The budget offers the rosy view that the Malaysian economy will continue to be resilient, with a projected growth of between six and 6.5 percent in 2008.
The economic prospects need to be placed in perspective. First and foremost, the external economic environment has sharply deteriorated and the international agencies and governments of the developed countries have turned bearish on global economic growth prospects in the wake of the US sub-prime crisis. Some analysts have even gone so far as predicting a recession.
Malaysia, as an open economy, is not immune from these adverse developments. History indicates that a global slowdown impacts on Malaysia in a magnified manner — lower exports linked to weak demand and lower commodity prices; lowered inflows of capital and through multiplier effects contributing to lower domestic economic activity, lower domestic investment, and lower government revenues which in turn force the government to increase borrowing with the inevitable growth in the deficit.
Thus, the over-optimistic assumptions and forecasts lack credibility. The prognosis for 2008 must thus be viewed at best as one of increased uncertainty and heightened risk.
A more realistic assessment would be that Malaysia may face an economic crisis and will need to change course to withstand the looming economic storm. It cannot continue on the present path. It is deeply troubling that the Government does not appear to have recognized the perilous circumstances that are now unfolding.
The Prime Minister offered in the latest budget more incentives and concessions to the private sector and yet again exhorted the private sector to take a lead in investing and promoting growth. What the Prime Minister failed to acknowledge was the stark fact that implementation of the NEP was the single most important impediment that affected the private sector and its ability to play a fuller and more robust role. He offered no indication of policy changes or attempts to allay the fears and frustrations of the private sector concerning the NEP.
The private sector can be broadly sub-divided into three major components:
- The GLCs
- The foreign owned corporations or corporations in which there foreign participation
- The Small and Medium sized Enterprises
It is appropriate to briefly review the current scene in respect of each of these groups.
The GLCs constitute the largest and most important segment of the private sector and operate as monopolies facing little or no competition. Many of these entities are ill-managed and record humongous losses or at best low returns on capital. Proton is but one example.
There is little evidence that the various tax and other incentives offered via successive budgets have influenced their investment or other business decisions. The corporate culture in many of these entities differs from that prevailing in the multinational corporations.
The foreign owned multinationals have for the most part located themselves in Malaysia in past decades for the most part because of the attractions offered by a low wage labor market coupled with the tax holidays.
New investments have been affected by the disappearance of the low wage factor, the over-regulation by the government, the high cost of doing business and the increasing political uncertainties. These entities are unlikely to expand irrespective of the changes in the so-called incentive packages.
New investors of this genre are unlikely to locate themselves in Malaysia as alternative investment destinations gain ground, e.g. Vietnam, China, India etc. Furthermore, the growing negative factors in terms of the cost of doing business, corruption, and lack of transparency, over-regulation and the political risk factors outweigh the benefits of investment incentives that are offered.
Malaysia’s Small and Medium-sized Enterprises contribute some one-third of its GDP of RM340 billion. An estimated 90 per cent of SMEs are Chinese-owned. It is these that bear the full brunt of the NEP.
According to a recent survey conducted by the Associated Chinese Chambers of Commerce & Industry of Malaysia (ACCCIM) these enterprises had a rough ride in the first half of the year and are pessimistic about second-half year prospects. The survey revealed that domestic competition, rising raw material prices and operating costs, as well as opaque government policies were the three factors which most adversely affected the business performance of these businesses.
The survey indicated that despite the slew of ongoing government initiatives to ensure the sustainability of the local economy, the community appears less optimistic about economic prospects in H2.
A more robust ringgit had affected nearly a third of its 28,000 members who are export-oriented. Only 20 percent of ACCCIM members who participated in the survey anticipate a rise in export sales, compared with 37 per cent in 2006. The pessimism also extends to local sales. Only 17 per cent believe domestic sales will increase. The survey also indicated that inflationary pressures are expected to continue to have an impact on sales, with 64 per cent believing rising inflation will affect consumer sentiment and sales.
A more stark survey finding was that the Chinese owned SMEs do not expect to benefit from additional government spending on a number of massive development initiatives to ensure the sustainability of the local economy in the years ahead. This is in part because they do not believe they would be on the list of beneficiaries of these projects, and they anticipate bureaucratic red tape will continue to act as a stranglehold.
The ACCCIM once again called for improving the delivery system. In their view government policies need to be more transparent and liberal.
The ACCIM expressed deep concern about the policy guidelines on distributive trade which the Domestic Trade & Consumer Affairs Ministry has tried to introduce to the ire of many. These guidelines stipulate businesses which are owned 15 per cent and above by foreigners should be restructured in a way which allows bumiputras to hold at least 30 per cent equity. The paid-up capital of the businesses also has to be raised to a minimum of RM1 million and the composition of the directors and employees must reflect the racial composition of the country.
It is these and similar issues which are matters of concern. These remain unaddressed. Thus, granting more incentives as the present budget does is not a solution. What is indeed devastating is the lack of consistency. Whilst much is made of the incentives, the budget takes contradictory positions.
One section in the budget – tucked under the Corporate Social Responsibility section — is likely to further alarm the private sector. The budget proposes from next year, that all public-listed companies will have to disclose their employment composition by race and gender, and list program to develop local and Malay partners. This surprising section is only one sentence long, but it will reinforce the idea of a stronger Malay, rather than a national agenda. It is actions such as these that bring into question the seriousness with which the Government approaches the issue of improving the business climate.
The budget for 2008 continues to pay lip service about improving the nation’s competitive position and a few rhetorical sound bites are offered. There is however a total disregard of the fact that improving competitiveness will demand drastic and vigorously implemented measures to:
- Pursue relentlessly the elimination of corruption
- Greater accountability and transparency concerning the use of public resources
- Deregulation and a change in the licensing and permit regimes which feed into the culture of rent seeking and corruption
- Improve the productivity of the million plus public servants
- Effective use of the nation’s reservoir of human resources via policies that give scope for merit and talent
- Elimination of counter-productive policies and procedures associated with aspects of the NEP
It is noteworthy that the Budget speech, the most important and key policy statement in the national calendar, contained no references to any of these issues. Nor did the speech acknowledge, let alone offer solutions or steps in facing up to the greatest and most dangerous challenge posed by the acceleration in race polarization. The most telling message delivered by the Budget is that these challenges are not to be met; the nation will instead continue to rely upon short term feel good populist policies.
(Speech 5 on 2008 Budget in Parliament on Monday, September 10, 2007)