October 18, 2016
The World Bank: Right Part of the Time and Wrong On Occasion on Malaysia
by Dr Lim Teck Ghee
The World Bank’s occasional economic reports on Malaysia can generally be relied upon to offer sound analysis on the country’s economic development that is different from those emanating from our national sources. They provide a more critical perspective on entrenched policies or proposed new ones by stake players who should be independent and should not be beholden to the Malaysian government or any interest or lobby group.
Two recent reports should be of interest to our policy makers. The first which came out in June this year affirmed the importance of leveraging on trade agreements and partnerships for the nation’s continuing economic prosperity.
The Economic Monitor report noted that
- Malaysia is one of the most open economies in the world, with a trade to GDP ratio of 148% (from 2010 to 2014) compared to 58% in developing countries in East Asia and Pacific.
- About 40% of jobs in Malaysia are linked with export activities.
- Total wages supported by exports has quadrupled between 1995 and 2011 (http://www.worldbank.org/en/country/malaysia/publication/malaysia-economic-monitor-june-2016).
Most Malaysians are aware of the importance of trade. But we have also seen the rise of uninformed and often xenophobic sentiments targeting the Trans-Pacific Partnership when it was being negotiated by the government. The Bank’s opinion on this and other similar agreements needs to be reflected upon.
In essence the Bank argues that implementation of new regional trade agreements can help Malaysia carry out key economic reforms and accelerate the country’s transition to high-income status. It notes that the new generation of regional trade agreements – including the Regional Cooperation Economic Partnership, Trans-Pacific Partnership and European Union Free Trade Agreement – will shape trade and investment over the next decade.
It also calls for commitment to these agreements which goes beyond tariff reduction This is because not only will they have a significant impact on attracting investment, and further open up market access for the country’s exports of goods and services; they can also be used to push for deeper reform in competition policy, services trade and support to SMEs that would otherwise be difficult to initiate.
The Bank rightly warns that the transition will not be easy and proactive measures will be needed to ensure wider benefits under the new regional trade agreements.
Notwithstanding the problems and difficulties, it is important for our policy and decision makers to get the Bank’s message and stay the course of this road of reform if we want our economy to grow and become more resilient.
Reducing Vulnerabilities the Wrong Way
The latest Bank report – a newly released East Asia and Pacific Economic Update entitled “Reducing Vulnerabilities” – focuses on current global economic uncertainties; the risks that come from external developments as well as touches in its country chapter on Malaysia on our own home grown financial crisis arising from 1MDB which “could impact investors’ sentiments and divert the Government’s focus from needed reform, while an unanticipated sharp adjustment among households to a higher cost of living or a more pronounced softening in labour market conditions could also affect private consumption”.
To alleviate the impact on the bottom 40% population, the Bank is recommending targeted measures “to support the most vulnerable households”. This, in its view, could include the introduction of “unemployment benefits [which] could help to improve matching in the labour market and provide support as the labour market softens” (https://openknowledge.worldbank.org/bitstream/handle/10986/25088/9781464809910.pdf; p.128).
Bank guidance on this issue is clearly off the mark if not plain wrong. Firstly, the nation’s finances are in no position to support a social welfare system providing benefits to the section of the population that is registered as unemployed or do not currently have a job. For now and the foreseeable future, the nation needs to exercise financial prudence and discipline in spending. In fact, the Bank itself has noted in the same report that recent increases in the minimum wage and public sector salaries would be difficult to sustain as the necessary fiscal consolidation continues.
Any social welfare or social protection system that is being proposed needs to be sustainable, financially viable and well targeted. In Malaysia it is especially important to ensure that the new proposed system does not become a political football and/or is open to wide scale fraud and abuse. Both negative possibilities are very likely given the present state of politics and governance in the nation.
A stronger and more rigorous defence of the proposal for the introduction of unemployment benefits by the World Bank with empirical data proving its case is necessary if it wants this policy recommendation to be taken seriously. For now, the advocates of this policy in the Bank may be comforted by the fact that a de facto unemployment benefits system already exists in Malaysia through the use of the civil service to employ hundreds of thousands of otherwise unemployed and unemployable school leavers, graduates and others primarily from the Bumiputra community. Poor Indians have been left out leaving them marginalized from the mainstream.
Such a system has been ongoing for at least the last 20 years and makes Malaysia a role model for countries in this field of racially targeted labour market intervention.