At the crossroads

Will the 10th Malaysia Plan put us on track to high income status?

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

ON paper, it seems promising. But will it fall short on execution?

That question may seem like a cynic’s oft-quoted critique, but it resonates with the sentiments of the general Malaysian populace who were over the week given large doses of information on how the Government plans to steer the country towards a high income nation. All of that – and some – were encapsulated in the 420-page 10th Malaysia Plan.

For starters, the broad plan sets a target growth rate of 6% per annum over the span of 2011-2015 to bring the country closer to its aspiration to turn into a high income nation by 2020. The Government will fork out some RM230bil on development, just as it did in the Ninth Malaysia Plan (9MP).

Prime Minister Datuk Seri Najib Tun Razak tabling the 10th Malaysia Plan in parliament on Wednesday.

 

Essentially, it echoes the salient targets of the New Economic Model that was revealed in March as well as transformation efforts under the Government’s Transformation Programme.

Views seem mixed; while some economists opine that the growth target may be ambitious, others say it’s achievable but the Government needs to pull out all the stops to get there.

“10MP makes the right soundbytes,” says Maybank IB Research. But “the market wants to see action,” says Citigroup, referring to past delays and false starts in project and policy implementation.

The main approach

A higher sum of money will be devoted to soft infrastructure (40%) such as skills training and human capital development in contrast to hard infrastructure (60%) such as roads, power stations and ports. That marks a shift from the past plans and is very much in keeping with the main thrust of the 10MP – change.

Second Finance Minister Tan Sri Nor Mohamed Yakcop elaborates: “The world has changed and countries have become more liberalised and we have to get the 10MP right to get to Vision 2020. We want to be driven by productivity and innovation and no longer by factor accumulation.’’

Tan Sri Nor Mohamed Yakcop ... ‘Progress is going to come from skills.’

 

No doubt. There’s wide room for improvement in this area. The number of people getting technical and vocational knowledge in more developed nations far outweighs those in Malaysia. Toss in the fact that presently, over 77% of secondary school leavers are entering the workforce armed with merely SPM qualification and the push to get this plan on high gear becomes imperative.

“We don’t need more brick and mortar. Progress is going to come from skills and now is the time to do it,’’ says Nor Mohamed.

The plan further expounds the Government’s repeated calls for the private sector to take the driver’s seat to build the economy. Towards this end, the Government is looking for businesses to invest some RM115bil a year to achieve a growth rate of 12.8% per year in private investment as opposed to a paltry 2% in the 9MP.

In line with this, the Government will gradually scale back its pump priming strategy whereby in 2015, it intends to slash the deficit to 2.8% of GDP from a projected 5.3% in 2010.

Apart from the ambitious target of private investments to pick up speed dramatically, the plan also sees household spending growing by 7.7% per annum, much more than it has been. There are concerns if this can happen given the debt levels of households.

Do people have the appetite to take on more debt? Is it wise to expect a rising spend policy when subsidies are expected to be slashed leading to higher inflation?

Aspiration vs achievement

Some will argue that the plan repackaged many of the previous objectives. One example is efforts to improve human capital levels which have been spelt out in the past.

“We need a transformation in the planning approach. There must be a major change,’’ says economist Datuk Dr Zainal Aznam Yusof.

He argues that economies are getting lighter on their feet and reacting faster than they did 40 or 50 years ago.
“It must be beyond a rolling plan and there must be continuous planning and we should not wait for the mid-term review to change things,’’ he says.

A more nimble approach in planning is painfully obvious based on the aspirations of the past five-year plans and its actual achievements.

The past 10 years has seen Malaysia traverse a bumpy path – two recessions and a world that has grown smaller on the back of globalisation which also makes it more vulnerable to external factors. Understandably, it would be difficult to take into consideration economic cycles when formulating policies as rarely, downside risks are taken into account when setting targets.

Suffice to say that many key indicators set have not met their mark not just in the 9MP, but also in the previous two plans.]

In fact, among the major economic targets contained in the 9MP, the only one that was met was inflation.
In comparison, key targets such as GDP growth, private investment, exports and consumption, both public and private, were pleasantly surpassed in the Fifth and Sixth Malaysia Plans. Noteworthy is that these two plans – between 1986 and 1995 – were unveiled when Malaysia was being transformed into a manufacturing-led economy and when foreign investors viewed Malaysia as a darling investment destination in Asia.

On the other hand, the last three plans coincided with the Asian Financial Crisis and the financial sector crisis in the United States and Europe that plunged the world into a recession. But analysts say the culprits could also be private sector withdrawal and weak implementation.

The private path

A central feature of the 10MP is to crank up private spending but as history has proven, that is no walk in the park.

“The private sector has lost dynamism, with private investment languishing due to external and internal constraints,’’ says CIMB Research head of economics Lee Heng Guie in a recent report.
The constraints include the weak government bureaucracy where approvals take far too long and that the private sector is being crowded out by government linked companies (GLCs).

