Pre-polls reforms unlikely, says Roubini’s RGE

By Yow Hong Chieh
The Malaysian Insider
January 13, 2011

KUALA LUMPUR, Jan 13 — Much-needed reforms to Malaysia’s pro-Bumiputera policies will likely be put on the back burner until Prime Minister Datuk Seri Najib Razak secures a new electoral mandate, a report by star economist Nouriel Roubini’s RGE global economic analysis firm has predicted.

RGE said in its “Wednesday Note — Malaysia’s Middle-Income Malaise” released yesterday that Umno was “unlikely” to revamp such policies “blocking” Malaysia’s rise to high-income nation status before the next general election for fear of antagonising Malay voters.

Najib’s market-friendly reforms under the New Economic Model (NEM) have received lukewarm to hostile response from the Malays, many of whom regard such proposals as a challenge to the special position of Bumiputeras outlined in the Constitution.

“[Given] the governing party’s reliance on Bumiputera support, major changes are unlikely until new elections are held and the government has the political confidence to confront popular resistance to reform,” RGE said.

The Malaysian Insider, quoting sources, reported yesterday that Najib was considering pushing back snap polls, said to have been slated for the first half of this year, to the fourth quarter to give big-ticket projects time to gain traction.

RGE pointed out that the decline of the local electrical and electronics (E&E) sector over the past 10 years was “one of the most noticeable manifestations” of the middle-income trap afflicting Malaysia.

At its height in 2000, the E&E sector accounted for more than one-third of the country’s total value added in manufacturing, over 70 per cent of revenue from manufacturing exports and almost four per cent of world E&E exports, the New York-based company noted.

However, Malaysia’s E&E sector has witnessed a drop in productivity, export stagnation and deteriorating global market share since 2000 due to its inability to maintain a low value-added growth model in the face of higher labour costs and increased competition from low-cost rivals like the Philippines and China, RGE said.

It fingered the “stifling” effects pro-Bumiputera policies had on the development of a robust and indigenous E&E sector as the main culprit behind Malaysia’s failure to transition into higher value-added E&E production from its current “downstream dominated” setup.

RGE stressed that it was this “evolutionary process” to upstream production that allowed Asian Tigers South Korea, Taiwan, Hong Kong and Singapore to successfully transition to higher value-added manufacturing, and later, high-income status, despite facing similar challenges as Malaysia.

“By the time labour cost increases forced downstream production facilities to lower-cost markets, [Singaporean] firms were experienced and competitive enough to continue operating in the E&E supply chain at higher levels of value added. In this way, Singapore has managed to increase its global market share of E&E since 2000,” its note said.
“In contrast, Malaysia’s E&E sector has been unable to adjust to shifts in the country’s comparative advantage.”

RGE said the underperformance of the E&E sector over the last decade should serve as a warning to Malaysia’s policymakers that the continuation of “distortionary” pro-Bumiputera policies may limit the country’s growth prospects.

It also said that affirmative action policies have exacerbated the non-Bumiputera brain drain problem and also created a “strategic disadvantage” for local firms by limiting human and financial capital as well as “perpetuating an unlevel playing field” for entrepreneurs.

The note added that the continued government presence in the economy via procurement policies and some 500 government-linked corporations (GLCs) provided “ample opportunity for rent-seeking by well-connected Bumiputera” able to take advantage of favourable policies.

RGE is chaired by Nouriel Roubini, famous for correctly predicting the US sub-prime crisis three years before it happened.

Roubini, an economics professor at New York University’s Stern School of Business, previously advised the World Bank and International Monetary Fund (IMF) and currently holds research fellowships at London’s Centre for Economic Policy Research (CEPR) and the National Bureau of Economic Research (NBER) in Cambridge, Massachusetts.