On the Malaysian Economy and Other Issues

January 10, 2012


Emeritus Professor Dato’ Dr. Mohamed Ariff: Malaysian Economy and other issues


Three most troubling economic issues facing Malaysia today

Persistent and endemic fiscal imbalance, growing income disparity and overdependence on foreign workers top the list. Malaysia lacks fiscal discipline. In the last 54 years since Independence, Malaysia has had budget surplus only in 7 years. Fiscal prudence demands counter-cyclical fiscal policy with surplus in good times and deficit in lean times, which allows fiscal stimulus during economic downturns to be financed by the accumulated surpluses without borrowing. As this has not been the case with Malaysia, the nation’s public debt has been growing.

National debt has risen to RM430.2bil in the first quarter of 2011, roughly 55% of gross domestic product (GDP), up from 41% in 2008. To balance the books, the government must rein in its operating expenditure and introduce tax reforms. The government’s reliance on oil and gas which accounts for about 40% of total revenue is simply untenable.

Federal revenue growth has failed to keep pace with GDP growth, so much so that the revenue/GDP ratio has fallen to 22% from the 10-year average of 34%.

The growing income disparity is also worrisome. The bottom 40% of the households account for only 14% of national income, while the top 20% of the households account for roughly 50% of aggregate income. Income inequality in Malaysia hovers at levels higher than that in Indonesia, the Philippines and Thailand.

Regional disparity is equally striking. Sabah is the poorest with 20% of the households living below the poverty line. Sabah accounts for 43% of the country’s poor, trailed by Sarawak (12%) and Kedah (9%). These three states jointly account for nearly two-thirds of the poverty in the country. To fix the problem, the government must revisit and review its affirmative action plans so that the benefits accrue directly to the poor and the marginalised, regardless of ethnicity.

While one must thank foreign workers for their contributions to the economic growth and development of the country, their numbers have grown far beyond “optimal” level. This overdependence on guest workers has contributed to the middle-income trap, as their over-presence tends to suppress wages. In the early 1990s, it was thought that Malaysia could stay competitive internationally by keeping wages low and hence the opening of the floodgates to foreign workers.

Experience has shown that such input-driven growth is unsustainable. High wages backed by high productivity can translate into low labour costs. Malaysia needs to ensure that the locals have the necessary skills as the economy moves up the value-chain.

On Being an Economist

I found economics interesting and challenging. I was attracted by the logical structure of its construct. More specifically, I was fascinated by the history of economic thought, the evolution of economic theories and the beauty of its empirical literature. The most memorable experiences I have had were during my sabbatical attachment to the Institute of Developing Economies in Tokyo, the Australian National University in Canberra, and the East-West Center in Honolulu, Hawaii which I found most stimulating and inspiring.

Exciting experiences were during crisis times, especially the 1997-98 Asian financial crisis, as the head of the Malaysian Institute of Economic Research (MIER), crossing swords with policy makers on issues relating to crisis management, particularly the capital controls and the currency peg that were put in place in September 1998.

Vision 2020

The long-term Vision 2020 was both laudable and feasible. It was like running a marathon. The mistake we made was to run it like a sprint at maximum speed right from the start, pursuing input-driven high growth single-mindedly. In the process, we seem to have fallen unwittingly into the middle-income trap. We needed to grow only at 7% per annum to be a developed nation by 2020, and there was no need to grow at overheating double-digit pace. Malaysia’s potential growth rate has fallen from 7% in the early 1990s to roughly 5% now.

We need to raise our growth potentials by reinventing the economy. We need to move away from low value-added to high value-added activities, but this is easier said than done. It calls for bold policy reforms which may not sit well with vested interests that support and benefit from the current order.

Making Economics Interesting

Economics can be made more interesting by mixing theories with empirical observations. The notion that theory is different from practice is a non-starter and counter-productive. Theory has an important role to play in understanding the happenings and in formulating policies. Economic policies without theoretical underpinnings can be hazardous. It is in this sense that theory precedes practice. Nevertheless, theories can become obsolete if the underlying assumptions no longer hold, in which case theory will have to change in accordance with practice. In this sense, theory follows practice. In any case, serious disconnect between theory and practice is not good for any discipline.

Economic Transformation Programme (ETP), Government Transformation Programme (GTP) etc

The various transformation programmes including the ETP and GTP are significant steps in the right direction. Much however would depend on their implementation. Besides, as the saying goes, the proof of the pudding is in the eating. Experience has shown that such programmes tend to work well if they are perceived to be bottom-up, not top-down. To reinvent the Malaysian economy, what we need is a holistic, not selective, transformation. In any case, change should be gradual, for “big bang” can be disruptive.

The Brain Drain

Brain drain need not be seen negatively in the first place. I once heard someone quip “brain drain is better than brain stuck in the drain.” It can play a positive role by creating a diaspora with pivotal international connectivity which is equivalent to gaining offshore economic space generating income inflows for the home country. The flip side, however, is that it deprives the nation of skills much needed to transform the economy.

