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Monday, April 5, 2010

NEM – a steep hill to climb

COMMENT BY STEWART FORBES

WITH the publication of Part 1 of the National Economic Advisory Council’s New Economic Model (NEM) For Malaysia report on March 30, the Prime Minister has committed the country to a fundamental process of change.

Much of the NEM report’s findings are already known and have been debated extensively by both the Government and the private sector.

The falling levels of foreign direct investment (FDI), the relatively poor levels of productivity, the over-dependance on foreign labour and the low levels of expenditure on research and innovation have all been identified. Similarly, the distortions emanating from a low-cost, subsidy-rife economy and some poor perceptions of Malaysia externally are not newly discovered.

Where the NEM report scores, however, is in its bringing together all the disparate elements in our current economic situation and setting out in stark detail the implications for Malaysia if no change is made.

While growth continues, it is fragile, and if the country is to continue to be locked into the so-called “middle-income trap” then not only will we see many nations increase the economic distance between themselves and Malaysia but other, more aggressive developing nations, will overtake us, pushing Malaysia to lower and lower world rankings.

Ultimately, instead of Malaysia gaining “promotion” to the champions league of nations, we could find ourselves “relegated” to division two or even lower.

And here is our dilemma: If Malaysia’s attractiveness as an investment destination deteriorates, then economic activities will decline since we do not have the population base to drive growth solely through domestic consumption. And if economic growth declines then the country cannot afford the incentives and fiscal policies that are necessary to sustain investment attractiveness. Thus, a vicious downward spiral is generated.

Accordingly, as the Government knows well, and has articulated both verbally and now through the comprehensive NEM report, there is no status quo solution – we cannot stand still. Malaysia either accelerates upwards economically or risks a downward spiral and possible stagnation.

Much to applaud

This might seem a dismal picture but just as the issues are identifiable, so too are many of the solutions. From a private sector perspective there is much to be applauded in the honest appraisal presented by the NEAC’s NEM report and many of the solutions proposed will materially improve economic performance. But only if there is a concerted effort to implement change and the will exists to take what in some cases will be difficult decisions.

There is no one “silver bullet” that will fix everything; a range of actions is necessary, some palatable and some less so. But seeking to implement only the popular measures and ignore the unpopular ones is a sure recipe for failure.

From a private sector point of view, therefore, are the outline proposals in the NEM report likely to stimulate business and allow the NEM to emerge? At the core of any success must be business growth, new sources of income generation and increased investment.

While it is not the purpose of these short comments to examine the socio-economic aspects of the NEM, it should be apparent that the laudable goals of poverty eradication, affirmative action programmes in favour of under-privileged groups and a more equitable distribution of wealth cannot take place if there is no wealth to be distributed.

Thus, a move towards a high-income economy with higher value-added business contributing to a significantly stronger gross domestic product (GDP) growth is a mandatory success factor for the NEM and its associated objectives.

The NEM calls for a reinvigoration of the private sector and a return to private sector-led investment levels of the 70s and 80s rather than the Government-led investment scenario that now appears to be the norm.
This is a difficult challenge and a steep climb. Fundamentally, when the details of the implementation of the NEM are revealed over the next few months following consultation with stakeholders, investors will want to see a number of clear indications of commitment to a more conducive business environment. Some of these would include:

● First and foremost evidence that the Government will take the difficult decisions necessary without backtracking. It is inevitable that some reforms not favour certain groups who benefit today from special protected positions. These groups are always the most vociferous in defending their positions.

If the Government allows itself to be browbeaten into reversing reform policies once agreed upon, then the entire structure of NEM will be compromised and sceptical investors will run for cover to business regimes that offer greater certainty;

● Foreign investors must be assured of ownership and management of their business operations. This is more relevant in the context of new high-value industries and services where intellectual capital and IP form a larger element of the business capital than bricks and mortar and machinery.

Growth from tech transfer

While positive steps have already been taken in this direction, all government ministries need to embrace an open, liberalisation agenda so that growth is derived more from technological transfer and the multiplier effects of clustering and new cutting-edge industries, rather than demanding a minority slice out of every pie.

The proposed corporatisation of Malaysian Industrial Development Authority, and its enhanced role in investment promotion, is an important component in a better integrated process of investment identification, negotiation and finalisation;

● The NEM must deliver on the human capital needs of a new economy. This is perhaps the single biggest problem confronting us today and is a real barrier to developing new business, especially in the high-tech arena.

A reduction in over-dependance on foreign labour will spur a greater emphasis on productivity in support of a higher income model.

At the same time, the new technologies and processes associated with the desired new investments demand skills that are in limited supply today. This is ultimately unacceptable to investors; and

● Finally, the total environment surrounding business will need attention under the NEM, the fiscal environment must encourage risk taking and innovation through appropriate incentives and low corporate taxation. Corruption must be a zero tolerance feature of society and personal security must be an automatic assumption of residents’ rights.

The NEM report is a positive and honest appraisal of the current national dilemma and points clearly to desired reforms to advance the nation, both economically and socially. It has raised considerable expectation in the minds of both the people and business. If it fails to deliver through a lack of political will, excessive compromise or prevarication, then the negative impact may be severe.

The private sector has concerns that previous experience suggest deliverables rarely match rhetoric and both domestic and foreign investors will find it difficult to re-energise in terms of expansion or new investment if uncertainty prevails.

The clarity and forthrightness of the NEM report Part 1 make it an exemplary document. It must now be matched with equal clarity and decisiveness in setting out and implementing the action agenda.

We have a steep hill to climb, but the ultimate goal justifies the effort and support by all Malaysians.

The writer is executive director of the Malaysian International Chambers of Commerce and Industry.

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