NEM stillborn?

Malaysia’s Development Strategy Revisited (4)
by Dr. Mohamed Ariff*

New Economic Model Up Against Formidable Challenges

The structural change agenda presents formidable challenges. The kinds of skills that the new paradigm demands cannot be provided by Malaysia’s archaic education system, which needs a complete overhaul. At the same time, the country is suffering from a serious brain drain caused by both push and pull factors. The importance of a truly independent judiciary cannot be exaggerated: anecdotal evidence suggests that Malaysia’s tarnished judiciary and gutter politics are among the push factors. Seen in these terms, the brain drain is largely a manifestation of frustration that has led some people to vote with their feet.

All this calls for bold structural changes, including institutional reforms encompassing everything from education to the judiciary, backed by governance reforms to strengthen fiscal discipline, transparency and accountability. Nothing short of a holistic approach will set the Malaysian economy far enough or fast enough on a true development path. The politics of policy making, however, may hobble the reform process.

Indeed, there are ominous signs that the New Economic Model may be stillborn. The powerful vested interests that have thrived on the rent seeking put in place by the New Economic Policy will resist reform tooth and nail. The all-inclusive ‘1Malaysia’ concept propagated by the Najib administration and the exclusive New Economic Policy caucus promoted by ultra-Malays simply cannot mix, each being antithetical to the other.

This paradox cannot be resolved by cosmetic changes to win over diehard supporters of the New Economic Policy or increase the appeal of the 1Malaysia concept. Inclusiveness, meritocracy and competitiveness must be the hallmark of the New Economic Model if it is to fly. If it fails to take off, the lofty 1Malaysia initiative will be reduced to an empty slogan.

The 10th Malaysia Plan relies on Private Investment

Unfortunately, the Tenth Malaysia Plan for 2011–2015 does not echo the inclusive sentiments espoused by the New Economic Model. The plan, which targets GDP growth of 6 per cent, looks somewhat similar to the preceding Ninth Malaysia Plan for 2006–2010 in terms of fund size (RM230 billion), sectoral allocation and strategy, albeit with different goals.

The assumption in the Tenth Malaysia Plan that private investment will grow at an annual rate of 12.8 per cent to energize GDP growth is questionable given that private investment slowed to 2 per cent under the Ninth Malaysia Plan. FDI trickled in at a snail speed of 1 per cent per annum during 2006–2009, a far cry from the 9 per cent growth seen before the Asian Financial Crisis.

According to the United Nations Conference on Trade and Development (UNCTAD), there was a massive 81 per cent drop in FDI inflows to Malaysia in 2009 alone. Although it was a bad year for nearly every country in the region (the notable exception being Singapore), the other countries fared much better, with Thailand, Viet Nam and Indonesia registering significantly smaller drops of 30.4 per cent, 44.1 per cent and 44.7 per cent respectively. What is more, the Philippines attracted more FDI than Malaysia for the first time ever, while Vietnam overtook Malaysia as a favoured destination for FDI.

The dramatic drop in inflows in 2009 cannot be dismissed as an aberration given that a downward trend had been evident for several years. Nor can it be explained away by the observation that FDI was in short supply. The fact remains that Malaysia is losing out to its competitors as it seeks to attract increasingly scarce FDI funds. One cannot help but wonder if foreign investors are voting with their feet.

The Tenth Malaysia Plan expects the private sector to be in the driver’s seat, but this assertion alone is unlikely to entice the private sector, especially foreign investors, when there is no strategy to dislodge distortions in the market place related to the New Economic Policy. As Albert Einstein remarked, it is madness to keep doing the same thing over and over again while expecting a different result.

The New Economic Policy is an addiction for some, redundant for some others and unjust for the rest. Like the legendary Gordian knot, the New Economic Policy cannot be loosened but must be cut. Apparently, no one in the corridors of power in the country has the gumption to do away with it, because they all owe their jobs to the current set-up. All this, one must hasten to add, does not constitute an argument against affirmative action per se.

(to be contd)