Professional Documents
Culture Documents
High Income
Rakyat
Quality of Life
Inclusiveness Sustainability
NEAC
National Economic Advisory Council
Level 5 & 11, Menara Usahawan
Persiaran Perdana, Precinct 2 NATIONAL ECONOMIC ADVISORY COUNCIL
NEAC
www.neac.gov.my
1
NEW ECONOMIC MODEL
F O R M A L AY S I A
Secretary
National Economic Advisory Council
Level 5 & 11, Menara Usahawan
Persiaran Perdana, Precinct 2
Federal Government Administrative Centre
62652 PUTRAJAYA
__________________________________
Cover design and layout by
Percetakan Nasional Malaysia Berhad
iii
iv
vi
vii
viii
ix
List of appendices
Appendix 1: Sustainability and the palm oil industry 153
Appendix 2: Managing adjustments – Aligning old expectations to the new reality 165
Appendix 3: Targeted actions needed for promoting micro-enterprises and SMEs 175
Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high
value-added niche areas 179
xi
xii
xiii
Malaysia has reached a defining moment Two other pillars have been launched over
in its development path. Vision 2020 is the past year. They are the 1Malaysia, People
not possible without economic, social and First, Performance Now concept to unite all
government transformation. To move the Malaysians to face the challenges ahead and
Executive Summary
country forward, the government has crafted the Government Transformation Programme
a framework comprising four pillars to drive (GTP) to strengthen public services in the
change (Figure A). The New Economic National Key Result Areas (NKRAs). The last
Model (NEM) to be achieved through an pillar is the 10th Malaysia Plan 2011-2015
Economic Transformation Programme to be unveiled later this year.
(ETP) constitutes a key pillar which will
propel Malaysia to being an advanced nation
with inclusiveness and sustainability in line Why do we need the NEM and
with the goals set forth in Vision 2020. The what are its goals?
ETP will be driven by eight Strategic Reform
Initiatives (SRIs) which will form the basis The old growth model provided three decades
of the relevant policy measures. of outstanding performance, permitting
Malaysia to provide for the health and
Figure A – The four pillars of national education of its people, largely eradicate
transformation poverty, build a world-class infrastructure
and become a major exporter globally. Our
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Executive Summary
Malaysia’s economic engine is slowing. Low skills jobs equal low wages. Skilled jobs
Since the Asian financial crisis of 1997- are most often synonymous with higher wages.
1998, Malaysia’s position as an economic In Malaysia, not enough high wage jobs have
leader in the region has steadily eroded. been created and the share of skilled labour
Growth has been lower than other crisis- has declined across industries. In many
affected countries, while investment has instances, employers do not pay for skills,
not recovered. relying instead on a readily available pool
of unskilled foreign workers and underpriced
Private investors have taken a back seat. resources – made possible by government
Since the Asian crisis, aggregate investment policies – to generate profits from production
as a share of GDP in Malaysia has continued of low value added products and services.
to decline, with private investment remaining These factors have also largely dampened
stagnant due to several factors. In some wage growth.
industries, heavy government and government-
linked company (GLC) presence has Productivity is growing but far too slowly.
discouraged private investment. Before the Asian financial crisis, Malaysia
was leading the region in labour productivity
Doing business in Malaysia is still too difficult. growth. It has since lost the pole position.
Cumbersome and lengthy bureaucratic The weak productivity growth highlights the
procedures have affected both the cost stark reality that Malaysia still lacks creativity
of investing, and the potential returns on and innovation – as shown in stagnant
investment. Malaysia’s place within the Global contribution by total factor productivity and
Competitiveness Index dropped to 24th in the education to output growth.
2010 report from 21st previously, indicating
that the country is losing its attractiveness Efforts to innovate and create have been
as an investment destination. insufficient. The weak track record of domestic
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Executive Summary
niches and strategic reform plans, many rather than broad-based subsidies.
countries have been unable to break out of
the middle income category – a phenomenon Low-cost business models made possible
that has been termed the ‘middle income by pricing and policy distortions encourage
trap’. a private sector focus on short-term profits.
The private sector is not investing in products
Our shortcomings are preventing us from and services that will drive future growth.
getting out of the middle income trap. Almost This is reflected by low investment in R&D,
all economies of East Asia are poised lack of interest in innovating products and
to achieve high economic growth in this processes to move up the value chain,
decade. But Malaysia runs the imminent risk and hence a strong disinterest to build
of a downward spiral and faces the painful skills and pay higher wages for improved
possibility of stagnation. productivity.
Ethnic-based economic policies worked We must act now before our position
but implementation issues also created deteriorates any further.
problems. The NEP has reduced poverty and
substantially addressed inter-ethnic economic
imbalances. However, its implementation has What’s happening around us?
also increasingly and inadvertently raised the
cost of doing business due to rent-seeking, To act effectively, we need to understand
patronage and often opaque government and appreciate what is happening around
procurement. This has engendered pervasive us. Due to the global financial crisis, the
corruption, which needs to be addressed advanced countries will grow slower in the
earnestly. near future and many countries are revisiting
their growth strategy.
Executive Summary
drive labour productivity and boost efficiency,
Where do we want to be? lifting real growth rate to an average of 6.5%
per annum over the 2011-2020 period. Per
The main goals of the NEM are that Malaysia capita GNP will rise to about USD17,700 by
will become a high income advanced nation 2020. This scenario assumes that globally
with inclusiveness and sustainability by 2020 there will not be another major economic
(Figure D). No one goal should be achieved crisis to derail the Malaysian economy from
at the expense of the others. In striving to this growth path.
achieve those goals, we cannot take the
short-cut of pump-priming with wealth from If the GDP growth target is to be achieved,
natural resources, which is not sustainable. aggregate demand will have to grow at a
Nor can we completely leave things to market robust pace. Investment will be the main
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10
Executive Summary
measures defined under the new model arising from environmental degradation. The
must be sustainable in both economic and recent development of the ‘Green GDP’
environmental terms. Malaysia’s dependence concept will allow proper consideration of
on natural resource consumption as the the impact of growth on the environment
primary engine of growth is clearly not and the appropriate design of measures to
sustainable on either dimension. This is address environmental concerns.
not to suggest that exploitation of natural
resources should not be a key component The NEM seeks sustainable growth that meets
of national production. But it does mean the ongoing needs of the population without
that under the new model, investment and compromising future generations by effective
policy decisions will only be made after full stewardship and preservation of the natural
consideration of their long-term impact on environment and non-renewable resources.
the society, the economy as a whole, and This new approach will be particularly relevant
of course the environment. to the management of water, and oil and
gas resources.
Economic sustainability will be ensured through
the establishment of the fiscal discipline The ultimate beneficiaries: Rakyat and
needed to safeguard macroeconomic balance businesses
and financial stability. Public sector reform is
an important component of long-term fiscal The NEAC anticipates a series of benefits that
sustainability and is a key component of the would accrue to all Malaysians if the NEM
NEM. Ongoing reform of the civil service, policy measures are consistently and fully
including staff up-skilling and retraining, will implemented. We must recognise however,
be key to increasing the efficiency of public that the various benefits will be realised over
services and making it more customer- a period of time. In the meantime, some
focussed. segments of the population may perceive
11
• More choices and higher • Living and working in safe • Confidence in the
purchasing power surroundings government
• Better quality of life • Equal and easy access to • Improved
information environment
• Opportunities for upward
mobility • Mutual respect and • Sustained growth
individual dignity
• Reward for innovation • Sound
and creativity • Every part of the nation – management and
be it a state, a city, a town preservation of
• Greater confidence in
or a village – matters resources
the robustness of the
economy • The poor will not be
forgotten
Benefits for businesses will result from effective ecosystem and a more efficient
greater equity in the environment, a more market to facilitate investment and operations
(Table B).
