FEER Prognosis on 9MP-AN IMPERFECT PLAN; MALAYSIA WHICH WAY? Mind the MINDSET GAP; IMPLEMENTATION; NO More HEADY GROWTH

It looks bad as Malaysia faces real long-term challenges and in some quarters there is a feeling that “doom is on the horizon. and it is time for new ideas and fresh approaches.”

Read on the insightful analysis.

From The Far Eastern Economic Review; Issue July/August 2006

Abdullah’s Imperfect Plan By Colum Murphy

The recent mudslinging by former Prime Minister Mahathir Mohamad at his successor Abdullah Ahmad Badawi has enthralled Malaysia almost as much as the 2006 World Cup. Not since he dumped his former protégé, Anwar Ibrahim, has Mr. Mahathir’s vitriol been so potent.

Mr. Mahathir has accused Mr. Abdullah of incompetence and “stabbing him in the back” by halting some of the large projects begun when he was leader, including the plan to replace the causeway linking Malaysia to Singapore.

At stake is more than hurt feelings. Mr. Mahathir and his cronies are not happy with Mr. Abdullah’s approach to overhauling the Malaysian economy. In March, Mr. Abdullah announced the first installment of his blueprint—the $60 billion Ninth Malaysia Plan, or 9MP, which covers the five-year period 2006-10—aimed at keeping Malaysia on track to
achieve its much touted goal of becoming a developed country by the year 2020. While the goal is consistent with the “Vision 2020” slogan coined by Mr. Mahathir, there are some notable differences in Mr. Abdullah’s approach.

Gone are the graft-prone giant infrastructure projects of the 1980s and 1990s, and in their place the government is investing in human capital. This shift to a “people focus” is an attempt to ensure that Malaysians have the skills and attitudes needed in a global economy.

In a further break with the past, the Abdullah administration is also showing a greater willingness to liberalize Malaysia’s economy: An economic partnership agreement with Japan will go into effect later this month, and trade negotiations with the U.S. are already underway and are expected to result in a free trade agreement by early 2007. Consolidation of the banking sector is also ongoing, and new rules allow for higher foreign ownership in banks. Reform of government-linked companies such as the energy provider Tenaga and communications company Telekom is under way.

Not that all trademark elements of meddling in the Malaysian economy are being jettisoned. Khazanah, the government’s investment arm, is becoming more ambitious, investing in strategic assets both at home and overseas. Mr. Abdullah still clings to affirmative action for the mainly Malay bumiputra. The blueprint reiterates the goal of putting 30% of Malaysian equity in bumiputra hands by 2020.

Malaysia, Which Way?

Malaysia faces real long-term challenges. The economy grew by a respectable 5.3% in 2005, according to the country’s central bank, but that’s considerably lower than the average 8% growth rates of the mid-1990s. Mohamed Ariff, executive director of the Malaysian Economic Research Institute, an independent think tank that acts as consultant to the government on industrial policy, says the days of heady growth are over and it is time for new ideas and fresh approaches.

As elsewhere in the region, change is being driven by globalization, mainly in the form of a rising China. For now, Malaysia is benefiting from China’s explosive growth by feeding mainland factories raw materials and components. China is now Malaysia’s fourth most important trade partner after the U.S., Singapore and Japan, and last
year bilateral trade between the two countries was 85.1 billion ringgit, or around $23 billion. This is expected to more than double by 2010.

In the long term, Malaysia has little hope of competing with China, at least in lower wage manufacturing. And even if Malaysia moves up the value chain in manufacturing, Mr. Ariff says, that will only stave off the inevitable. “It will take 10 to 15 years, but eventually China is going to catch up,” he says. The challenge is for Malaysia to find new growth areas, and build an economy that is not on a “collision course” with China. This includes reducing dependency on manufacturing to 20% to 25% of GDP within 15 years, from the current level of around 32%. Services should increase to around 65% from 58% in the same period, says Mr. Ariff.

