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Can Malaysia graduate?

East Asia Forum
January 19th, 2011
Author: Hal Hill, ANU

Malaysia is one of the developing world’s great success stories. Few countries outside of East Asia can match its development record. Since its independence over 53 years ago per capita incomes have risen more than eight-fold, and absolute poverty has been all but eliminated.

But it currently faces three key, interrelated challenges, some generic to upper middle income developing countries, others specific to Malaysia itself.

The first, how to graduate to the rich-country club, has been clearly articulated by the country’s Prime Minister, Tun Najib: ‘We are now at a critical juncture, either to remain trapped in a middle-income group or advance to a high-income economy … We now have to shift to a new economic model based on innovation, creativity and high value added activities.’

The second, shared by some of its Southeast Asian neighbours, is the country’s slower development trajectory since the Asian financial crisis of the late 1990s. Even before the current global financial crisis, which it has navigated quite successfully, economic growth in the 2000’s was about two percentage points below that of the decade 1986-96.

Particularly worrisome is the slump in investment, which has been stuck at little more than 20 per cent of GDP since the late 1990s. This is 10-15 percentage points of GDP lower than the country’s historic ratio. With savings remaining buoyant, the country’s external position has been transformed dramatically. In 2002, the country had net liabilities equivalent to 35 per cent of GDP. By 2008, this had been transformed to net assets of 20 per cent of GDP. Put simply, Malaysians have been finding overseas investment increasingly attractive, while foreigners have been less attracted to Malaysia.

The third challenge relates to the development of high-quality institutions to underpin a modern market economy in a country that has experienced continuous one-party rule for over half a century. Malaysia’s ruling United Malays National Organisation (UMNO) is in fact the world’s longest-serving governing party currently in power among all ‘quasi democracies’. Not surprisingly, elements of UMNO exhibit the problems of complacence and arrogance that one expects from entrenched one-party dominance.

Malaysia’s strengths are not to be underestimated. It has always been one of the most open economies in the developing world, to both trade and foreign investment. It has rarely had a severe macroeconomic crisis, in large part because of this openness. It derived a major early mover advantage from its adoption in the early 1970s of export oriented industrialisation through foreign direct investment, before it was fashionable to do so. Among emerging economy manufactured goods exporters, it has progressed from 15th ranked and 1.2 per cent of the total in 1969-70 to 5th ranked and 5.2 per cent of the total in 2006-07. It is a major player in the global electronics industry. In 2006-07, it accounted for 3.8 per cent of global parts and components exports, in East Asia behind only the highly industrialised economies of China, Japan and Korea.

But Malaysia is struggling to shift out of low-skill activities, where it is no longer competitive with lower wage neighbours. These problems have been exacerbated by its vigourous promulgation of one of the longest running affirmative action programs in the developing world. Designed to redistribute employment and wealth to the dominant Bumiputera – principally ethnic Malay – community after the nasty communal conflict of May 1969, the so-called New Economic Policy (NEP) and its successors played an important role in promoting racial harmony in the country where there are large differences in living standards across racial groups.

But these programs have created a culture of entitlement, and they have resulted in institutionalised leakages that permeate practically every aspect of Malaysian commercial, social, political and educational life. The programs to advance Bumiputera development have benefited spectacularly the politically well-connected within this community, through preferential contracts, share allocations, and general commercial advancement, while all too little has trickled down to the general community. The programs can hardly be justified as anti-poverty programs when the principal beneficiaries are already egregiously wealthy.

