This article first appeared in Forum, The Edge Malaysia Weekly on August 5, 2019 - August 11, 2019

During a forum this year, Securities Commission Malaysia chief economist Allen Ng made the assessment that ever since the 1998 Asian financial crisis, Malaysia’s economy has regressed structurally, sliding towards a more labour-intensive and low-skilled one, and less on investment in the economy.

This view was supported by Shankaran Nambiar, who shared the stage. Shankaran, a senior research fellow at the Malaysian Institute of Economic Research, added that the government needs to halt this trend of deindustrialisation by crafting new industrial policies and setting up appropriate support structures that would revive Malaysia’s industrial capabilities, allowing the country to move up the global value chain. Both gentlemen’s calling for a rethink and restrategising of our economic development by means of industrial policy is timely.

In discussing the Japanese economy, its stagnation since the 1990s has been described as the “Lost Decades”. Malaysia’s economy has also suffered similarly. Labour productivity rose on a yearly average of 5.5% from 1988 to 1997 but slumped to a weak 2.9% from 1998 to 2007. China, on the other hand, witnessed a growth in labour productivity from 4.5% to 9.2% during the same period.

Although it suffered more damage during the 1998 Asian financial crisis, South Korea has been able to rejuvenate its economy so that it now commands impressive capabilities in the automotive, mobile and heavy industries, combined with attractive soft power through its global cultural exports of Korean music, drama and cuisine, stirring even a storm across the diverse ethnic communities in Malaysia.

The socio-political Reformasi movement since 1998 has left a deep and enduring legacy for this nation. But since that same year, one wonders what errors have been committed in drafting and executing our economic policies that have led to the economic stagnation of the past 20 years. The causes are many and complex, but this article seeks to explore Malaysia’s failures in industrial policy.

Industrial policy refers to a policy aimed at particular industries (and firms as their components) to achieve the outcomes that are perceived by the state to be efficient for the economy as a whole. Despite their variances, the “East Asian model” adopted by China, Japan, Singapore and South Korea have chosen to directly influence market prices and production priorities in order to allow its corporations to overcome its latecomer disadvantages so that they reach the capacity and scale required to compete globally.

Unbeknown to many is the fact that Malaysia was one of the largest recipients of foreign direct investment (FDI) in the world during the 1980s. However, it has not brought about tangible benefits that commensurate with the level of investments poured in. As early as the 1980s, weaknesses such as overreliance on foreign investment and technology in certain critical industries had been identified through the publishing of the Industrial Master Plan. Overreliance on foreign capital risked suppressing the development of local industrial base. An excessive dependence on foreign technology risked causing massive outflows of economic surplus through licensing, patents, internal cost transfers and other forms of repatriation to parent companies.

Take the example of the electronics industry in Penang. Research has shown that while multinational companies have shifted low-technology assembly lines to Penang, much of the high-end research, machinery, human capital and sales operations have remained in their home countries. This, of course, is a pragmatic cost-saving move on the part of the multinational companies, which have also moved operations into Asia on a massive scale to ease access to its markets. To expect FDI to bring economic transformation and progress as a Christmas gift is hence nothing short of wishful thinking.

Instead, governments should periodically review their industrial policies during the inflow of FDIs and utilise tax instruments to encourage technological transfer, local procurement and the employment of high-skilled local labour to allow a strong backward link with its own local industries.

Singapore, while highly dependent on FDIs, stringently executes its industrial policies under the oversight of the Economic Development Board, reviewing the incentives provided to foreign investors once every five years to further incentivise foreign corporations to increase their deployment of technology and productivity locally, hence increasing the quality of FDIs. Malaysia’s failure to utilise FDIs efficiently when crafting its industrial policy led us to miss out on the potential benefits of the golden era of FDIs. It is not surprising then that Penang’s industrial parks have not given birth to world-renowned brands like Samsung, HTC or Quanta.

Moreover, the Malaysian Industrial Policy Studies report has unearthed a stark and unhealthy dualism in Malaysia’s manufacturing sector. On one hand are foreign corporations that are highly export-oriented, with little to no participation in local markets. On the other hand, there are overly protected local corporations that only supply to the needs of local markets.

This has created an awkward situation in which Malaysia is left with only jaguh kampung or village champions that are incapable of competing beyond the protection of the Malaysian border and foreign industries that provide little value to the development of the local economy.

This dualist problem uncovered by the report published in the 1980s has continued to haunt Malaysia to this very day. This very peculiar problem has reduced opportunities for local firms to access advanced technology and management capabilities, so we are unable to bring forth the industrial advancement that comes from more competitive firms, leading to a failure in bringing forth economic development and progress.

As we brace ourselves for a highly globalised Industrial Revolution 4.0 and increasingly volatile world, there is an urgency to review and craft a new industrial policy for Malaysia. Admittedly, drafting the correct policy is only the first half of the battle. The second half requires strict discipline and an excellent and responsible civil service that is able to ignore the countless distractions and rent-seeking practices that have plagued the government’s ability to execute policies. Our quest to achieve developed nation status would depend on our ability to overcome this problem that has entangled us for the last 60 years.

Lee Chean Chung is state assemblyman (PKR) for Semambu. He holds a Master’s in Transportation and Logistics from Malaysia University of Science and Technology and a Master’s in Public Administration from Lee Kuan Yew School of Public Policy at the National University of Singapore.

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