Zainal says that to have more effective implementation, what is needed is a more realistic and forceful approach, akin to what is being done in Singapore. While consultation and engaging the public on key policies are fine, it ought to be employed with discretion. Otherwise, it could come at a cost. “What you will lose is leadership strength in the timeliness and aggressiveness in implementation,’’ he cautions.

To address the infamous red tape and bureaucracy and government hindrance to private investment, several measures have already been put in motion.

Pemudah and Pemandu are two government agencies that have been entrusted in bringing about on-the-ground change that is needed for Malaysia to remain competitive in the world.

And progress has been made.
Via Pemudah, the time taken for a number of government services have been cut. It now takes three days to start a business compared with 11 previously.

A vast improvement has also been made in registering standard property titles and getting tax refunds but there is a lot more left to be done before the country can meet its aim of breaking into the top 10 in the World Bank’s Doing Business survey where Malaysia was ranked 23rd in the 2010 report.

Improving approval process is one step. Eventually, it still boils down to wooing domestic businesses and foreigners to invest more in the country.

Centre for Public Policy Studies chairman Tan Sri Ramon Navaratnam says it will be difficult for the Government to see private investments grow by 12.8% a year during the duration of the plan.

“How do you do it when there is really nothing attractive enough to attract FDI in a significant quantity and to prevent domestic investments from going abroad to more attractive pastures?’’ he asks.

He feels that unless there is change to the policy of allocating 30% of wealth to just one race, corruption eradicated and a more merit-based and liberal environment promoted, the task is difficult if not impossible.
“There must be a holistic improvement to the environment,’’ he says.

Backing the sector

The concept of the Public Private Partnership would be backed with a RM20bil facilitation fund and this is seen as a major kicker in getting the private sector to open up their wallets.

Nor says the Government would give private companies a grant of up to 10% of the cost of the project.
“The rules are simple and the Government will give a cheque,’’ he says.

The Facilitation Fund is expected to attract private sector investments worth RM200bil during the 10MP.
“If those are government initiated projects, then it is pretty much government driven. But the private sector will bite into the money made available and take advantage of the facilitation fund,’’ says an economist from RHB.

Other measures proposed is a timely focus on SMEs and trying to get their contribution to GDP up to a level enjoyed by other more developed countries. To do so, funding and market access issues would have to be ironed out.

Malaysian Investment Development Authority (Mida) would also be reformed to make it more effective as a one-stop centre in bringing in FDI into the country.

On its part, the Government has proposed to establish a Talent Corp to inject more professionalism and capability into the service.

Even so, at this point, sweet talking the Malaysian diaspora into coming back to Malaysia and keeping the next wave of talent from moving abroad to greener pastures is a mountain of a challenge as the brain drain over the years has built up tremendous momentum.

Much of the same?

The 10MP contained excerpts of what the proposed New Economic Model but not the more controversial changes proposed, such as the doing away with affirmative action and cutting foreign labour, and that took some by surprise.

The current 30% bumiputra equity ownership remains one of the key thrusts of government policy and while the equity number stands, the Government has broadened it to non-financial indicators such as professional employment and real estate ownership.

The Government felt there was a need to transform the bumiputra development agenda to enhance participation among competitive and resilient bumiputra companies.

Such an approach will be based on four key principles – market-friendly, needs-based, merit-based and transparency.

“I am encouraged by some of the announcements and confused by others. Are they going to have quotas for employment and properties?’’ asks Navaratnam.

Whether that would deter foreigners or even domestic investors from investing into the country is up in the air but while the Government spoke about maintaining affirmative action, it also sent a strong signal that it was moving ahead with its international obligations to liberalise more sectors of the economy, especially in the growing and important services sector by 2015.

Liberalisation will bring about more competition and allow companies to benefit and prosper in a more open business atmosphere. In addition, the Government will enact the Competition Act next year.

“That’s a good development but at the moment many people are unaware of what the Competition Act will do,’’ says an analyst.

He feels once the ramifications of the Act is assessed, there could very well be lobbyists who might put pressure on the Government to repeal or change the legislation.

The changes to the bankruptcy law is lauded as it will encourage risk taking among entrepreneurs, which is essential, especially in the high-tech businesses, in building a more dynamic business community.

“Banks will have to be more cautious and they will eventually have to learn to price in such new risk elements,’’ he says.

That, coupled with the removal of distorted price controls and subsidies should help improve the competitiveness of the economy.

The leeway for mistakes is getting slim. There is just 10 short years that stand between now and the time the country achieves its big objective of becoming a high-income nation. Considerable work needs to be done.
CIMB Research sums up the task ahead pretty well.

“If the reform programmes and high-impact projects under the 10MP are properly executed, it will be positive for both the economy and the capital market in the short-to-medium term. But if the reform moves are stalled and implementation of the planned projects and programmes is delayed, it could hamper growth and investment prospects,’’ it says.

The broker says there should be more openness in government expenditure including significant acceleration of enforcement and prosecution for misappropriation and mismanagement of resources within the Government.

It points out that expenditure leakage and wastage is a pervasive problem and has an impact on the overall economy.

“Unless the Government means business, this is our last chance,’’ says Navaratnam.

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