As a result, some of the country’s industry policies have backfired. Malaysia might have been expected to be the leading Southeast Asian automotive producer, but Thailand has become the ‘Detroit of Asia’ owing to Malaysia’s disastrous national car program. In addition, the ‘spillover’ benefits from the large multinational presence in manufacturing have been limited by the fact that Malaysia’s small and medium enterprises (SMEs), that are predominantly owned by the ethnic Chinese community, prefer to stay small, below the threshold above which Bumiputera employment quotas become mandatory. The country’s public universities, once among the region’s best, have also slipped in East Asian rankings owing to these ethnic quotas as well as heavy bureaucratic control. The civil service is bloated and in need of reform, while there is a very large state enterprise sector that functions in a non-transparent manner and subject to little public accountability. Moreover, Malaysia has missed out on emerging service sector opportunities owing to the slow pace of liberalisation in that sector, itself a product of the very large presence of state-dominated firms and the NEP-preference schemes. And the country continues to experience a substantial brain drain as a result of the exodus of skilled professionals from the Chinese and Indian communities.

It is fashionable in Malaysia to attribute its current malaise to China, a country that is able to out-compete Malaysia in low-end and increasingly a sophisticated range of manufactures. While the ‘export similarity index’ (that is the composition of their exports) for the two countries is quite high, and thus there has some been some loss of market share to China from Malaysia in third-country export markets, the notion that the rise of China explains Malaysia’s current difficulties is untenable. That view overlooks the positive sum game for Malaysia from China’s rise. As a resource-rich economy, Malaysia has benefited from the general China-fuelled rise in commodity prices, for example its exports of palm oil and oil and gas. Similarly, commercial opportunities in tourism and education have been rising rapidly, with two-way investments rising very quickly. And Malaysia is a central player in the increasingly China-centred East Asian production networks that export to the world.

Hal Hill is HW Arndt Professor of Southeast Asian Economies at the Australian National University. With Tham Siew Yean and Ragayah Haji Mat Zin, he is co-editor of ‘Graduating from the Middle: Malaysia’s Development Challenges’, forthcoming in 2011.

32 Replies to “Can Malaysia graduate?”

  1. “‘We are now at a critical juncture, either to remain trapped in a middle-income group or advance to a high-income economy … We now have to shift to a new economic model based on innovation, creativity and high value added activities.’ Najib

    Yup, we have the most innovative private bankers in the world who can help transfer funds offshore. We know exactly which banks offshore we can trust and which banks we can’t. We can do creative accounting by borrowing heavily in the local market, and then siphoning off the funds. We don’t have to worry about liabilities, because the banks can always be told to take a haircut. High value-added indeed – all RM 888 billion over the last ten years.

  2. Can Malaysia graduate? – Hal Hil

    I disagree with the author Hal Hil. It is not a matter of “Can Malaysia graduate?”, it is a question of “Does Malaysia want to graduate?”

    Malaysia has all the resources, people and even the know-how to graduate, all it lacks is the desire. And let us be frank, aside from a large minority blogging on the internet, most Malaysians are actually rather happy with UMNO/BN and the NEP. Unhappy people leave.

    As much as it pains me to say this, UMNO remains in power because it enjoy popular support (you know who). This party’s policies has give many benefits to its supporters, and such benefit have trickled down all the way to the grassroots.

    Certainly UMNO’s policies over the last few decades has slowed Malaysia’s progress significantly (see South Korea and Singapore as comparison) and has probably damage the nation’s long term future, but enough voters continued to give their support to keep UMNO/BN in power.

    One must then conclud that while we aren’t as developed or as wealthy as we could be, the majority of the population is satisfied with what has been achieved. I can only conclude that the lost of national progress and lower standard of living is counterbalanced by the benefits that the BN/UMNO government brings to its supporters.

    We are a democracy. And by virtue of that we follow the will of the majority, even if the majority are making poor decisions.

    So this brings us back to the original question. “Can Malaysia graduate [to a high income nation]?”

    Our reply would be “Most certainly yes. But we aren’t interest in graduating at the moment. We are actually quiet happy were we are right now. Thank you very much for your concern.”

  3. ///We now have to shift to a new economic model based on innovation, creativity and high value added activities.///

    While Najib is interested in the new economic model, unfortunately investors are not impressed due to lack of strategies, timeframes and genuine commitments by the government in bringing the new model to pass.