12
Executive Summary
• Rule of Law. Ability to licensing and undue
tenders
manage businesses with regulatory burden
the assurance of a fair • Fair Market
• Dynamic Clusters. Benefit
and credible legal system Pricing.
derived from scale through
With minimal
• Ownership Freedom. industry clustering and
exceptions,
Freedom to fully own networking
subsidies and
businesses and choose
• Human Capital. Improved price controls will
partners
access to the best talent be eliminated
• Intellectual Property. based on ability to pay
• Barrier Free.
Intellectual assets will be
• Funding. Flexible and Liberalisation of all
protected
prompt access to SME sectors.
• SME Recognition. funding under strong
• Fair competition.
Regulations are governance rules
Ability to operate
appropriate and
• Efficient Courts. Swift on a level playing
proportionate to small
resolutions of legal disputes field created by
businesses
• Transformation Fund. the enactment of a
• Market Transparency. competition law
Fair access to special
Absence of rent-seeking
assistance during the • Public-Private
and quotas, with support
economic transition period Partnership. More
to businesses based on
• Regional Integration. An opportunities to
market principles
integrated regional market collaborate with
and support to grow into the public sector
regional champions. and GLCs
13
14
Executive Summary
2 investment (including through
to revive private investment and market
GLCs) in selected economic
dynamism
sectors
Localised autonomy in decision-
Centralised strategic planning.
making. Empower state and local
Guidance and approval from the
3 authorities to develop and support growth
federal authorities for economic
initiatives, and encourage competition
decisions
between localities
Balanced regional growth. Cluster- and corridor-based economic
Disperse economic activities activities. Concentration of economic
4
across states to spread benefits activities for economies of scale and
from development better provision of supporting services
Favour technologically capable
Favour specific industries and
industries and firms. Grant incentives
firms. Grant preferential treatment
5 to support innovation and risk-taking to
in the form of incentives and
enable enterpreneurs to develop higher
financing to selected entities
value added products and services
Export dependence on G-3 (US, Asian and Middle East orientation.
Europe and Japan) markets. Develop and integrate actively into
6 Part of production chain to supply regional production and financial
consumer goods and components networks to leverage on flows of
to traditional markets investment, trade and ideas
Retain and attract skilled
Restrictions on foreign skilled
professionals. Embrace talent, both
7 workers. Fear that foreign talent
local and foreign, needed to spur an
would displace local workers
innovative, high value added economy
15
Figure E – The New Economic Model: Enablers and Strategic Reform Initiatives
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16
Executive Summary
the business community including protected refinement and improvement in policy actions.
industries, employers of foreign labour, At the same time, the political and intellectual
licence holders, beneficiaries of subsidies, leadership must continue to be at the forefront
and experts at doing business the old way. of this transformation process.
Some segments of the rakyat who no longer
qualify for government subsidies and grants A ‘big push’ of synchronised policy measures
might react strongly, and those that have and initiatives
enjoyed secure jobs and a stable lifestyle
from protected firms may feel threatened and With the leadership and rakyat on board,
object. Each individual player will be tempted
a big push in the form of a critical mass
to look at the NEM from the perspective of
of policy measures derived from the SRIs
“winners” or “losers”. For this reason it is
must be announced. Due to the cross-cutting
important to clearly communicate the vision
nature of the Strategic Reform Initiatives, the
of the NEM to bring everyone on board.
sequencing of policy actions is crucial for
The NEAC assigns a large measure of achieving impact and results. Some policy
importance to the government’s proper actions could be immediately implemented.
management of the political situation. Peace Others may be introduced at a later date
and harmony must be preserved in Malaysia because they require a longer preparation
in the midst of the likely, but temporary, period. However, this preparation must
disruptions from the ETP. commence immediately. Piecemeal and
incoherent introduction of policy would be
Getting the rakyat to drive change inconsistent with the cross-cutting nature of
together the SRIs. The policy measures in line with
the SRIs must move in tandem to deliver
Garnering the support of stakeholders high income in an inclusive and sustainable
and ordinary Malaysians for the NEM is a manner.
17
18
Target high value n Align incentives to foster investment in high value added
added product and activities which generate spill-over effects
services
n Tailor incentives to meet the needs of each firm
n Facilitate FDI and DDI in emerging industries/sectors
Executive Summary
e-Government portals to include local and state
governments
Promote SME growth n Provide support for SMEs in innovative and technologically
advanced areas
n Facilitate timely access to funding for business activities
19
Increase local talent n Review the education system – shift educational approach
over time from ‘rote learning’ to ‘creative and critical thinking’
n Increase emphasis on reintroducing technical and vocational
training colleges
n Identify and nurture talent through a demand-driven
process
n Improve autonomy and accountability of educational
institutions
n Encourage R&D collaboration between institutes of higher
learning and industry
n Enhance English language proficiency
n Deliver high quality education, within reach of all
localities
Re-skill the existing n Upgrade skills of the bottom segment of the Malaysian
the labour force labour force through continuing education and training
n Establish a labour safety-net for displaced workers
n Industry to partner with government in encouraging ‘Continuous
Employment Training’ (CET)
n Formalise international quality standards and certification
of skills
n Allow wage levels to be reflective of the skill level
20
Executive Summary
arrangements
Remove labour n Protect workers, not jobs, through a stronger safety net,
market distortions while encouraging labour market flexibility
constraining wage
n Revise legal and institutional framework to facilitate hiring
growth
and firing
n Raise pay through productivity gains, not regulation of
wages
Reduce reliance on n Enforce equal labour standards for local and foreign
foreign labour labour
n Use a levy system to achieve targets for unskilled foreign
labour in line with sectoral needs
Many distortions would be removed and objectives. The ETP will help individuals and
the economy will experience greater firms to cushion the impact of such a bold
competitiveness from the elimination of measure by putting in place an enhanced
subsidies, price controls and a myriad of social safety net and a special transformation
incentives which have lost their original fund (Table F).
21
Build n Revamp the seed and venture capital funds to support budding
entrepreneurship entrepreneurs
n Simplify bankruptcy laws pertaining to companies and individuals
to promote vibrant entrepreneurship
n Provide financial and technical support for SMEs and micro
businesses, to move them up the value chain
Remove market n Phase out price controls and subsidies that distort markets for
distortions leading goods and services
to misallocation of
n Apply government savings to a wider social safety net for the
resources
bottom 40% of households, prior to subsidy removal
n Create a Transformation Fund to assist distressed firms during the
reform period
22
Executive Summary
n Empower MIDA to become an effective one-stop-agency to
facilitate foreign investment
n Revamp MPC to be more effective in driving productivity and
efficiency improvements
Provide a safety n Retain a residual role for safety nets to stabilise and correct
net to facilitate a periods and instances of market failure
smooth transition
n Apply government savings to a wider social safety net for the
bottom 40% of households prior to subsidy removal
n Create a Transformation Fund to assist distressed firms during
the reform period
23
24
Executive Summary
and health, especially in Sabah and Sarawak
Economic transformation in the industrial, drive. The adoption of processes in line with
agricultural and services sectors is a best practices and international standards
process requiring continuous innovation will improve the chances for Malaysian
and productivity growth with significant firms to succeed in the global market place
technological advancement and entrepreneurial (Table I).
25
Create an n Easing entry and exit of firms as well as high skilled workers
ecosystem for
n Revamp the seed and venture capital funds to support budding
entrepreneurship
entrepreneurs
n Simplify bankruptcy laws pertaining to companies and individuals
to promote vibrant entrepreneurship
n Harness Web-based expertise and industry networks
26
Malaysia must build on its strategic location scale through growth corridors to energise
together with the comparative advantages promising expansions into new markets such
arising from its natural resource endowment as downstream agricultural outputs, eco-
to establish production platforms which drive tourism, alternative energy generation and
high value added growth with spillover effects. climate change mitigation (Table J).
