Cover Story: Seven necessary fixes for Malaysia’s development fabric

-A +A
This article first appeared in The Edge Malaysia Weekly, on December 19-25, 2016.


MONETARY and fiscal policy tools are often employed to tackle immediate needs, such as supplying liquidity or pump-priming the economy. But when the issues facing future growth involve the need to alter the fabric of a country’s economy and competitive strength, change needs to happen at the core and on multiple fronts at different facets of our multi-racial society.

Worryingly, public governance and corruption are issues Malaysians are increasingly concerned about and leaders need to constantly battle against. As the Sultan of Perak and Deputy Yang di-Pertuan Agong Sultan Nazrin Shah reminded in his Maulidur Rasul speech, the history of Islamic governments has shown that corrupt practices and ravenous use of power  caused the downfall of many governments and the collapse of civilisations: “When power was regarded as an opportunity to fulfil personal interest and not as a trust, the functioning of the government would be impaired and ultimately resulted in its downfall and collapse of a civilisation.”

Corrupt practices have no place in the future Malaysia aspires to. To borrow the words in the 11th Malaysia Plan (2016-2020), the future of Malaysia beyond 2020 “will depend on how the rakyat navigate the highly volatile new economic era”. The 11MP speaks of Malaysia having an advanced, progressive and inclusive economy that not only leaves an imprint on the world but is also a passionate steward of the environment. The economy will be a socially advanced one with emphasis on the people’s well-being.

Malaysians will be united in diversity, possess unshakable national identity, and be guided by inspirational leaders who are moulded by a holistic education system and driven by an insatiable appetite for knowledge. Malaysia will be a great nation, as reflected by how we care for the vulnerable and underprivileged. Malaysia will be a major player in the global arena, with innovative leaders who actively influence and shape global discourse.

We Malaysians will be governed by trusted and independent executive, legislative and judicial institutions that protect our rights and treat all Malaysians equally. The people will be led by a government that delivers, led by leaders with integrity and convictions who “embrace the concept of amanah” (the moral responsibility of fulfilling one’s obligations), read the 11MP aspirations.

These aspirations are tall orders by any measure and policymakers will have to work fast to flesh them out. Here at The Edge, we identify seven structural issues that Malaysia must overcome for a post-2020 policy to be effective.


1. Fixing government finances

Much has been said about Malaysia’s fiscal deficit, which is essentially the amount the government spends (or intends to spend) in excess of its income that year. This spending in excess of its income would have gone on for 23 straight years if indeed Malaysia kept to its fiscal consolidation plan of having a balanced budget by 2020. As it is, Malaysia last had a budget surplus in 1997.

A big part of needing to spend extra from what it earns is because the federal government’s operating expenditure (OpEx) has stayed above 95% of government revenue since 2008. That is akin to a company having less money to grow the business as most of its income is going into administrative expenses. It also leaves Malaysia little choice but to borrow to fund development expenditure (DevEx) to help grow the economy.

Some 40% of government revenue goes to paying the emolument and pension bill. The civil service emolument bill has doubled the past decade from RM32.6 billion in 2007 to RM70.5 billion this year.

The federal government’s pension obligation of RM19.5 billion in 2016, meanwhile, is 8.6% of federal government revenue and 9.1% of OpEx. A decade ago, pension or retirement charges were only RM8.3 billion in 2007. Pension obligation will only rise as Malaysians are living longer and healthcare is also costlier for the aged. By 2021, Malaysia will reach that 7% threshold that the World Bank defines as an ageing society — not that far away.

But among the most unproductive of OpEx is debt service charges, which are projected to reach RM28.87 billion in 2017 or 13.1% of projected government revenue. Not only has the amount spent on servicing debt been above 10% of government revenue since 2014, it is 75% of the RM38.5 billion Goods and Services Tax (GST) collection expected for 2016. It also means the government needs to spend RM2.4 billion a month, RM555 million a week or RM79 million a day to service its debt. In infrastructure terms, RM28.87 billion debt service charge is enough to build at least 70 hospitals.

Malaysia could have also substantially boosted its coffers in the past two decades, had there been less debt service charges or if its economy had expanded further with higher development spending. The need to substantially cut OpEx is necessary for Malaysia to lift DevEx as well as build up its coffers to expand its capability to provide safety nets to the lower and middle-income groups that will be ageing in the coming years.

As the government asks the rakyat to spend more wisely and rein in debt, Malaysia too needs to reduce its budget deficit that has reached RM40.34 billion in 2017 — equivalent to the net worth of Tan Sri Robert Kuok (US$10 billion according to Forbes 2016 Billionaires List), Malaysia’s wealthiest. Including the RM40.3 billion projected for 2017, Malaysia has over the past two decades (1998 to 2017) spent RM554 billion in excess of its revenue (budget deficit) — almost the combined net worth of Bill Gates and Warren Buffett. This cannot go on if the country hopes to build its coffers to better weather the future.