    Investors continue to shun Malaysia realizing that the so-called “New Economic Model” is no more than windows dressing aimed at prolonging the outdated NEP.

    Najib’s pursuit of a high-income Malaysia is to conjure a good scenario of the country’s economic destiny so as to win voters support during GE13.

  4. Can we graduate? I say no hope. We cannot even if we want to. Not with umno around. And sadly, standing still is not an option. If it is then illicit capital outflow would not happen. Umnoputras are pumping money out of the country like crazy. At the same time they are telling poor people and the illiterates here that it is ok to be poor as long as you are happy. Yeah. Look at africans. They are poor, hungry but not happy. They are poor and bashing each other. They are poor and cannot afford education. So they cant help themselves. They dont even know where to start. They are poor and cannot afford basic health care. So they suffer terribly. Without money and knowledge, farms would turned into wasteland. Factories and all equipments inside would be stolen and sold on as scrap metal. A large cake can feed many. A small cake can feed only few. There are 3million members in umno. As it is the current cake the country has is already too small even to feed and satisfy all umnoputras. Inner circles will soon grow within umnoputras. And inner inner circles too will appear. Discrimination and special preferences will take root within them. There will be internal fights. The party will break up. And everyone will suffer.

    Can we graduate? No. Unless we vote umno out. It is happening. I can see it coming. I would rather see it happen sooner and not later. People, the able and capable ones, might lose patience and interest in the cause; and leave the country. This is my concern.

  7. Can Malaysia graduate?

    Yo yo,graduating round the history circle for 53 years whom umno is churning the racial and religion struggle all year around for the majority malays to support them.With umno it’s almost non probable to graduate least pass the critical point to advance status.Almost 80% work force are SPM holder.Yes graduated..so SPM graduates is what our pride trophy at this moment.

  10. graduates? sounds more like get-duits. this is what they are good at. distinction for this. world class robbers.

    this captcha thing is driving me nuts…whose nutty idea was it anyway?

  11. The “WrathofGrapes”..will need the “Godfather” get ready the “undertaker888″… when these three “tak tahan”…all the billions stolen…and a hilly billy professor from Downunder…wants to know can Malaysia graduate to be better… with “PoliticotKat” feeling optimistic and “k 1980” feeling pessimistic…and “degan” intends to teach the professor one or two things about Malaysia.. and I read and get totally confused…how on earth one from DownUnder..expects Malaysia to graduate without changing the Govt.

  12. At the moment we already have Tanjung Rambutan graduates lying up to supersede the mamak,three legs,ect..The top graduate najis will make sure his former father’s cobweb,NEP will work till the fullest effect.

  18. *smile* you conjure up an image of a playful student in some private education institution who has all the money in the world and still tell her parents that she is still in the university after 10 years while her friends have already graduated after 3 years. It is still nice to hear that you are still in university after all these years.

  20. // Can Malaysia graduate?//

    My answer is a big NO. Not unless UMNOB/BN is kicked out of Putrajaya.

    For Malaysia to graduate will require very strong political of the present government to revamp the whole rotten system put in place by none other than the one who ruled for 22 years. This, of course, is impossible and will never happen under UNMOB/BN because the rot has spread over to all their leaders, members and every government institutions.

    It would be sucide for any of their leaders to even suggest to overhaul the system. Theirs is about the members controlling the leader; not the other way around which is normally the norm. Assuming that the top leadership want to right the wrongs, the lieutenants and grassroots will be quick to protest for the simple reason that they, unlike the leaders, have not made their million$ yet. Get the picture now?

    Malaysia can graduate only if there is a Ballot Box Revolt. Our Malay brothers who, being the majority of the 30 million population, must take the initiative if they really love and want to save our country. The non-Malay brothers are ready to cooperate, work and fight alongside them

    Do not wait until what the Malay saying goes, ”padi sudah menjadi bubur” Say TAK NAK UNMOB/BN come 13th General Election. From then on, make the new government do what we want them to do; reclaim our ‘people power’ and let them know that NOT they but WE, the people are their MASTERS

    Ready, brothers?