There must be a focus on economies of
Executive Summary
Create value from n Identify E&E subsectors to build depth and foster new niche
first mover and industries, and to capture a greater share as a distributional
other comparative hub as intra-regional trade expands
advantages
n Focus on palm oil-related downstream industries to develop
indigenous technology and innovation or acquire technology
to meet new market demands
n Encourage upstream technology innovation to develop
higher yielding fresh fruit bunches
n Capture a greater share of the education, medical tourism
and ecotourism markets through domestic and regional
partnerships
n Promote climate change mitigating products and services
e.g. recyclables
n Promote products and services that comply with Islamic
tenets e.g. finance, pharmaceutical
27
Integrate real n Develop the commodities trading platforms and products for
sector industries domestic producers to benefit from financial innovation and
with financial expansion
services
n OfferMalaysia as a regional hub for both futures and spot
markets for commodities
n Develop Islamic-based financial products to support domestic
production and risk management of prices and production
28
Preserve natural
Executive Summary
n Use appropriate pricing, regulatory and strategic policies to
resources manage non-renewable resources sustainably
n Encourage all sectors to embrace ‘green technology’ in production
and processes
n Develop a comprehensive energy policy
Facilitate bank n Develop banking capacity to assess credit approvals for green
lending and investment using non-collateral based criteria
financing for
n Liberalise entry of foreign experts specialising in financial
‘green investment’
analysis of viability of green technology projects
n Support green technology investment with greater emphasis on
venture capital funds
29
The discussion above outlines the main The work of the NEAC is not complete. The
elements of the proposed NEM. The SRIs next step is for the NEAC to help formulate
represent the key changes required to drive and detail policy with key stakeholders, in
Malaysia to an advanced nation. But this is support of the proposed SRIs. The details of
not the end of the journey, just a signpost the policy measures will be set forth in Part
to the beginning. The way ahead, however, 2 of the New Economic Model for Malaysia
is clear and Malaysia will lose its way if report, to be submitted for government
urgent action is not taken. consideration later this year.
30
1
Why do we need
the NEM and what
are its goals?
CHAPTER 1
goals?
W h y d o we n e e d th e NE M a nd what are its goals?
Malaysia has reached a defining moment in the National Key Result Areas (NKRAs). The
its development path. The Government has third critical pillar will be the New Economic
crafted a blueprint to move the country towards Model (NEM) resulting from an ambitious
its next stage of development that is based on Economic Transformation Programme (ETP)
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CHAPTER 1
and achieve a new economy as contemplated NEM exemplifies the courage of Malaysians to
in Vision 2020. take the right decision at the right time and a
collective desire of Malaysians to build a better
The NEAC also recognises that the transition tomorrow.
period can be painful for households as well as
for firms. The definition of social safety net will The Malaysian economy will be market-
need refining and the provision of social safety led, well-governed, regionally integrated,
net programmes will be enlarged to include not entrepreneurial and innovative.
just the disabled and the elderly but also for
35
The NEM will provide the framework and To garner the support of stakeholders and
environment to engender the entrepreneurial ordinary Malaysians, the NEAC will recommend
spirit to make the most of growth opportunities an engagement framework to prepare the
from available financing. Innovative and state- rakyat for change in the second phase. The
of-the-art technology will generate high value NEAC places great importance on informing
added products and services, and creative the public and providing coherent explanations
technical, social, and institutional processes. about the vision and agenda of the NEM and
All these will feed into an expansion of the transformation process. This important
markets through regional integration in trade groundwork will include sufficient details on the
and services and by shaping cross-border disruptions, bumps and hiccups likely to befall
production networks and supply chains. business firms, households and individuals.
1.2 Enabling the NEM The path forward to attain future progress will
result in major adjustments in the economy
The ETP will not be a painless journey and which will inevitably lead to groups of winners
hard decisions must be taken and trade-offs and losers. Firms and individuals will have to
managed. It is a journey that will require: 1) cope with the new market realities and many
the steadfast commitment by the government companies will either have to restructure or
to stay the course; 2) the preparedness of the be phased out. Workers in these firms may
rakyat to embrace the difficult changes; and 3) become redundant and may need to re-skill to
a ‘big-push’ of strategic policy measures, not be employable. Changes in sources of growth
incremental changes. are often geographically imbalanced with
some regions benefiting more than others. The
Political will phasing out and elimination of price controls
and subsidies will affect some groups directly
The political leadership must be committed and others indirectly. These are just a few of
and steadfast in its will to decide and follow the disruptions expected.
through with implementing the SRIs. The
government will face resistance from many Big push of policy measures
quarters but it must have the determination to
break down the log-jam of vested interests and With political commitment and the rakyat
opposition of short-sighted factions. Opposition prepared for deep-seated changes, a critical
36
CHAPTER 1
the potential solutions, early and concurrent workforce to meet the needs of a high-value
implementation of these measures will create knowledge economy while wage-restraining
a multiplier effect on the benefits derived, labour market distortions, such as excessive
sustaining the momentum needed for real and indiscriminate use of foreign labour, will be
change. Piecemeal and incremental measures removed.
will not have the same effect.
SRI 3: Creating a competitive domestic
Managing winners and losers economy – Subsidies, price controls and a
myriad of distortion-creating incentives will
The NEAC will suggest programmes for be phased out. The impact on the vulnerable
37
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2
Where are we?
CHAPTER 2
Today, Malaysia’s GNP per capita is about into account the 2008 global financial crisis).
USD7,600 annually or RM2,200 a month. Investment was 40% of GDP in Malaysia in the
Inequality remains high, even with a reduction mid 1990s. Since 1997 it has steadily fallen,
in the Gini coefficient from 50% in 1970s. reaching just 20% of GDP right before the 2008
41
42
CHAPTER 2
United States, the 1997-1998 Asian financial equally damaging consequences. For example,
crisis, the dotcom crash in 2000-2002, and any increase in international commodity prices,
the latest global financial crisis that began in like fuel or food, could have direct immediate
2008. Each event has plunged Malaysia into a impact on domestic prices. These impacts
more severe recessionary spike than the one cannot continue to be absorbed by government
before – a testimony to Malaysia’s increased subsidies. Similarly, unless production costs in
openness but also a sign that Malaysia must Malaysia can keep pace with those abroad,
keep abreast of, and move in sync with global exports are likely to lose ground with negative
developments. effects on national employment and income.
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43
The crisis also caused significant outflows of • Insufficient innovation and creativity
foreign portfolio investment (FPI) and foreign • Lack of appropriately skilled human capital
direct investment (FDI) as well as a fall in
overall investment which has not recovered. Each of these factors is described and
Malaysia’s economic performance since the discussed below.
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44
CHAPTER 2
Since the Asian crisis, Malaysia has seen a lengthy bureaucratic procedures have affected
major change in aggregate investment trends. both the cost of investing, and the potential
While countries such as Indonesia have seen returns on investment. The persistent shortage
notable recovery in investment levels since of skills has had an impact on investment as
the crisis, Malaysia has seen no recovery, with well.
aggregate investment levels in percent of GDP
continuing to decline (Figure 6). The absence of private domestic investment
is further evidenced by developments in
This contraction in aggregate investment in the external accounts. In recent years,
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46
CHAPTER 2
higher levels of aggregate investment. This is outlays but require a high degree of innovation
an unusual phenomenon and suggests that and networking that domestic investors lack.
Malaysia is simply not taking advantage of the We have to create conducive conditions that
inflows of FDI to augment domestic sources will boost domestic private investment in high
of investment, especially in innovative and value added products and services in order to
technologically sophisticated areas. In 2008, raise our income levels.
a large portion of FDI went into the services
0DOD\VLD7KDLODQG9LHWQDP,QGRQHVLD3KLOLSSLQHV
Source: World Bank
47
Singapore 1 4 2 16 1 13
New Zealand 2 1 5 3 26 10
Hong Kong 3 18 1 75 2 3
US 4 8 25 12 18 8
UK 5 16 16 23 16 23
Thailand 12 55 13 6 12 24
Japan 15 91 45 54 17 20
S. Korea 19 53 23 71 8 5
Malaysia 23 88 109 86 35 59
2.2.3 Our exports are still strong but not such as petroleum and palm oil. Figure 9 shows
generating enough added value that more than 40% of Malaysia’s exports are
accounted for by E&E products.