2. Moving manufacturing up the global value chain

Malaysia and South Korea joined the middle-income group of countries in the same year, but the latter took only 26 years to reach high-income status in 1995. Malaysia, on the other hand, has spent 47 years in the middle-income group, 20 of which was in the upper tier. South Korea only stayed seven years in the upper tier of the middle-income group.

While the Organisation for Economic Co-operation and Development (OECD) reckoned that “high-income status by 2020 is well within reach” using “best scenario” projections, it also noted “signs of weakening economic dynamism” that needs to be quickly tackled if Malaysia hopes to advance to the next stage of development. Time is of the essence because generally, countries in the middle-income trap that do not grow fast enough to reach the high-income category find themselves “squeezed between the low-wage poor-country competitors that dominate in mature industries and the rich-country innovators that dominate in industries undergoing rapid technological change”, the OECD noted in a recent report.

Malaysia has known for some time that its manufacturing sector needs to move up the global value chain towards higher-value and more complex products to remain a relevant and competitive player. Not only does low-end, low-wage manufacturing make it harder for locals to command better pay, it is also not a conducive environment for technology transfers, let alone innovation.

There are several weaknesses in the innovation ecosystem, including the lack of co-ordination in the implementation of science and technology policies, lack of industry and society linkages to universities as well as insufficient transfer of technology and technical expertise from foreign to domestic firms. The Conference Board of the World Bank noted that Malaysia was in the so-called efficiency stage for 19 years before graduating to the current transition stage and it needs to move to the innovation-driven stage to become an advanced nation.

To be sure, Malaysia has made notable progress in diversifying its export composition and markets. But Malaysia’s share of the world’s manufacturing exports is declining and the local manufacturing sector “has not evolved enough to respond to changing global demands, producing products that are also manufactured by many other countries”. “Issues affecting the manufacturing sector are low productivity, pervasiveness of low value add labour-intensive industries, lack of innovation and competitiveness and weak enablers,” the OECD said.

As stated in the New Economic Model, many of the policies and strategies Malaysia has used to achieve the current state of development are insufficient to take the country to the next stage.

So, while Malaysia has successfully identified its main challenges and come up with ambitious strategic plans in response, “its capacity to implement and deliver them appears limited”. The weakness in implementation is attributed to inadequate governance, lack of policy sustainability and predictability, ill-conceived measures and insufficient capabilities of middle-management administrators at some ministries and agencies.

Not only does Malaysia need to improve the government’s delivery ability, it also needs to establish a “systematic evaluation system at the core of policymaking” to make real progress. It is high time that these long-time issues are ironed out or Malaysia will risk being left behind in the fourth industrial revolution.


3. Boosting productivity and wages

Just as Malaysia knows it needs to boost innovation to move up the value chain in manufacturing, the country knows productivity is the crucial game-changer in the fourth industrial revolution, where intelligent machines and ubiquitous mobile supercomputing are set to disrupt and change the way we live, work and relate to one another.

“Our goal of becoming a high-income and developed nation by 2020 is dependent on our ability to raise the labour productivity level,” Datuk Seri Mustapa Mohamed, Minister of International Trade and Industry, said in the foreword of the Annual Productivity Report 2015 issued by the Malaysia Productivity Corporation (MPC).

“To achieve the 3.7% annual growth as targeted under the 11MP, we need to adopt some very radical approaches to ramp up productivity growth,” he said, noting that the average annual productivity growth from 2010 to 2015 was 2%.

The 3.3% year-on-year labour productivity growth to RM75,538 achieved in 2015 (from RM73,091 in 2014) contributed 5% growth in the Malaysian economy to RM1.263 trillion. The growth rate is decent compared with South Korea’s 1.5%, Singapore’s 1.2% and US’ 0.6%. The US has been the world’s most productive country since 2000. Nonetheless, Malaysia ranked 47th in 2015 while Taiwan ranked fifth, Singapore ninth and South Korea 18th.

“Having better productivity has widespread and all-embracing implications or benefits, either for the country, organisation or individuals through higher revenues or incomes, enhanced reputations and less wastage of resources,” the report read. The trend in productivity growth is often determined by investment in machinery and equipment, human capital formation and openness to trade and investment. These three factors strengthen growth across the economy by promoting innovation and diffusion of new technologies.

Toward this end, the Malaysia Productivity Blueprint is being finalised for implementation, reportedly led by the National Productivity Council.

As outlined in the 11MP, the public sector itself needs to be leaner, facilitative, more efficient, more productive, more skilled, more open, more innovative and less bureaucratic in order to better deliver for the rakyat and for Malaysia. Beyond the public sector, greater effort is needed to boost innovation and translate innovation into new wealth for the nation and its people.