To stem the brain drain, we need to identify the root causes and tackle them effectively. Brain drain can be due primarily to the pull factor or the push factor. If it is the former, little can be done as it is purely external, but if it is the latter, it can be fixed domestically. We need to create lucrative job opportunities with level playing fields at home and eliminate the disincentives that encourage skilled personnel to exit. A reasonably liberal environment can be a powerful plus factor. A strong domestic currency would also discourage brain drain, just as a weak home currency would do exactly the opposite.

Unwinding and Managing Time

I am very mindful of the fact that time is the most precious of all God-given resources, which has to be managed very carefully. Unwinding after work need not be just idling around. This after-work slot can be meaningfully filled by doing things that are not work-related but fruitful nonetheless, engaging the body and the soul (e.g. reading a book, listening to a lecture, exercising on a treadmill). I have discovered that grandchildren are stress-busters. It’s fun to be with them.

National Competitiveness

This is an empirical question. Empirical evidence is not conclusive, although the various competitiveness indices that rank countries provide some pointers. However, there are concerns over Malaysia’s declining growth rates, with newly emerging economies in the region exhibiting greater dynamism. It is quite normal for emerging economies like Vietnam to grow faster than mature economies like Malaysia, due mainly to what economists call the base effect.

Malaysia is still fairly competitive as shown by the seemingly perennial surplus in the balance of payments, but no country can afford to rest on the laurels. Latin American experiences are telling. Malaysia has enormous potential waiting to be unlocked through real policy reforms that would allow greater economic freedom to unleash the forces of transformation. It is unfortunate that politics tends to override economics.

University Rankings

This indeed is a big concern, but we cannot blame it all on the universities as they partly inherit the problems from secondary and primary schools. Our education system is somewhat archaic with rote learning taking primacy over creativity and thinking. Nothing short of a complete overhaul can fix the problem. In short, we need to democratise our education system, but no one in the corridors of power has the gumption to get it done.

Outlook for 2012

I am afraid that we need to brace ourselves for a rough ride in 2012. Malaysia’s exports are likely to face strong head winds, with several European economies shrinking and other developed economies stagnating, compounded by a sedated slowdown in China. The prices of major commodities, including gold, are likely to melt. The silver line is the window for real reforms as tough times will force politics to take the back seat. Hopefully, economic necessity will knock out political expediency.

29 thoughts on “On the Malaysian Economy and Other Issues

  1. Currently, we have the most fiscally irresponsible PM in
    Malaysia’s history.

    Expect inflation to accelerate under the rule of this PM.

  2. Well. Mr Phua. That is why we must have people like Tun Tan Siew Sin or Tengku Razaleigh as Finance Minister and Tun Ismail Mohamed Ali or Tan Sri Abdul Aziz Taha as Governor, Bank Negara Malaysia. Tun Tan was fiscally responsible and frugal man and Ku Li was a fiscal conservative, while both Tun Ismail and Tan Sri Aziz were tough on inflation (price stability) and committed to sound banking. During their stewardship, the ringgit was strong because they focused on economic fundamentals. Cry Geranimo.

  3. “We need to create lucrative job opportunities with level playing fields at home …”

    Yep. Go the way of “Screws, Nuts & Bolts Corp” which has created 1,000s of jobs by employing labor intensive operations. Don’t just follow the way of the West where labor is scarce and expensive. Modernisation does not equal westernization. Also small scale enterprises are the backbone of the economy. We need more tax incentives to act as lubricant. We need anti-trust laws to break the monopoly some businesses like KY Corp. has.

  4. Dear Geranimo,

    I prefer Tan Siew Sin’s cousin, the Malacca-born Goh Keng Swee !(another talented Malaysian lost to Singapore). Smart, very capable and very, very careful with the spending of tax payers’ money !

  5. When Siew Sin was Minister the Central Bank was under Ismail Ali as Governor. Both these individuals came from a different tradition i.e. a tradition which respects the independence of the Central Bank which was fiercely independent of the MoF. As the country’s Central Bank its role is not only as banker to the government but through its monetary policies it maintains the value of the ringgit and shield it from the roller coaster ride which is international trade, and maintain foreign currency reserves sufficient to finance three months imports. It maintains stability through the use of a suitable basket of currencies vis-a-vis the ringgit that no one knows — except Din Merican when was he was one of the assistant governors before he chao to Sime Darby.
    The basket of currencies (trade weighted) is managed tightly. Only the Governor, Deputy Governor and the Head of Investment knew its composition. So I don’t know.–Din

  6. It was a different time period in the country’s history. It was Siew Sin a Straits Chinese who couldn’t speak Mandarin who said the business of the government was to govern and not to do business.

    The country’s Central Bank tradition of being independent of the MoF under the Minister of Finance slowly eroded when Ku Li took over as Minister of Finance. But Ku Li had respect for the institution and its tradition, distancing himself from Ismail Ali as governor in public, though tension between the two was inevitable in private with one neither wanting to be seen to do the bidding of the other.

    The rest is history.

  7. Yes, scarlet

    Your comment reminds me of Dr M starting the
    “tradition” of the Malaysian PM holding the post of
    Minister of Finance simultaneously.

    (And the “tradition” of the PM having “direct access” to the
    huge amount of funds generated by Petronas’ activities ?)