Exports is, and has been for some time, a key
focus for Malaysia. The economy is highly The E&E sector is a good illustration of the
dependent on external markets, with an export- difficulty we face in moving up the value chain.
to-GDP ratio of 1.2 and a trade-to-GDP ratio Historically, Malaysia’s E&E sector benefited
of 2.2 in 2008. Malaysia’s export structure has from the large inflow of foreign investment,
focussed mainly on electrical and electronics mostly from multi-national corporations. While
(E&E) products and on primary commodities a handful of MNCs have upgraded their
48
CHAPTER 2
result, Penang’s E&E cluster has created a muster the capital needed to invest in R&D and
huge community of component manufacturers, make a breakthrough to new higher value added
namely original equipment manufacturing products. As a result, E&E exports continue to
(OEM) suppliers. Firms that become “locked” have high import contents and to be produced
into OEM relationships are prevented from in large part by firms under foreign ownership
developing their own independent brand name using foreign innovation and technology.
recognition and marketing channels. Profit
([SRUWRWKHUV
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Source: BNM
The result of this effect is that Malaysia enhanced demand and market leadership.
became a cost-competitive production base. Nevertheless, GDP growth in Malaysia is
However, given the large import content in sensitive to the fortunes of the E&E sector,
the manufacturing of export goods, the value where recent decline in global growth was
added to the final product has been low. Inability quickly reflected in a fall in such exports,
to attract talent has led to low innovation. After exposing the country to volatility in global
three decades of industrialisation, investors markets. Reducing Malaysia’s dependence
have yet to distinguish Malaysia as a producer on generic E&E assembly activities requires
of innovative and progressive goods – with the continuous innovation to deliver high value
potential of yielding greater returns through added products and processes.
49
Immigration policies favour low skilled and cost and unskilled foreign labour, which has
cheap labour. Between 1990 and 2005, foreign sustained the profitability of low value added
labour contributed more than a third of the businesses in the short term and provides no
increase in total labour supply, and over 98% incentive to move up the value chain. It has
were low-skilled contract migrant workers. also largely contributed to a dampening effect
Easy access has led to over-reliance on low- on wages. As a result of these trends, only
50
CHAPTER 2
Figure 11 - Highly-skilled and low-skilled labour (2007; %)
+LJKO\VNLOOHG
/RZVNLOOHG
The skill level of the labour force is also linked those registered by Malaysia (Figure 12). More
to education. The share of labour force with notably, while the upward trend in Malaysia
tertiary education for advanced countries is has been unimpressive, the rate of increase
usually high, for example in Korea, people in Korea of people with at least some post-
with post-secondary education greatly exceed secondary education has been phenomenal.
0DOD\VLD .RUHD
51
2.2.6 Efforts to innovate and create have for higher value added products and processes,
been insufficient and the capacity for their commercialisation
are essential to global competitiveness. A
The weak track record of domestic innovation World Bank survey of manufacturing indicates
in Malaysia is reflected by the comparatively that Malaysian firms are doing less to develop
low number of researchers (Figure 13). At innovative processes than those of similar
the same time, the number of scientific and countries. Surveys conducted in 2002 and
technical articles published in internationally 2007 indicate that Malaysian firms prefer
recognised journals by Malaysians is also to undertake less sophisticated activities,
well below comparable countries (Figure 14). such as upgrading existing product lines or
The lack of researchers and R&D results in a machinery and equipment. Activities that give
lack of innovation in the industrial and export rise to greater innovation and require the filing
sectors, sectors in which an unrelenting search of patents are undertaken less frequently.
52
CHAPTER 2
Figure 13 - Number of researchers (2006)
*1,SHUFDSLWD86'
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86$
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Source: WDI, KRIS
Innovation is a process that is self-sustaining – market and thus sustains output growth,
it pushes entrepreneurs and investors to further contributing to Malaysia’s high income
maintain their leadership position in the goal.
'HQPDUN
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Source: WDI, KRIS
53
&$*5
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6HUYLFHV
0DQXIDFWXULQJ
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2WKHU
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6RXUFH'HSDUWPHQWRI6WDWLVWLFV(38
Source: Department of Statistics, EPU
54
CHAPTER 2
The result is a shortage of the dynamic talent several reform efforts, is not effectively delivering
needed to push Malaysia into higher value the skills needed. The government has
added activities. In comparison with a number ploughed substantial investment into education
of advanced economies in the region such relative to many other countries (Figure 16).
as Singapore, Korea and Taiwan, the share But compared to other countries – both in the
of unskilled and semi-skilled workers is much region and developed countries worldwide – the
higher in Malaysia. Skill shortage consistently quality of students being produced, according
ranks high among the top obstacles faced to the Trends in International Mathematics
by firms according to studies on Malaysia’s and Science Study (TIMSS), continues to be
investment climate. The most recent inadequate. Education policies saddled with
RI7RWDO
*RYHUQPHQWH[SHQGLWXUH
0DOD\VLD
+RQJ.RQJ
6.RUHD 'HQPDUN
1RUZD\
6ZHGHQ 86$
6ORYDNLD
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6RXUFH:RUOG%DQN.5,6
Source: World Bank, KRIS
55
6RXUFH02( 02+(
Source: MOE & MOHE
56
CHAPTER 2
improving the potential for employment in higher to overall poverty reduction. The incidence of
wage jobs and meeting the demand for mid-level absolute poverty has been cut from about 50%
skills by investors. Better collaboration between in 1970 to almost 20% by 1987 (Table 4). All
private sector employers and universities will ethnic groups recorded progress in poverty
help to correct the mismatch between industry reduction. Despite slower growth post-Asian
demand and graduates as well as improve crisis, the incidence of poverty continued to
graduate employability. decline to 3.6% in 2007.
2.3 The gap between rich and poor is Inequality, however, remains a real challenge
widening for Malaysia. While overall income disparity
Ethnic
Strate
Source: EPU
1 The Gini coefficient is a measure of statistical dispersion of income or wealth. The closer the Gini coefficient
is to 0, the smaller the dispersion - or the greater the wealth equality.
57
Ethnic
Strate
Source: EPU
Moreover, the results of household income since 1990 (Figure 19). The bottom 40% of
surveys over the years suggest that income households have experienced the slowest
growth has been strong only for the top 20% growth of average income, earning an average
of Malaysian income earners, particularly of RM1,222 in 2008.
50
7RS
0LGGOH
%RWWRP
6RXUFH0',
Source: MDI
58
CHAPTER 2
areas. This less-than-satisfactory distribution of reform plans, many countries have been unable
wealth prevents a large portion of Malaysians to break out of the middle income category – a
from sharing the fruits of progress. In the phenomenon that has been termed ‘the middle
long run, this hampers social mobility, again income trap’.
inhibiting large numbers of Malaysians from
fully realising and developing their potential to Although Malaysia’s income trajectory
contribute to the economy. continues to exhibit a gradual upward trend, it
remains far below the ‘high income’ boundary
2.4 Malaysia is stuck in a middle income (Figure 20). Several countries have been able to
2 Based on 2008 data, the World Bank classifies upper middle income countries as those with Gross National Income
(GNI) per capita in the range of USD3,856 to USD11,905.