Just as higher value-added activities are the result of effective and efficient utilisation of better quality inputs, higher productivity levels are expected to translate into better wages and higher standards of living in Malaysia. The latter is essential if the country hopes to keep the best of its talents.


4. Corruption must be fought at all levels

Corruption in Malaysia, which is not decreasing despite high-profile government action in recent years, took on a bizarre dimension in 2016. It showed one face overseas and another in the country, particularly in relation to the 1 Malaysia Development Bhd (1MDB) scandal, but also featured staggering exposé of unexplained wealth that stunned the nation.

In July, a watershed was reached when the US Department of Justice filed a lawsuit to seek the recovery “of more than US$1 billion in assets associated with an international conspiracy to launder funds misappropriated from a Malaysian sovereign wealth fund”. The case, it said, represents “the largest single action ever brought under the US Kleptocracy Asset Recovery Initiative”.

In all, at least 10 countries are investigating 1MDB-related fund flows. Singapore’s financial authority has shut down branches of several banks and fined two others for breaching anti-money laundering rules in view of 1MDB-related dealings. In November, former BSI banker Yak Yew Chee became the first person to be convicted in Singapore in the 1MDB affair. The Swiss authorities have also penalised a merchant bank, and in Hong Kong, accounts related to the case have been frozen.

In Malaysia, however, the 1MDB saga made waves of a quite different sort.

Several leaders who were critical of the government’s handling of the issue are out in the cold. They include a former deputy prime minister, federal ministers and a menteri besar. An opposition MP has been sentenced to jail for exposing the classified audit report on the troubled fund. They were joined by a number of top civil servants who headed regulatory, investigative or prosecutorial agencies, prompting speculation about their departure. Something is surely missing here.

In the second half of the year, a series of arrests of senior civil servants set new records in the annals of anti-corruption action for the country. The biggest ever case involved was alleged kickbacks from the multi-billion award of projects by the Sabah Water Department, where a mind-boggling array of wealth including vast cash were seized by the anti-graft commission.

Other cases involving tens of millions that led to the arrests of key management staff at a bank, and top-ranking officials at a local authority, and an earlier case of money laundering at a ministry, where some RM100 million is said to be involved, all point to the shocking scale of the problem. Penang Chief Minister Lim Guan Eng was also charged with corruption over a land conversion application and the purchase of a bungalow at below market price.

The question that hangs over Malaysia’s struggle with corruption is whether these earth-shaking developments are just the tip of the iceberg. Alongside with that is the poser of whether politics has anything to do with it.

But has corruption gone systemic? And are we still in the mode of selective persecution? We must fight corruption without fear or favour if Malaysia wants to achieve a high-income and developed nation status.


5. A shrinking space for civil liberties will not make Malaysians a ‘thinking’ society

The strain on democratic freedoms has increased notably this year, as symbolised by the arrest of Bersih 2.0 chairman Maria Chin Abdullah under the Security Offences (Special Measures) Act on the eve of the electoral reform movement’s rally in November. Her detention for “alleged involvement in an activity that could be detrimental to parliamentary democracy” reflects a hardening of the state’s stance against its critics.

The detention is a direct breach of the government’s promise to Parliament that the Act will not be used for political purposes. Civil rights groups including the Malaysian Bar and Hakam, the National Human Rights Society, have expressed deep concern at the use of an array of laws to suppress dissent.

The arrest of Chin, other activists and opposition leaders ahead of the rally, and the police’s warning that the demonstration was illegal were significant hurdles standing in the way of the democratic right to assemble peacefully.

Social media and websites have also come under particular scrutiny. In March, Parliament was told that since Jan 1, 22 netizens had been probed and 399 websites blocked by the Malaysian Communications and Multimedia Commission (MCMC).

These curbs resulted in a drop in Malaysia’s rating in the Freedom House’s Freedom on the Net 2016 report, which said that online freedom in the country worsened in nearly all categories measured, putting it among those with the most marked increases of government restrictions.

The use of the Sedition Act 1948 against the government’s critics extended into 2016 from the previous year, when the Act was used 91 times to arrest, investigate or charge people for expressing their views, it was reported.

The arrest at a literary festival of Zunar, the political cartoonist who is facing nine charges under the Act and is under a travel ban, drew sharp criticism as a sign of official disregard for the freedom of expression that is a yardstick of democratic rule.

Another damper on civil liberties took the form of a raid by the MCMC on Malaysiakini in November. The news portal said the raid was over two video clips it had uploaded in July on its website of a press conference by a former Umno politician that was critical of the attorney-general. The investigation was for alleged improper use of network facilities.

