Three sound recommendations for Penang to break out of the middle income trap
THINK ASIAN By ANDREW SHENG
EVERY time I open my window, I see paradise – not heaven, but a neon sign for Paradise hotel in Penang island or more precisely, George Town, Pulau Pinang.
Situated at the entrance to the Malacca Straits, directly opposite Kedah Peak, the city was founded by Sir Francis Light in 1786 as the first English bridgehead to East Asia.
Since then, George Town has been a melting pot for Armenians, Arabs, Malays, Indians, Chinese and European travellers passing through the Far East.
At its height at the end of the 19th century, the city boasted the earliest bank branches in the country with key trading ties to Sumatra, Burma, Southern Thailand and Northern Malaya.
Like people and countries, cities have their ups and downs. When I first set eyes on Penang, my first impression was green rice-fields from the airport to a tree-lined city with a lovely, relaxed colonial feel.
George Town boasted the oldest and arguably best schools in the Far East. After duty-free status was removed and Sumatra and Southern Thailand went through a period of relative decline, the Penang economy had to reinvent itself, initially with the electronics industry.
But by the turn of the 21st century, even the electronics industry felt under threat as Penang talent left for richer shores.
What should Penang do?
A recent joint study by the World Bank and Khazanah Nasional Bhd brings forth a timely and well-researched book, “Cities, People and the Economy – a study on Positioning Penang” to discuss how Penang can escape the middle income trap.
Drawing on empirical studies by a team of internationally-renowned researchers, the book examines how the State of Penang needs to re-invent itself.
Having been successful in becoming industrialised through cheap labour, subsidised infrastructure and available land for low-tech manufacturing, Penang must now focus on developing industries which bring new competitiveness against the growing giants of India and China and other middle-income countries that are eating into Penang’s traditional strengths.
The editors of the book comprise three eminent economists who are clearly concerned about the need for Penang to reinvent itself.
Homi Kharas was formerly the chief economist for East Asia for the World Bank and currently at the Brookings Institution and a member of the National Economic Advisory Council.
Dr Albert Zeufack is a Cameroon national, formerly with the World Bank and currently working for Khazanah. Hamdan Majeed is the energetic head of the Penang office of Khazanah and deeply committed to Penang’s revival.
The central thesis of the book is that the three elements of Penang’s growth – its cities, people and economy – are not developing in tandem and that their cycles of development must be synchronised to turn Penang around.
Fortunately, following George Town’s world heritage designation, the urban cycle is starting to enter a recovery phase. But the challenge is that the people cycle is still in a deficit phase, with new graduates choosing to leave the area, while the economy is caught in a slump.
The authors carefully argue that a new development strategy must be articulated that can guide Penang to better wages, jobs and prospects for the next generation.
Penang must move from the old “sweatshop” assembly model to become a “smartshop” for sustainable products. Restoring lustre to the “Pearl of the Orient” does not have a simple engineering fix.
Instead, Penang must do different things and do them differently. Given its strong track record of economic success, Penang must set a new multidimensional agenda to become the most vibrant economic hub for its economic geographic advantages – the northern Peninsular Malaysia, Sumatra, Southern Thailand and through good air and telecommunications, South, North and Southeast Asia.
Given its strong base of human talent, with affinity for community harmony and creativity, particularly in the culinary and service area, Penang offers the best opportunity to break out through innovation and change.
The book offers three sound recommendations to break out of the middle income trap. The first is to exploit economies of scale through specialisation, focusing on a few products where it is possible to achieve global excellence.
The six focus areas identified are technology-based manufacturing, biotechnology/life sciences, business process outsourcing (BPO), logistics, tourism and agribusiness.
Secondly, Penang must build density on the basis of an integrated land use plan while also ensuring efficient connectivity with the capital city.
Thirdly, Penang needs to increase its “liveability” factor, which is the key factor determining competition for top global talent.
Underlying the strategic concept is the premise on what the Government can do to facilitate sustained development in a middle income region.
Penang’s experience will provide valuable lessons for other states in Malaysia. What makes this book valuable is that it offers a development strategy that can be applied not just for Penang but also Malaysia as a whole.
It recognises that a city (and a nation) has to understand its place in the global economy and in regional supply chains.
Penang, and by extension Malaysia, can become an advanced economy by 2020 if it becomes globally connected, regionally oriented and locally centred.
But it can only do so if all parts of the nation, city and rural areas work together through efficient connectivity. What comes through the book is that Penang’s development is not a stand-alone objective.
Put simply, Malaysia’s targets of the New Economic Model cannot be achieved without successful development in Penang. Greater density of economic activity in the Northern Corridor will benefit all states and accelerate the reduction of poverty in Malaysia.
Thus, if the Northern Corridor can escape the middle income trap, then, so can Malaysia. This is a timely and relevant book as it comes out at the same time as the 10th Malaysia Plan.
The book will be useful for policy makers and those interested in the rejuvenation of cities as engines of economic development. It will also help interested citizens to understand how cities can change. George Town has always been a jewel in the Orient, which is why I live here.
■ Tan Sri Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council. He is the author of the book “From Asian to Global Financial Crisis”.