This article first appeared in Forum, The Edge Malaysia Weekly on October 4, 2021 - October 10, 2021

The Malaysia Plans, including the 12th announced recently, are essentially the nation’s medium-term development strategies, charting our socioeconomic course over the next five years. Since the First Malaysia Plan in 1966, a lot of attention has been on strengthening the country’s economic competitiveness.

Indeed, the word “competitive” — used, at least, in relation to economic growth — has been present since the Third Malaysia Plan. However, its meaning comes through clearly, though the word may not be used explicitly, even in the first two Malaysia Plans. But what does it really mean to be competitive?

There is no one single way for a country’s economy to grow. Certainly, there are patterns and similarities, but in the nitty-gritty of things, every country’s path is different. For instance, while Taiwan and South Korea may have employed heavy government intervention, particularly in industrial policy, in the 1960s to 1980s, South Korea made use of large chaebols while Taiwan was more inclined towards using large public enterprises.

For many countries that are far from the global economic frontier, catching up by competing via low labour costs is a common strategy. This is what Malaysia has done, with some success, and it is currently what Vietnam is doing with manufacturing and indeed what Bangladesh is doing with textiles.

But, as has been well pointed out, this strategy only gets a country so far. At some point, when a country gets closer and closer to the economic frontier, at least in the sectors in which their economy is based, it then needs to transition from learning from others to innovating. Failure to do so puts a clear ceiling on a country’s economic development. This is, in no small part, one of Malaysia’s most crucial economic challenges and, I suspect, will be at some point as well for the likes of Vietnam and Bangladesh.

And so, as we think of Malaysia’s medium-term economic strategy, we should ask — what is our economic structure? Is the bulk of our economic activities in mature, old-economy industries, or are we transitioning towards more cutting-edge, new-economy ones?

Are we still in an outdated, yet entrenched, economic strategy based on low-cost labour as a competitive advantage, or are we innovating? At the heart of these questions is, ultimately, the economic competitiveness of not just Malaysia, but also companies in the country, where all economic activity is organised. We need to take a deeper look — are our largest firms in old-economy, mature sectors or are they in more dynamic, new-economy ones?

When it comes to thinking of competition, I find nature’s grandest form of competition — Darwinian evolution — to be a very helpful analogy. The ecosystem in which the competition for survival takes place really matters.

Evolution on a continent is far different from evolution on an island. Given that islands impose a natural restriction on the types of animals that might reach it, islands tend to have fewer species than areas of land of similar size on mainland continents. Indeed, the collection of animals that manages to colonise an island is usually not a representation of the mainland.

Naturally (pun intended), evolutionary pressures on islands lead to wonky differences relative to species on the mainland. According to a recent article in The Guardian by Hanneke Meijer, a vertebrate paleontologist at the University of Norway, the insular island environment creates havoc in mammals, with changes in body size.

While there are certainly exceptions to the rule, on insular island environments, small mammals tend to increase in size (insular gigantism) while large mammals decrease in size (insular dwarfism). In fact, this pattern of body size changes is known as the “Island Rule”.

In many of our neighbouring Southeast Asian islands today, giant rats are still around. Mediterranean islands were once home to giant shrews and rabbits. At the opposite end of the size spectrum, the Mediterranean is also known to have been home to dwarf hippopotami and elephants.

In the US, the remains of dwarf mammoths have been found on a couple of islands. The main cause of the Island Effect, particularly for animals larger than rats, is a lack of competition. The absence of predators, which may not be able to swim out to the islands, and decreased food competition with competitors reduce the need for increased sizes for these larger species. As such, compared with their mainland cousins that are far larger, these species exhibit dwarf characteristics.

Coming back to Malaysia, we should ask, to what extent are our firms on an island of their own, and to what extent are they on the “continent”? To be clear, Malaysia has a long history of being a trading nation, with a strong export base. The question is whether we can hold on to that export base given our existing development strategy. And, among our largest firms, we need to ask what their markets actually are? Are they simply providing domestic services to an island of, say, 35 million consumers, or can they go out and compete to provide those same services to a continent of 7.5 billion people?

When it comes to competition, if Malaysia’s largest firms primarily compete among themselves for an “island-type” market size, how productive can they actually be? Furthermore, it is common knowledge that given the institutional arrangements of the country’s largest institutional investors, valuations in Malaysia’s public equity markets may not be in line with the actual values of those companies.

We can check for some tell-tale signs of our listed companies’ productivity by comparing efficiency metrics — such as return on equity, asset turnover and cost-to-revenue ratio — against regional and global benchmarks. Is our market structure artificially giving the corporate sector a sort of social welfare?

At the employee level, we can also ask if we are creating islands — for instance, what is the impact of the recent policy changes to the Malaysia My Second Home programme on our economic competitiveness? Are we creating a larger moat around our island and is it still based on older, more mature industries?

In considering whether Malaysia can continue to increase its economic competitiveness, we need to therefore think about whether our firms can increase their own competitiveness. And this competitiveness needs to be beyond our Malaysian “island”.

Certainly, government support can be helpful, and indeed integral, in promoting new, emerging industries. But in old, mature industries, that support should really be withdrawn and reallocated. The 12th Malaysia Plan and any subsequent development strategies will ultimately hinge on how we organise our economic activities at Malaysian firms.

Nicholas Khaw is an economist and head of research at Khazanah Nasional Bhd

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