Seen together, the official actions against dissension form a dark cloud over civil liberties — a retreat from encouraging openness and Malaysians to be a “thinking” society — a prerequisite for us to progress as a developed nation.


6. Rising racial and religious tensions must be avoided

Racial and religious polarisation has become twin bugbears for the nation especially since the mood of the electorate has drifted towards political change over the past decade.

A power-sharing paradigm since independence that served to balance the interests of the country’s three main races — the Malays/bumiputera, Chinese and Indians — has locked its politics into a holding position that now defines all spheres of national life.

Given the emotive power of these two themes, it is not surprising that many political leaders have cultivated the role of being communal champions, and so have framed virtually all issues, from economic targets to cultural rights and religious priorities, in terms of ethnic and religious identity.

As a result, Malaysians have become habituated to identifying themselves and their concerns in racial and religious terms.

This tendency to view a whole gamut of issues, big and small, in a communal light has prompted many opinion leaders to warn that the nation is moving along a dangerous path that could lead to a serious fracturing of inter-ethnic and inter-religious relations in the foreseeable future.

The uneasiness felt by many Malaysians in the face of frequent displays of racial intolerance and extreme views on religious matters has led to various initiatives to steer the nation towards a more inclusive outlook.

Notably, the prominent Malay individuals who formed the G25 to promote moderation and tolerance in a plural society reflect the concern of progressive and just-minded people that wish to see harmony and good governance prevail in the country.

An especial point of concern is the dissonance that has resulted from the overlapping of civil and syariah laws, particularly in relation to the unilateral conversion of minors, child custody, the criminalisation of personal conduct, apostasy and such matters.

The divisiveness even reaches an intra-communal level with the Syariah Courts (Criminal Jurisdiction) Act 1965, also known as Act 355, for which amendments are being proposed to empower Islamic courts to enforce higher punishment.

Politically, the private member’s bill to table the amendments has driven a wedge between Umno and its steadfast coalition partners, while warming its ties with a longstanding rival, PAS, whose president Datuk Seri Abdul Hadi Awang has been the driving force behind the bill.

Although the bill was meant for Muslims only, answers were not clear as to what will happen if the offences are jointly committed by a Muslim and a non-Muslim. The interfaith council representing non-Muslims has pointed out that the amendments have the potential of undermining religious freedom and fundamental liberties enshrined in the Federal Constitution.

Their concern mirrors the fears of moderate Malaysians that the country is veering towards a position that its founding fathers, taking note of the nation’s plurality, had taken great pains to avoid. Perhaps, what we need to do is to depoliticise religion so that we can come to a better understanding and a responsible and mutually accepted decision on religious matters.


7. Still missing the mark in education

Malaysia’s ardent attempts at raising its standard of education have produced a mixed bag of results — it has certainly achieved broad access to basic schooling but scores rather disappointingly in its record of student achievement.

The World Bank raised a red flag in 2013 that education standards were deteriorating although Malaysia was spending twice as much on schools as its Asean neighbours.

Its poor showing in the OECD’s Programme for International Student Assessment (PISA), a test of 15-year-old students’ skills and knowledge, signals a major obstacle standing in the way of its aspiration of becoming a high-income nation.

The serious under-performance of Malaysia’s students has been linked directly to the poor quality of teachers, which the World Bank has identified as a critical deficiency in the education system.

A ray of hope is seen in the transformative Malaysian Education Blueprint 2013-2025, but as always, the positive outcomes that are envisaged hinge on vigorous implementation of reforms.

This clouded outlook for the school system has contributed to a growing demand for alternative channels for education. In line with the deregulation of the economy, private schools have mushroomed — many where English are used extensively — and drawn a substantial enrolment from a large pool of parents anxious to prepare their children for a tougher future.

A similar malaise is dragging on the tertiary education sector. The government’s efforts to infuse a culture of excellence in its public universities have produced a chequered record.

The failure of Malaysia’s public universities to make the list of top 400 in the Times Higher Education World University Rankings in recent years was a wake-up call for the authorities. Various efforts to incentivise high-impact research work by providing funding and encouraging autonomy in academia have indeed helped Malaysian institutions climb up the ranking tables in the past few years.

However, there is deep concern that the advances that have been achieved would be reversed following drastic budget cuts in the past two years.

At the same time, graduate unemployability has remained a major challenge. Employers complain that the quality of fresh graduates is disappointing, with poor command of English and the lack of soft skills being significant concerns.

Addressing these issues with a substantive programme to promote technical and vocational education and training and bridging programmes to prepare graduates for employment have shown encouraging progress.

However, employers squeezed by a challenging economic environment and a severe skills shortage are left with poor choices. Put together, these minus points create a strong pressure for talent flight. We must produce and keep more talents at home for Malaysia to prosper.