59
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2.5 …and these deficiencies are very well. High dismissal costs as required
preventing us from getting out under the labour laws make investors unwilling
to go into new areas of business which may
In the current evolving situation, almost all involve shedding of labour. In response, some
economies of East Asia are poised to recover investors have found it more profitable to take
sharply. But Malaysia – already caught in the on foreign unskilled labour where labour laws
middle income trap, and facing all the challenges are not as strictly enforced. This, in turn, holds
described above – runs the imminent risk of a down wage levels for all workers. Unless such
downward spiral and faces the painful possibility market rigidities are corrected, Malaysia will not
of stagnation. be able to attract investment in new sources
On the basis of recent trends and the fact that of growth such as medical tourism, ICT, and
our economy was already one of the hardest Islamic products and services.
hit by the recent global financial crisis, Malaysia
is set to fall behind others in the region, given Malaysia suffers from an exodus of talent. Not
the weaknesses that we have accumulated only is our education system failing to deliver
over the years. the required talent, we have not been able
to retain local talent of all races nor attract
Labour market distortions impede productivity. foreign ones due to poor prospects and a lack
The labour market in Malaysia does not function of high skilled jobs. Lack of talent will hamper
60
CHAPTER 2
of its traditional advantage in commodities and to become more agile in order to survive in an
manufacturing. increasingly competitive global environment,
such policy deficiencies must be corrected so
Ethnic-based economic policies worked but that the private sector will take a longer term
implementation issues also created problems. view of business prospects.
The NEP has reduced poverty and substantially
addressed inter-ethnic economic imbalances. Our oil resources are depleting. Globally, prices
However, its implementation has also are constantly rising, making subsidies and
increasingly and inadvertently raised the cost of price-controlled items more costly. The subsidies
61
3
What’s happening
around us?
CHAPTER 3
around us?
/HDGHUVKLS *RYHUQDQFH
3HRSOH
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65
Many countries are adopting niche strategies Malaysia can be one of the first non-oil-based
that build on their strengths, including Organisation of Islamic Counties members
geographic location and people skills. to reach advanced country status ahead of
Resource-scarce countries like Korea are both Lebanon and Turkey. Malaysia can be
moving up the technology path. Taiwan the world’s leading green economy in tropical
focusses on strengthening innovative SMEs forest and marine biodiversity conservation.
that capture commercial value in larger Building upon its strategic geographic location
markets. Hong Kong and Singapore are in the fastest growing region in the world
upgrading financial skills to exploit the Asian and a strong base of foreign investment,
66
CHAPTER 3
In short, Malaysia can become a global but exceed global standards of excellence
leader in selected fields, and be a strategic and performance.
link between the Muslim world, resource-
rich emerging markets, and high growth/ Modern governance in highly inter-connected
wealthy areas. Through active partnership network economies relies principally
between the government and the private on collective actions, cooperation, and
sector domestically, and with multi-national coordination, but also competition between
companies globally, we can create domestic, different parts of the network. The current
regional and global champions, extending financial crisis has amply demonstrated the
the ‘Malaysia, Truly Asia’ brand far beyond gaps, overlaps and structural weaknesses
67
68
CHAPTER 3
must work flexibly to adapt and adopt new Preserving the natural rain forests and
processes and systems, whilst discarding marine reefs plays a significant role in the
and removing barriers to social efficiency global carbon emission mitigation strategy.
and competitiveness. Properly managed and preserved, these
natural resources have the capacity to reduce
3.3 Malaysia should lead the global the world’s carbon emission and help offset
green revolution the impact of environmental deterioration on
sustainable living. If mismanaged, Malaysia
As one of the top 17 mega-biologically could face both irreparable environmental
69
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70
CHAPTER 3
inter-connected supply chains transform and critical masses of SMEs to support their
global business. Profits will come from growth and creativity. SMEs are still the
creatively opening up new brands, products most important employment providers and
and services, requiring higher levels of sources of talent for large firms. Large firms
research and development, investment in that compete globally are based primarily
people and infrastructure, and the creation in stable, advanced and open economies
of new entrepreneurial skills. with excellent supply chains. Currently,
many of them are located in North America
Growth can only be widely shared through the and Western Europe, while the majority of
relationships between the global giants and companies located in the Pacific Rim can
((XURSH 0DOD\VLD
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Source: Forbes
71
72
CHAPTER 3
environment that nurtures and appreciates often derived from continual consultation and
human creativity. wide feedback in a manner that is tolerant
of differences of opinion.
The mobility of talent has created problems
for many failed states, as poor security Conversely, a more open, comprehensive
and working environments lead to outward dialogue between the people and leadership
migration of the best people and skills, will ensure that the people have a better
leading to a vicious circle of deterioration of understanding and ownership of the national
production and services and hollowing out agenda and aspirations. This is particularly
73
4
Which advantages
do we have?
CHAPTER 4
W h y d o we n e e d th e NE M a nd what are its goals?
While Malaysia faces daunting challenges (NEP) which had a two-pronged focus on
amid rapid global changes, we also have a the eradication of poverty irrespective of race
number of strengths and unique advantages and the restructuring of society to correct
on which to draw as we take purposeful the identification of race with economic
,QFLGHQFHRI
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,QFLGHQFHRISRYHUW\
Source: UN
6RXUFH81
77
78
CHAPTER 4
investment by multinational firms. The E&E Malaysia is strategically located in a high
sector spawned the growth of other sectors growth region (Figure 26). In 2008, bilateral
in supply, logistics and services. Malaysia trade between Malaysia and China was
has become a major exporter of consumer USD53.5 billion, a 15% increase over 2007.
and industrial electronic products. It is Bilateral trade with India is close to exceeding
now poised to make the next technological USD10 billion in 2009.
leap to more innovative and higher value
added, cutting-edge technology industries. Malaysia’s geographic location and its
Such industries may have to be part of endowments help to attract FDI/FPI from
6RXUFH%DQN1HJDUD
Source: BNM
79
&KLQD
0(1$
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$XVWUDOLD
6RXUFH:RUOG%DQN
Source: World Bank
The country’s strategic location, coupled with to leverage the best of each group’s innate
its well-developed infrastructure, will serve skills and traits for the good of the society as
to attract investment to build transportation a whole. Diversity of culture also stimulates
and logistics hubs. Our infrastructure is imagination, creativity, and innovation.
currently augmented with modern industrial Malaysia’s rich and unique cultural heritage,
parks and development corridors, which are and even colonial history are assets for forging
meant to favour innovative and high value relationships in many countries, especially in
added businesses. the high growth economies of China, India,
the Middle East and Indonesia. Furthermore,
4.4 Malaysia is a model of cultural, Malaysia’s diverse language networks help
ethnic and biological diversity to support the development of tourism and
industry links in those same markets.
Malaysia is a culturally rich society with an
array of diverse ethnic groups spread across Malaysia is one of the 17 most important
the Peninsula, Sabah, and Sarawak. This mega-biodiversity countries in the world
diversity provides Malaysia with substantial (Figure 27), with 16 million hectares of
advantages. Diversity of culture, ethnicity, tropical forest area, covering 60% of our
languages, and religions enables a society land area. Over 90% of the forests remain
80
CHAPTER 4
and Mulu National Park. Malaysia has over
2,650 native tree species, of which 550 are Malaysia’s rich biodiversity can be harnessed
vulnerable or endangered. to generate economic benefits from tourism,
recreation, pharmaceutical applications and
Malaysia has a total coastline of 4,675 km, the nutritional products. Although a shift away
29th longest coastline in the world, teeming from reliance on heavy resource consumptive
with coral reefs (the best known being Sipadan) industries for economic growth is essential,
and marine life. A total of 16% of terrestrial Malaysia’s natural resource endowment
and marine areas are protected in Malaysia. can be used in creative and sustainable
Mega-diverse countries
Source: UNEP
81
5
Where do we want
to be?
CHAPTER 5
W h y d o we n e e d th e NE M a nd what are its goals?