The 9MP, and the related Third Industrial Master Plan (IMP3, expected to be released shortly), are supposed to help by pushing high-technology, knowledge-intensive activities with high value-added content in areas like electronics, petrochemicals, biotechnology,
aerospace and maritime, according to Senator Effendi Norwawi, the minister in the prime minister’s department responsible for the 9MP. On services, the goal is to spread the sector out from its traditional base in greater Kuala Lumpur, with Johor being eyed as a regional services hub. In particular, tourism, health services, financial services and education will be targeted for growth, the senator says. For the first time in a long time, a strong focus will be placed on developing agriculture and related industries.

In Penang, the China threat has been around for years. That’s hardly surprising, given that around a quarter of a million Penangites—out of a population of 1.3 million—are employed in the cutthroat electronics sector, in which China’s profile increases with each passing year. While defections to China are occurring, the sector still seems reasonably healthy. Even so, there is a feeling that doom is on the horizon and moving up the value chain has become a mantra.

Wong Siew Hai, the retired head of Intel in Penang and current chair of the Malaysian American Electronics Industry association, explains: “In the past, 60% of these jobs were direct labor and 40% were indirect labor such as engineering, planning and human resources.” The aim is to reverse those figures, he says. Mr. Wong believes Penang’s
electronics industry must concentrate more on R&D, marketing, and product design for semiconductors, microelectronics and software development.

But first, Malaysia needs highly skilled graduates. Currently, there are a reported 60,000 Malaysian university graduates who are seeking work, largely because of a mismatch between university curricula and employer needs. In the case of the electronics industry, for example, Mr. Wong says there are only one or two universities in the whole of Malaysia that have graduate-level programs in new technologies such as semiconductor design.

Mind the Mindset Gap

It is precisely these gaps that Mr. Abdullah hopes to fill under 9MP. He warns against having a first-class physical infrastructure with a third-class mentality. The goal is a labor force that has the ability and attitude to excel in a globalized world. It sounds a bit nebulous, but a first step is to pour money into revamping the education system—no less than 40 billion ringgit, or roughly 20% of the total 9MP expenditures, is earmarked for this.

It would be hard to find fault with greater investment in education as long the money is spent properly and the goals are achieved. But throwing money at universities is not going to be enough. In a globalized world, knowledge workers also need the right attitudes: flexibility, tolerance, and the ubiquitous ability to “think outside the box”—attitudes, some say, that are sorely lacking among Malaysians. It is for this reason that Mr. Abdullah’s plan hopes to instill “progressive attitudes and thinking, strong moral and ethical values” in its citizens—all under the auspices of Islam Hadhari, or Civilizational Islam, a development framework that “emphasize[s] faith and piety, a just and trustworthy government, and balanced, comprehensive economic development.”

The introduction of such abstract concepts in an economic plan has left many observers bewildered. In Mr. Mahathir’s time, it was easy to understand what was going on—Malaysia was building a lot of really big things. Mr. Abdullah, however, is leaving himself wide open to criticism because attitudinal changes are not only hard to achieve but hard to measure.

There are several possible explanations put forward for Mr. Abdullah’s insistence on including such high-concept ideas in his plan. One school of thought says that this is just rhetoric meant to soothe those who lament the loss of Malaysia’s Islamic soul. The second school says the concepts are clues to Mr. Abdullah’s underlying intentions. Said one economics professor at a public university in Penang: “What makes the 9MP plan especially challenging is how to get people to read between the lines.”

But divining Mr. Abdullah’s intentions is not easy. One big focus of the plan is “integrity,” a clear a nod to the government’s anticorruption drive. But grasping his true intentions on the thorny issue of affirmative action is trickier.

On the one hand, the plan clearly states that “during the Ninth Plan Period, the distributional agenda will be pursued more firmly so as to ensure the achievement of a more equitable distribution of the benefits of economic development by all Malaysians.” The plan also brings back the controversial issue of bumiputra equity ownership after it mercifully faded into the background over the past few years. The goals have now been restated unequivocally: Bumiputras should hold between 20% to 25% of Malaysian equity by 2010, and 30% by 2020. The figure was around 18% in 2004 but realistic figures on equity holdings are notoriously hard to find. Similarly, the government wants to increase bumiputra ownership of residential, commercial and intellectual property.