  8. Remember BMF? It could not have happened without the knowledge of the Governor of the country’s Central Bank. No longer Ismail Ali but Aziz Taha. Good friends with Lorraine Esme Osman from BBMB.
    Bank Bumiputra was directly under Prime Minister Mahathir Mohamad at that time. BTW Aziz Taha did not get on with the Prime Minister and because of that, he resigned. The late Lorraine Esme Osman, on the other hand, was Mahathir’s good and trusted friend.–Din Merican

  9. Why do you think Ku Li as Minister of Finance and Aziz Taha as Governor of Central Bank were effectively excluded in the rescue operations of BBMB? And in fact Ismail Ali and Nawawi instead became active participants? Didn’t the duo act to slow down the rescue of BBMB so a US700 + million loan could be disbursed to buy back the property inadequately secured or unsecured bought by the Carrian Group?

  10. The late Lorraine Esme Osman, on the other hand, was Mahathir’s good and trusted friend.–Din Merican

    Late? When did he become late? I once had lunch with him together with another at Daikoku i.e. just before BMF went down. He later became the longest serving remand prisoner in London rather than joined Hashim Shamshudin in H.K. Is Hashim late too?

  11. Hi scarlet

    At that time, I was just a poverty-stricken postgraduate student
    trying to survive on my university’s scholarship/stipend money
    and keeping my head above the academic waters,

    No time to pay attention to affairs of (Malaysian) state under the care of the dynamic Dr M (“Amanah, Bersih, Cekap”).

    Students are supposed to concentrate on their studies and not get involved in grownup activities such as politics, right ? 🙂

  12. U of Rochester & Johns Hopkins.

    Also spent some time at U of Illinois and U of Pennsylvania

    (Wish I had spent some time at English universities too!)

    At that time, before the age of the Internet, my way of keeping up with news from home was reading the Far Eastern Econ Review once in a while 🙂 But I remember the BMF-related murder in Hong Kong.

  13. FEER was my favorite magazine something I picked up from school days. FEER is too expensive in dollar terms and so after a year’s subscription I gave up. Rochester and Hopkins? OK, father’s scholarship?

  14. No, scholarship from both universities.

    American private universities were generous in the late 1970s and 1980s.
    I am grateful for the excellent education I received in the USA.

    I wish that public universities in Malaysia can change so that our younger generations can also enjoy mind-opening education (like those Malaysian kids who are fortunate enough to study in overseas universities where there is real academic freedom, freedom of speech, freedom of thought etc)


  15. “While one must thank foreign workers for their contributions to the economic growth and development of the country, their numbers have grown far beyond “optimal” level. This over dependence on guest workers has contributed to the middle-income trap, as their over-presence tends to suppress wages. In the early 1990s, it was thought that Malaysia could stay competitive internationally by keeping wages low and hence the opening of the floodgates to foreign workers.”

    I agree with the above statement but the trouble is that most locals are not interested to work in the sectors occupied by foreign workers. I’m a business person and own several retail outlet. So far we’ve manage to prevent ourselves from having to employ foreign workers but for how long more? We’re having loads of problems getting new workers despite increasing their basic wages, providing better bonuses and giving other incentives despite the poor economic climate. Sure, they want to work for the good pay we’re giving them but they have disciplinary problems, not consistent…can’t get up from bed regularly in the morning?…..I Rest My Case.

    If you have to depend on cheap labour (they are not getting any cheaper), you ought to start thinking of getting out of that business. Take your cash out by harvesting your business before it is too late, and do something else.–Din Merican

  16. Oh, Founding Fathers scholarship.

    There is a provision within the INA 1965 that allows specially talented people like yourself to be permanent residents. But you chose to return to Malaysia?

  17. I wish that public universities in Malaysia can change – Phua Kai Lit

    Dream on, my man, dream on, Alice in Wonderland will one day come true too.

  18. Yes, Mr Bean

    I chose to return to Malaysia. Why not? It is a nice country …. except for its present set of rulers and their misrule!

    (I remember the city of Baltimore with great fondness too)


  19. Prof Ariff’s article is depressing to say the least and my first instinct is to throw a four letter letter word to those morons in Putrajaya for screwing up the economy.

    We are such a rich country in terms of resources and no lacking in talent either but the political culture of the ruling elite has skewed economic policies to a fine art of depleting resources. The masses were consigned to remain poor perhaps to stop them from developing into better citizens.

    We urgently need good leadership and a new policy framework so that the riches of the country can be enjoyed accordingly. I’m hoping a new breed of leadership will be in Putrajaya after the coming GE.

  20. We are such a rich country in terms of resources and no lacking in talent-ARMS728

    But, jambu Saiful got end-result talent; Khir Toyo got Javanese talent, Rosmah got diamond talent, Taib Mahmud of Sarawak got billionaire talent, Chua Soi Lek got Bukit Bintang talent, Hasan Ali got (Islamic) talent, Ibrahim Ali got talent in front of international TV, Ezam Nor got froggy talent, Zulkifli Nordin got Muslim talent, and Muhyiddin got pea-talent.

    Who says Malaysia got no talent.

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