From the analysis thus far, the NEAC and, Figure 28 – Goals of the New Economic
we believe, most other informed observers Model
would draw the conclusion that Malaysia’s
handicaps are starting to undermine our
85
86
CHAPTER 5
2010* 2015 2020 2010 2015 2020 2011-15 2016-20
Exports of Goods 546,375 808,562 1,196,790 101.5 111.1 118.1 8.2 8.2
& Services 665,993 1,086,489 1,757,522 101.5 111.1 118.1 10.8 10.1
Imports of Goods 502,100 749,148 1,168,375 93.3 103.0 115.3 8.3 9.3
& Services 612,025 1,006,653 1,715,793 93.3 103.0 115.3 13.8 11.3
GNP (USD
149,607 219,354 311,686
million)**
GNP per
7,558 11,929 17,725
capita(USD)**
Notes: Population growth rate in 2010 is 1.5% & currency exchange rate is RM3.4/USD in 2010. Baseline year
is 2010 based on EPU latest revised numbers. Current prices are computed based on the GDP & GNP
implicit price deflator forecasted numbers for 2010-2020 derived from IMF-IFS CD-ROM. For 2011-2020,
average population growth rate is 1.3% & average currency exchange rate is RM3.2/USD.
* Based on EPU estimates
**At current market prices
87
Average annual
RM million (in 2000 prices) % of GDP
Sectors growth rate (%)
2010* 2015 2020 2010 2015 2020 2011-15 2016-20
Agriculture, forestry
40,172 46,706 53,153 7.5 6.4 5.2 3.1 2.6
& fishing
Mining and
41,867 44,309 46,615 7.8 6.1 4.6 1.1 1.0
quarrying
GDP at 2000
538,069 727,510 682,401 100.0 100.0 100.0 6.1 6.9
constant prices
The fiscal deficit of the Federal Government, (NFPEs), even taking into account the
at about 7.4% of GDP in 2009, has reached impact of fiscal stimulus measures in the
a peak and is expected to decline to 5.6% of wake of the recent global financial crisis.
GDP in 2010. Market sentiments will further This level of debt is much lower than many
improve if the fiscal deficit is brought down other countries. The external debt service
even lower. The NEM calls for a further ratio from 2005-2009 averaged about 4.9%,
reduction of the fiscal deficit with the easing reflecting the fact that Malaysia has relied
and exit from fiscal stimulus, to a near-balance far more on domestic sources for financing
by 2020. Further control of public expenditure, its growth than on external funding.
diversifying the sources of revenue, and a
much more efficient utilisation of financial The NEM envisages a continuation of a
resources will be required if the economy prudent debt management policy. As public
is to achieve a near-balance budget over investment is reduced over time, the fall
the next 10 years. in the need for external financing from the
public sector will be replaced by an increase
As at end-June 2009, the national debt stood in external financing from the private sector.
at about 34% of GDP or RM 233.9 billion, Overall, in the 2011-2020 period, the NEAC
which includes debt from the private sector envisages a slight dip in the total national
and the Non-Financial Public Enterprises debt to just under 30% of GDP by 2020.
88
CHAPTER 5
Inclusiveness is the second goal and a and numerous other ways. Even within ethnic
key part of the NEM. It is a prerequisite groups there can be sharp disagreements
for fostering a sense of belonging. Not and dissensions. Individuals are characterised
having the opportunities to benefit from by a plurality of identities. The notion of a
economic progress breeds resentment within singular identity overriding the rest can be
marginalised groups in the urban and rural misleading and dangerous. The notion of
areas, especially those in remote locations 1Malaysia, or a united Malaysia, should be
of Sabah and Sarawak. Inclusiveness will used in a much wider sense and to transcend
enable all communities to contribute to and ethnicity. There is a plurality of identities that
share in the wealth of the country. While go beyond ethnicity and must be addressed
89
90
CHAPTER 5
be associated with a narrowing of income years will have to be clarified. Malaysian
inequality, this outcome should not be seen as interests will need to be aware and alerted
guaranteed. The experience of the developed on the plan for liberalisation so that they
countries in recent years, especially the can be better prepared to meet the expected
US and UK, shows clearly that there is no increase in competition. The overall impact of
certainty that, having attained the status of liberalisation on inequality will be the result
a high income economy, income inequality of opposing factors. Existing interests which
would continue to narrow. Income inequality are unprepared, or are uncompetitive, will lose
has been rising in the US and to a lesser out to new entrants who are more efficient
91
The NEM will shift the emphasis to market- 5.1.3 An economically and environmentally
friendly affirmative action programmes enduring solution
supporting social and economic activities
aimed at broadening inclusiveness efforts. The sustainability component of the NEM
This approach will focus more on building is meant to ensure that all of the proposed
capacity and capability rather than the measures defined under the new model
imposition of conditions to meet specific must be sustainable in both economic
quotas or targets. a n d e n v i r o n m e n t a l t e r m s . M a l a y s i a ’s
dependence on natural resource
Augment regional growth and inclusiveness. consumption as the primary engine of
The NEM will give greater emphasis on growth is clearly not sustainable on
regional and sub-regional corridor development either dimension. This is not to suggest
through clustering, especially in Sabah and that exploitation of natural resources
Sarawak, to reduce inequality between the should not be a key component of national
states and regions. For areas with high production. But it does mean that
incidence of poverty and a high concentration under the new model, investment
of low income households, the policy priority and policy decisions should only be
should aim at building the capacity and made after full consideration of their long-
opportunities for residents to participate in term impact on the society, the economy as
corridor development. The persistence of a whole, and of course the environment.
92
CHAPTER 5
One of the SRIs will focus on strengthening the a medium-term budgeting framework which
public sector with the ultimate aim of shaping take into consideration the effects of
a responsive and responsible government. public debt management to underpin
There must be a focus on fiscal discipline sustainability.
for safeguarding macroeconomic balance
and financial stability. Public sector reform is Environmental sustainability as top
an important component of long-term fiscal priority
sustainability and is a key component of the
NEM. Ongoing reform of the civil service, The traditional approach to economic growth
93
The Malaysian government has made The NEM approach implies increasing higher
significant commitments to manage climate value- added and revenue per hectare of
change, pledging a RM1.5 billion fund in usable land, rather than pure output per
the national budget for 2010 to promote tonne, without damaging our environment. In
green technology and announcing several other words, we should maximise the quality
incentives to encourage the construction of of our income from our environment, rather
green buildings. Malaysia also made strong than focusing on quantity as at present. A
commitments to emissions reduction during the case study on the palm oil industry example
2009 Copenhagen climate change talks. is included as Appendix 1.
The NEM considers that sustainable agriculture 5.2 The ultimate beneficiaries: rakyat
should be fostered through the development and businesses
of productive, competitive and efficient
agriculture, forestry and fishery techniques, The NEAC anticipates a series of benefits that
while at the same time protecting and improving would accrue to all Malaysians if the NEM
the natural environment and conditions of policy measures are consistently and fully
the local communities. The sustainability implemented. We must recognise however,
principles call for the production of crops that the various benefits will be realised over
with high yield and income, ensuring minimal a period of time. In the meantime, some
effects on soil fertility, water and air quality, segments of the population may perceive
and biodiversity. They also call for optimising greater negative impact than benefit, or that
the use of renewable resources and enabling they are receiving less benefits than others.
local communities to protect and enhance The government must be able to convey the
their well-being and neighbourhoods. ultimate equity of the benefits over time, urge
94
CHAPTER 5
net and a transformation fund to cushion be achieved.
the various communities in the transition
95
Expected benefits for the rakyat from the NEM are as follows:
In a high income economy, All rakyat will feel included as a result A sustainable approach will
the rakyat can expect: of: provide the rakyat with:
• More choices and higher • Living and working in safe • Confidence in the
purchasing power. surroundings. Individuals will live, government. Fiscal
An upward spiral of work, study and play in localities free discipline will keep the
consumption and high from the fear of crime, the indignity economy well-balanced.
