OUR decelerating growth concentrates one’s attention on economic reform. Many challenges make economic reform urgent.
As Malaysia shifts to a digital economy, that is bound to create tectonic shifts in the structure of production and employment. Assembly-type operations no longer have appeal. They are low in value creation compared to that of technology development that advanced countries excel. Commodities too offer little succour for economic sustainability given their sustained price declines.
Industry 4.0 poses an existential threat to employment. It will make half of the jobs obsolete in the near future. Industry 4.0 requires high-end capabilities that 75 per cent of our workforce, with only school-leaving education, will find hard to offer.
Industrial compression is underway with manufacturing gradually losing its prominence in the economy. Manufacturing comprised 30 per cent of GDP in the mid-1990s. Now it contributes only 23 per cent. We therefore need to find new sources of growth.
In their 2017 book “Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia” Terrance Gomez and others highlight the plethora of government-linked companies (GLCs). Khazanah Nasional, the government’s investment vehicle, alone has in its stable over 50 GLCs and a huge number of subsidiaries. The heavy presence of government in the economy crowds out the private sector.
When the economy has been messed up long enough by the previous government, reform is needed to ramp up economic growth so that the economy continues to be resilient in the future.
The fundamentals are good to support an economic transformation. Our 4.7 per cent growth rate surpasses that of other developed countries in this region including South Korea, Taiwan, Australia and Singapore. It even surpasses the growth rates of the US and the Eurozone.
Inflation is low, debt is modest at about half the gross domestic product or GDP, and we are running at full-employment. Our current-account balance is healthy at 2.2 per cent of GDP. At 3.7 per cent of the GDP, our budget deficit is smaller than that of the US and China.
We have weaned ourselves from an overreliance on oil-related revenues and have found new ways to generate greater revenue. The income-tax amnesty programme, and the goodwill that the government enjoys with the public, afford the government greater confidence that it will be able to generate more revenue in the future.
As for a friendly business environment, we have jumped from the 24th position in 2017 to 15th among 190 countries in the 2019 World Bank Ease-of-Doing-Business Index.
Here are five ways that the government can kick-start economic reform.
First, the government will have to chart out vividly a vision for the economy. Much like Vision 2020, the economic vision should state what the economy will look like, say, in five years. The vision must be bold and audacious. Never mind if it is too ambitious or that it is not realistic or achievable. When Prime Minister Tun Dr Mahathir Mohamad set his Vision 2020 way back in 1991, not many thought it was achievable. But the nation believed in it. That is more important.
Second, the government should have a comprehensive long-term reform agenda replete with strategic result areas and KPIs. Quick fixes such as the elimination of the GST, and piecemeal policies on debt, budget deficit, elimination of tolls and infrastructure programmes are beneficial.
However, they would be more impactful if they are well-coordinated within a comprehensive reform agenda. And in the interest of accountability and transparency, the reform blueprint should be publicised for public debate.
Third, the government should extricate itself from being in business. Dr Mahathir has already fired the starting shot. Loss-making and non-strategic GLCs will be cut loose. Such a restructuring should restore the private sector’s rightful role as the engine of growth.
Fourth, business-related regulations should be reduced. While Malaysia has jumped nine places to the enviable 15th spot in the ease-of-doing-business ranking, Malaysia continues to underperform in the criterion of Starting a Business, ranking a dismal 122nd.
The reason? It takes 9.5 procedures and 13.5 days to register a new business in Malaysia. In contrast, it takes only 2 procedures and 1.5 days in Singapore and 3.5 procedures and 5.5 days in Brunei.
Both countries are the region’s best performers in the ease of doing business.
Fifth, as Dani Rodrick, a Harvard professor, argues, there needs to be a place for low-skilled workers in a digital economy. We cannot go against the inexorable march of technology. Displacement is therefore inevitable, but it has to be tackled. It can be done in two ways.
One is to reskill the displaced workers so that there is a better fit between skills and job requirements. Such better matches too will enhance the nation’s capabilities.
The second way is to ensure the development of low-end manufacturing, agriculture and services. Jobs in these sectors will be able to absorb low-skilled labour. This is not only socially ethical but also politically expedient.
Economic reform is imperative. China is resolute in shifting its growth model towards services while India is focused on upgrading its run-down infrastructure. Similarly, Japan through its Abenomics, an economic reform programme, seeks to bring about structural reforms to jolt the economy out of its stagnation.
Countries that are complacent will lose out in competitiveness in a rapidly-changing world. Malaysia cannot afford to suffer a similar fate.
The writer, a former public servant, is a principal fellow at the Graduate School of Business, Universiti Kebangsaan Malaysia