April 26, 2013
Malaysian Economy: Is the Party Over?
With an election in the near future, scheduled for May 5th, Malaysia’s economy is under scrutiny. Is it really as good as the present government says it is in its campaign propaganda? The usual indicators look good — growth is 5 percent this year, inflation is low at around 2.5 percent and unemployment is low and stable at about 3 percent. Malaysia has enjoyed vigorous growth and change in the 50 years since it became independent and it is now the 37th largest economy in the world.
But after more than 50 years of one-party administration, the country is now at a crossroads with the ruling coalition facing formidable opposition. The economy is a major campaign issue as the country has been running considerable budget deficits since 1998, with the government offering subsidies and cash handouts to maintain itself in power. Since 2008 the government’s debt has escalated exponentially and is projected to be RM 779 billion by 2017 — creating a major problem of domestic debt for future governments to face.
Government borrowing, excessive spending on huge infrastructure projects, the flight of capital overseas, and a downturn in gas and palm oil prices are combining to create concern about a potential economic dislocation, prompting warnings from financial analysts in the region.
Malaysia’s rising ratio of household debt to its GDP reached 80.5 last year, as the country’s middle class has taken advantage of easy credit. Now there is the risk of being caught in a credit bubble, similar to the sub-prime crisis in the U.S. in 2008 which forced foreclosures and the collapse of several major financial institutions.
With 30 percent as the acceptable debt service ratio, it is a matter of increasing concern that people are using more than half of their disposable income to pay off household debts. The ratio of household debt to disposable income in Malaysia is 140 percent, one of the highest in the world and above that of the U.S. at 123 percent and Thailand at 52 percent. Unless there is a rise in productivity and household incomes for Malaysia’s five million working population, this trend is not sustainable.
Prime Minister Najib Abdul Razak’s policies of short term gains and generous corporate welfare to maintain popular support contrast with the long term vision of the Pakatan coalition led by Anwar Ibrahim. Noting that “Malaysia’s fiscal space has shrunk considerably since the 2008 global financial crisis”, policies need to be put in place to spare the people the austerity measures being adopted by several of the troubled Eurozone countries.
The need is to curb household debt, to broaden the tax base, repeal subsides gradually, trim certain expenditures and generally bring the fiscal house in order without creating the pain of a sudden adjustment. Instead of raising the debt ceiling again and again, Malaysia needs to grow government revenue and rein in sovereign debt, as Malaysia’s debt to revenue ratio is approaching that of Italy’s.
In all the government’s campaign promises there is nothing to address the growing problem of blatant corruption in high places and the widening income disparities since taxes were lowered for the wealthy. Malaysian taxes are the second lowest in South East Asia, with Singapore lowest with personal income tax capped at 20 percent. Singapore has since instituted a tax on services and consumption, the Goods and Services Tax (GST) at 7 percent, a move currently under discussion in Malaysia.
To ensure that growth is sustained, Malaysia needs to implement numerous reforms which have already been outlined in the Government’s New Economic Model. Unfortunately, many of these proposals remain simply paper promises and Malaysia can no longer afford business as usual. Criticisms are common about the lack of transparency of government statistics which are skewed in favor of the incumbent regime. A retired Malaysian international banker recently described official government reports as “Alice in Wonderland statistics.”
This would change with a victory for Pakatan Rakyat. Anwar Ibrahim’s vision of good governance, based on fairness and justice and free of race considerations is reinforced by World Bank studies that compare Malaysia with more successful countries such as China, Indonesia and Vietnam. The latest IMF report card on Malaysia indicates the need for fiscal and structural reforms and an ambitious consolidation plan, with tax reform and expenditure rationalization.
Malaysians want an end to stagnant wages and earning levels and an end to the Malaysia being caught in the Middle Income Trap with little hope of higher productivity and wages. Malaysia’s dream of joining the league of high income developed nations as envisaged in its Vision 2020 will not happen on its current course.
Anwar Ibrahim will bring about the necessary changes based on the needs of the people of Malaysia, not be deferring to the bankers, corporations or profiteering capitalists. He understands that is time for more egalitarian policies to put an end to the stifling of initiative and competition through the old affirmative action policies favoring Malays. Preferential treatment for ethnic Malays and some indigenous groups, collectively known as Bumiputra, have led to inequalities in awarding government jobs and contracts and also the provision of education and cheaper housing.
It is also time to end the practice of using low-cost foreign labor for assembly work and to invest instead in a research and development base for new industries. This would help reverse the much-discussed phenomenon of the migration of talent out of Malaysia, and would turn the brain drain into an economic gain. Productivity and inclusiveness lie at the heart of Malaysia’s transformation programs and according to the latest Malaysia Economic Monitor Report, this is an historical opportunity for change.
It remains to be seen whether Anwar Ibrahim’s message will reverberate sufficiently among the voters next month, to bring about a change in direction and a change in leadership for Malaysia, bringing with it the opportunity for the country and its people to realize their full democratic potential.
Dr. Azeem Ibrahim is the Executive Chairman of the Scotland Institute and a Fellow at the Institute of Social Policy and Understanding