income career choices. of discrimination and the anxiety of Improvements in
• Better quality of life. Not need. bureaucratic processes
only higher incomes, but • Equal and easy access to information. will ensure timely, fair,
quality healthcare and Families will be endowed with the and respectful service
social support, accessible opportunity and capability to pursue delivery.
to all rakyat and income their aspirations in connected, • Improved environment.
groups. sophisticated, modern cities, townships Future generations will
• Opportunities for upward and villages. All communities will be be assured of continued
mobility. Readily available able to contribute to and share in the access to clean air, water,
skills development wealth of the country. healthy recreational living
programmes. Access to • Every individual counts. The conditions and well-
resources, jobs, contracts affirmative action approach will preserved biodiversity.
and licenses based on shift from ethnicity to low income • Sustained growth.
merit and effort. households and individuals on the Development will
• Reward for innovation basis of needs and merit. Mutual prioritise of sustained
and creativity. A more respect and dignity accorded. economic growth,
developed, specialised, • Every part of the nation matters. fiscal management,
innovative, technology- Regional and sub-regional social needs, and the
driven and knowledge- development will be given more environment.
based economic structure. emphasis, especially in Sabah
and Sarawak, to reduce regional
disparities. Everyone will be consulted
and their voices heard.
96
CHAPTER 5
the robustness of the prolonged growth period will be pro- management. Renewable
economy. Sustained high poor as it further eradicates poverty and non-renewable
private investment rates on and narrows inequality. No one is natural resources will
the back of high savings, to be left behind. A coherent and be prudently utilised to
foreign capital and globally comprehensive needs-based social maximise savings for
mobile talent. safety net will support vulnerable future generations.
groups, particularly those with
disabilities.
Benefits for businesses will result from greater equity in the environment, a more effective
ecosystem and a more efficient market to facilitate investment and operations.
• Business Rights. There will • Public Services. Approvals will be • Transparency. There
be due recognition of the faster. will be confidence in the
rights and responsibilities of • Licensing Efficiency. Unnecessary openness and fairness
business owners. licensing and undue regulatory of government tenders.
• Rule of Law. Businesses burden will be removed. • Fair Market Pricing. With
will manage their affairs with • Dynamic Clusters. Industry clustering minimal exceptions,
the assurance of a fair and and networking will create benefits subsidies and price
credible legal system. from scale. controls will be
• Ownership Freedom. eliminated.
• Human Capital. Employers will enjoy
Entrepreneurs will be free open and efficient access to the best • Barrier Free.
to fully own their businesses talent they can afford. Entrepreneurs will thrive
and work with partners they in liberalised sectors.
• Funding. Increased flexibility
choose. • Fair competition. A level
and timeliness of access to SME
• Intellectual Property. funding. playing field will be
Intellectual assets will be created by the enactment
• Efficient Courts. Resolution of legal
protected. and proper enforcement
disputes will be swift.
of a competition law.
97
5.3 Getting help to those who need it quality education referred to in the previous
the most section would target the bottom 40% to
improve their capability.
The NEAC also wants specific measures to
deal with inequality by targeting the 40% of While all Malaysians will feel the impact from
households in both urban and rural areas disruption and dislocation caused by the NEM
that have a monthly income of less than transformation process, the NEAC recognises
RM1,500. For everyone to enjoy the benefits that the bottom 40% will be least prepared
of a high income economy, the gap between to manage the changes. For this reason, it
the bottom 40% and others must be narrowed is crucial that a coherent safety net be put
within a reasonable timeframe. in place swiftly to help the households to
better cope with the inevitable distress.
The NEM provides for mechanisms to
strengthen the capability of the bottom 5.4 Core characteristics of the NEM
40% so that they can take advantage of
opportunities to secure better jobs, raise To be market-led implies that investment and
their productivity and grow their income. production should be private sector driven. The
This group should also have opportunities government should facilitate businesses by
to use their entrepreneurial instincts to start simplifying processes, increasing transparency
up and grow their businesses, which will and improving delivery of services. It
significantly improve their livelihood, life should also ensure that essential regulatory
chances and prospects. The social safety requirements are market focussed and
net, better health services and access to supportive. Also, the private sector must
98
CHAPTER 5
legislation. The government should retain which will allow the country to tap into the
a role to restore stability in the face of abundant opportunities emanating from a
disruption from market failures. high growth region.
99
100
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1 Growth primarily through Growth through productivity. Focus on
capital accumulation. Focus on innovative processes and cutting-edge
investment in production and physical technology, supported by healthy level
infrastructure in combination with low of private investment and talent, for high
skilled labour for low value added value added goods and services
exports
101
102
In many economies, income disparities are characterised by significant regional or locational dimensions. Often,
CHAPTER 5
governments feel the need to give priority to the allocation of resources to rural areas or lagging regions in order
to achieve ‘balanced growth’. However, the Korean experience suggests that the alternative of making basic living
standards more uniform across space will benefit the lagging regions more.
Evolving from a low income into a high income economy in less than 50 years, Korea’s approach was to target the
building of density in the capital region which centres on Seoul. This led to concentration of industries in the capital
region, allowing for agglomeration where firms benefited from economies of scale and network effects. The government
also continued to improve connectivity – mainly through transport and communication technology – between the more
dynamic centres and rural areas across provinces. More importantly, the government adopted a ‘spatially blind’ approach
to social expenditure in health, education and social protection. The objective was to provide the same level of social
services to all, which meant providing extra resources to serve hard-to-reach or high-cost areas.
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Over time, this approach paid off. With equal access to good social services, the less well-off rural population saw a
strong improvement in their labour quality, which translated into greater labour mobility. Skilled labour was attracted in
particular to Seoul and its surrounding areas in the capital region. The trend was reflected in Korea’s rapid urbanisation
rate (Box 1 Figure). But labour also benefited from spillover of economic activities from the capital region into other
regions which offered attractive low-cost settings. These shifts in location ultimately led to a marked decline in spatial
disparities – a remarkable convergence in regional living standards and incomes that could not have been achieved
through ‘balanced growth’ within the same time frame. A World Bank study shows that the gap between per capita GDP
for the capital region, which is the highest internationally, and that for the lowest region – the southwest – dropped from
about 40% in 1985 to about 10% by the late 1990s.
103
104
CHAPTER 5
of our well-developed infrastructure and encourages the retention of indigenous talent
geographical location in the region opens and inflows of foreign talent. Constraints
up possibilities for attracting investment in include cumbersome immigration and incentive
the logistics sector and for hosting regional policies which discourage recruitment of
headquarters and R&D centres for MNCs foreign expertise along with restrictive
and other businesses. Malaysia can also practices of professional associations which
reinforce its leadership in Islamic finance restrict foreigners from working in Malaysia.
and expand into other Syariah-compliant No one agency in Malaysia currently looks
products. at talent at the aggregate level and the
105
6
How do we get
there?
CHAPTER 6
Malaysia needs urgent transformation. The Malaysia’s economy must transform so
Malaysian economy needs to advance that it becomes fundamentally capable of
and transform into one that is capable achieving these goals and maintaining its
of delivering high income, of inclusively position against other economies through its
Figure 29 – The New Economic Model: Enablers and Strategic Reform Initiatives
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109
110
CHAPTER 6
Political will and leadership requires that there market
be an emphasis on a coherent explanation
of the vision and agenda of the NEM and n Greater decentralisation in decision making
transformation process. This requires the path will achieve speedier implementation and
of the NEM to be laid out in detail, including effectiveness but may result in diluting
indications of where actions may negatively federal government power
affect different segments of society. The aim
is to create an unstoppable wave of support The government must take prompt action
from all segments of society for this vision. and stay the course. Resistance is likely to
111
112
CHAPTER 6
With the leadership and rakyat on board, a circumstances for achieving the objectives
big push of new policies must be announced. may have changed and rendered earlier
This big push would consist of a critical policy actions less viable. Without a formal
mass of policy measures supporting the feedback mechanism, policy adjustments
SRIs. Due to the cross-cutting nature of the may become ad hoc and uncoordinated,
Strategic Reform Initiatives, the sequencing resulting in diffused implementation with
of policy actions is crucial for achieving little accountability and limited channels
impact and results. Some policy actions with which to address public complaints.
could be immediately implemented. Others The result is reform failure, which in turn
113
Globalisation also has increased the stakes Malaysia’s social protection system, as
for each country to have efficient labour in many Asian countries, is still evolving.
markets. Rapid technological progress, trade While it is relatively well-developed, there
in goods, mobility of labour, and international are major gaps and inefficiencies. Poverty is
sourcing of services have combined to create less widespread but there remain selective,
new openings for economic players and a vulnerable groups and pockets of intractable
more integrated global market for labour. poverty. Inequality remains a pressing issue.
