to rise but in Malaysia, that ratio has steadily fallen; in 2008, it was just below 20% whereas in Thailand it was 29% from a low of 20.5% in 1999 and 28% for Indonesia from a low of 11% in 1999.

Over that time, the Government has repeatedly declared that the private sector will resume its role as the engine of growth, much like it was prior to the crisis, but that has not materialised.
With falling private sector investment in Malaysia, the Government has had to shoulder much of the burden of generating economic growth.

There were times, both politically and economically, Malaysia could have instituted change that would have addressed that decline much sooner as the cost of supporting growth has become too large solely for the Government to be burdened with.

Being the engine of growth is a task the Government cannot continue indefinitely, given the already huge strain it has put on the national accounts by virtue of the repeated budget deficits since the Asian crisis.

Knowing this, there is seemingly a rush by the current administration to eradicate the malaise afflicting the economy and to get private sector to take over the reins of the economy.

It intends to lift the lid on the economy by revamping the NEP to bring about much needed entrepreneurship into the economy. The administration is also trying to figure out how best to reverse the perception or reality that the private sector is being crowded out of the economy in favour of government-linked companies. Subsidies are also in the crosshairs of the Government.

To tackle this, the Government is preparing a new economic model to get the services industry to invest more in the economy with the intention of moving the country’s per capita income up to the range of that of a high income economy.

All of that can only be accomplished if it manages to convince businesses to invest more in the economy. Companies today have more choices as to where to invest their money today than they did in the early to mid-1990s.

There is a lot of competition for investment money not only from our neighbours but also from the larger BRIC (Brazil, Russia, India and China) nations and emerging markets in Europe.

The Government has to position Malaysia, more so for local companies, as the destination of choice for businesses and come up with policies that will reverse the worrisome decline in private investment in the country.

Such a task is monumental and whether Malaysia will succeed is unknown as history has taught us that getting an economy out of the middle income range is extremely difficult to accomplish.
But try they must. There’s no time to waste.

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