  21. Najib to tak tahan; It’s only words… and words are all I have to take your heart away……

    Anyway, fyi that is one of my fave songs. I play it almost everyday. you see, I was so poor but I won over my wife’s heart with only words……

  24. The simple answer to the question is YES but NOT under BN rule.

    The truth of the matter is that Malaysia is well endowed and its problems and issue relatively simple IF politicians don’t screw it up. Most of the big issues can be solved largely simple honest governance and accountability – it does not even have to be perfect. We have enough resources to afford mistakes, imperfection unlike any other country in the world. BUT without a efficient delivery system ONLY possible by a less corrupted government, it will not work. Its not about pouring resources, its about production i.e., making the resources perform once it has the resources to do so.

    BUT all the resources available will not get us there if the resources are simply not made to perform. The sooner we are efficient the more we will get out of it. The longer we are inefficient, the decrease the future opportunity is until at some point, the opportunity will not be there anymore.

  25. yip……Change for the better government solve all problems.
    Be calm and observe.
    PR is riding high and mighty.
    If not…why Najib have nightmares?
    Why dinners ..sexy shows and presents given?
    Why hire APCO to help?
    UMNO B is being exposed as corrupted lot..and not one time..you get a straight answer for all revealed and discovered.
    Ling …a puppet to Mahathir is a chosen scapegoat…to stop Malaysians talking about Port Klang Free Zone RM14.5 billion ripped off by UMNO B.
    Now all quiet…one is telling PKFZ needs billions to be saved right now…or else need to close shop.
    We have heard this from Straits Times…MAS…Proton….Berjaya Steel….various Banks…and all are being saved by the Govt…WHY?????
    Now…not so easy as they do not have 2.3 majority…yet they are capable to break all laws and do as they like…but is very afraid to loose votes by the hundreds of thousands.
    So….steal billions to save cronies and their companies…..even their hardcore racists will vote against them in 13th GE. They know that too well.
    So apply cost savings …tightening belts ..get millions each month by increasing oil prices…few times per year…increase toll fees with few sens so as not to stir up mammoth hatreds over them.
    And for the first time….you can see MCA is taking out millions of their party money to throw dinners…sexy shows and lots of cheap presents..given a Tenang.
    They can disguise that from a so call NGO group from MCA….but who finance all that…any fool can conclude.
    Out come Chua talk big….insulting PAS candidate and DAP… and got backfired with DPM warning him.
    This shows clearly MCA have a real idiotic President.
    Where will Chua hide his face?
    I think Chua has a thicker face than the ex MIC President..Samy Vellu…and far far below in intelligences.
    Some Doctors are so call qualified doctors due to their powerful memory brain faculty…memorizing and pass all papers.
    Come to apply initiativeness and commonsense…..NIL.

  26. I agree with bigjoe.
    There is no perfect government and mistakes can be made.
    But systematic and continuous rape of the nation’s resources will definitely kill the nation’s progress.
    Definitely we need a change of government to discover where the dead bodies are buried…

  27. Can malaysia graduate?

    Why not?So many half past six graduates,If you throw one stone up it will end up hitting on one’s head easily.Try it on the street.Try it in government service worker department.

  31. can! we graduated long time back, from nursery schools! some still miss the nappy and diapers time, so they are still wearing it!
    some group needs support like the unlucky handicapped or the post stroke patients. this group needs attention. they need special care and support. so we must use the healthy and strong and willing to work-till-die of other group to support this group. like that, how to graduate? even the willing to -work-till-die people also cannot graduate la! no wonder some of us work in overseas forever. i guess overseas people dont supply free napkin and diapers when they know we can already walk. no special privilege. when to graduate? this answer lies in our hand….oh sorry, in some people’s hand. they hold the answer, they should show us. dont just publish in the paper and ask people to graduate. senselss act!

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