In addition, the government also wants to reduce income disparity between bumiputra and nonbumiputra ethnic groups. Chinese Malaysians, for instance, typically had incomes 64% higher than bumiputras in 2004; the 9MP wants that reduced to 50% by 2010. With huge chunks of the Malay community unable to join the middle class, income disparities between “have Malays” and the “have-not Malays” is also a concern, albeit one that, for obvious reasons, politicians would prefer to play down.

There is a fundamental contradiction here. Mr. Abdullah wants to create a more competitive Malaysia yet he supports strategies that protect the bumiputras. Abdul Razak Baginda, executive director of the Malaysian Strategic Research Center, not only considers the goal of 30% equity ownership as “meaningless,” he is concerned that affirmative action does more harm than good. The initiatives first set down in 1970 have been good for middle-class Malays, he says, but they have also had “the unintended result of Malays losing competitive ethos.”

The government would argue that ensuring equitable income distribution is the only sure-fire way of keeping Malaysia stable and avoiding a return to the times when racial tension erupted into violence. But without economic growth, there can be no redistribution of wealth. If Malaysia turns too readily to affirmative action it runs a risk of creating a workforce that falls down in the face of more competition-driven economies. In short, Malaysia, can’t expect to be competitive in external markets if it is protectionist in the domestic market.

Proponents of “reading between the lines” caution against taking Mr. Abdullah’s bumiputra stance too literally. Instead, they point to the emphasis on morals, ethics and integrity. This, some say, is a subtle hint to segments of the Malay population that might see themselves losing out—letting them know they must fend for themselves if they wish to partake of the benefits of growth. Some interpret the plan as a call to the bumiputras to take greater responsibility for themselves, and say that in a very quiet way the plan offers hope that the government is prepared to, if not abandon, at least tone down
affirmative action.

However, this sounds a lot like wishful thinking, and the main flaw of the plan remains the tension between aspirations to first-world thinking and an unwillingness to take the painful steps to create an open, vibrant and competitive Malaysia. “We keep telling the
government that the space for affirmative action is getting more and more limited,” says Mr. Ariff of MERI. “We can’t do things that we could do in the 1970s and 1980s in the 21st century.”

Mr. Abdullah’s success in office could be harmed by the schizophrenic nature of the plan. On the one hand, the prime minister wants to build a Malaysia that is able to stand on its own feet and meet the challenges of a rising China. On the other hand, he is hanging on to some of the old—and politically popular—ways of protecting the bumiputras.

The Proof is in the Implementation

Even if the tension between change and political inertia could be resolved—and this is unlikely given that abandoning affirmative action would invite political turmoil at the grass-roots—there are a host of other challenges if the plan is to succeed. First, Mr. Abdullah needs to win people over to his vision. The prime minister seems popular and
the tirades from Mr. Mahathir will probably serve him well. Malaysians seem to find the former prime minister’s antics tiresome. However, Mr. Abdullah will not be able to capitalize on the outbursts for long—sooner or later he will need to provide meaningful answers. As it stands, his administration will have to sell his ideas—a task made all the more difficult by the vague, touchy-feely bits in the plan.

Second, Mr. Abdullah needs to cement support from his party, UMNO, by addressing the issues raised by Mr. Mahathir and dispelling rumors that it’s only a matter of time before Mr. Abdullah is replaced. Third, the civil service has the potential to make or break any plan to overhaul the economy. With a shift to investment in people, many wonder if the government and its civil service will even know where to start. Anticipating such claims, a substantial part of the 9MP is devoted to addressing “public-service delivery” issues.

For Mr. Razak of MSRC, timing is of utmost importance. “If after one year of the 9MP there’s no change, then it’s time to do something drastic,” he says. But he is unsure that Mr. Abdullah can pull it off. “[Mr.] Abdullah is a product of the system,” he says. “I am not sure to what extent he can break the mold and think outside of the box.” But having a plan without the proper implementation processes in place would seem to be a classic case of putting the cart before the horse.