The impact is tempered by differences in Despite substantial subsidies available to
skills, technology, and know-how available the population, the disadvantaged are still
to workers. Although globalisation widens not getting access. Safeguards are needed
the breadth of export markets and improves to protect individuals from catastrophic
access to a wider range of cheaper imported outcomes and to soften income shocks for
products (thereby boosting productivity and the most vulnerable. Some have suggested
average living standards), it can also impose that a formal minimum wage might be helpful
adjustment costs on certain groups within to cushion workers against such shocks or
countries, primarily by influencing wages downturns. The NEAC strongly believes
and job security, and triggering the need this would be a wrong approach and in fact
for retraining. could exacerbate the situation by reducing
competitiveness and reducing employment
To cushion these adjustment costs, some opportunities.
phasing of the reforms may be advisable, but
experience has shown that reforms which are Existing weaknesses in the social safety net
carried out too slowly are often ineffective or need to be addressed. An evaluation of the
even reversed. Thus it is far better to have current social safety net raises a number of
in place social protection systems which can these issues:
cushion adjustment costs but in ways which
114
CHAPTER 6
effective unemployment insurance can
achieve more equitable and consistent
provide a short-term solution and usually
outcomes; and
does a better job than strict reliance on
n The structure of systems and programmes severance payments.
differs across agencies and needs to be
made more consistent. Training programmes can help but need to be
linked to market demand. During adjustment
More generally to overcome obstacles to periods, revamped training programmes are
subsidy reform, social assistance programmes often helpful in enhancing employability in
will have to be more efficiently structured. An a shifting labour market.
115
116
CHAPTER 6
undertake those tasks that the private process requiring continuous innovation
sector cannot perform. The delivery of and productivity growth with significant
government services must be efficient and technological advancement and
effective, using a ‘whole of government’ entrepreneurial drive. The adoption of
approach to facilitate the operations of processes in line with best practices and
the private sector. Fiscal management international standards will improve the
must be strengthened to include greater chances for Malaysian firms to succeed
transparency and to provide the right in the global market place.
incentives. The government’s revenue
117
118
CHAPTER 6
The government will encourage the private These actions seek to: (i) reform the complex
sector to take the lead in identifying areas array of incentives made available to the
of future growth. The government will no private sector; (ii) boost private investment
longer compensate the private sector for all through improving the business environment
the risks it takes or provide incentives simply by removing distortions and the high costs
for doing normal business. Instead it will of doing business; and (iii) rebalance the
try to reduce the level of risk by providing roles of the public and private sectors, giving
the private sector with a stable, rules-based greater prominence to private firms.
business-friendly environment.
119
120
CHAPTER 6
investment in market segments where GLCs
are strong. Such market segments could In sectors where the private sector is
well be the ones which could attract private operating effectively, GLCs will be privatised.
investment in high value added products Remaining GLCs will be required to operate
and services. on a commercial basis free of government
interference and without government
A more competitive environment can be preferential treatment. The government will
facilitated by legislation. The proposed Fair not seek to use its regulatory powers to
Trade Practices Act will be the first step protect GLCs from competition by the private
in establishing an explicit competition law. sector. Instead, it will encourage competition
121
Actions to re-energise the private sector must be accompanied by programmes which are based on needs
and merit, and which build up the bottom segments of the domestic private sector. Some common problems
faced by these segments, and the possible approaches to tackling the problems, can be found in Appendix
3.
Both informal businesses and micro-enterprises are at the bottom of the economic pyramid and likely
constitute enterprises, existing and potential, that reside among the bottom 40% of income earners. These
segments include the rural population and also those who migrate from the rural to the urban environment
seeking to better their lives. It also includes the wide range of women in the rural and urban areas who seek
work opportunities. These are motivated individuals who, but for the lack of knowing how, wish to better their
lot in life.
While there are some 30 government programmes to help the micro-enterprises and SME segments, the
effectiveness of the outreach for the bottom 40% of the economic pyramid is wanting. It requires greater
awareness of their needs and facilitation to bring them to the table of opportunities.
While not exactly at the bottom of the economic pyramid, SMEs – accounting for 35% of GDP, 57% of
total employment, and 20% of exports – should be given more support and assistance as well. Many SME
operations remain low-tech and exhibit low growth rates – due to lack of capital, lack of entrepreneurial skills
and management capacity, and high illiteracy rates.
122
CHAPTER 6
Table 14 - Inspiring the workforce to draw out their best
Increase local Review the education system – shift educational approach from
talent over time ‘rote learning’ to ‘creative and critical thinking’
Increase emphasis on reintroducing technical and vocational training
colleges
Identify and nurture talent through a demand-driven process
Re-skill the Upgrade skills of the bottom segment of the Malaysian labour force
existing the labour through continuing education and training
force
Establish a labour safety-net for displaced workers
Industry to partner with government in encouraging ‘Continuous
Employment Training’ (CET)
Formalise international quality standards and certification of skills
Allow wage levels to be reflective of the skill level
123
Remove labour Protect workers, not jobs, through a stronger safety net, while
market distortions encouraging labour market flexibility
constraining wage
Revise legal and institutional framework to facilitate hiring and
growth
firing
Reduce reliance on Enforce equal labour standards for local and foreign labour
foreign labour
Use a levy system to achieve targets for unskilled foreign labour in
line with sectoral needs
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CHAPTER 6
and the reskilling of workers to take on establishment of a joint council between
higher value jobs are an integral part of employer and employee representatives to
expanding the national talent base. In expand continuing education and training. At
particular, the skills of the lower segment of the same time all stakeholders should agree
the Malaysian working population must be on the standardisation of competency levels
upgraded through life-long learning. When so that skilled workers can become more
this goal is achieved, Malaysia can reach its productive. Upon completion of training, the
full potential as a high income and advanced new skills acquired should be recognised
country. It is estimated that some 60% of by employers in the form of better wages,
125
126
CHAPTER 6
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as nationals. Foreign workers have access Reports of firms recruiting foreign workers
to social services like health but the cost for jobs which do not exist is one glaring
is borne by the government. Thus, they are example.
less costly to hire than nationals – giving
foreign workers an unintended advantage Reforms should begin with rationalising
in the domestic labour market. the use of the levy mechanism, subjecting
foreign workers to the same labour standards,
Moreover, the large differential in wages granting them access to a comparable social
between Malaysia and labour-originating service as nationals. It would also address
countries has created a recruitment and international concerns about Malaysia’s poor
outsourcing industry that thrives on rent- treatment of foreign workers. A more rational
seeking. Recruitment fees now generate system of levies and the utilisation of the
huge profits for private agencies, which in proceeds to fund social services for migrant
turn spawns a range of abusive practices. workers would address equity concerns. In
127
Build n Revamp the seed and venture capital funds to support budding
entrepreneurship entrepreneurs
n Simplify bankruptcy laws pertaining to companies and individuals to
promote vibrant entrepreneurship
n Provide financial and technical support for SMEs and micro
businesses, to move them up the value chain
Remove market n Phase out price controls and subsidies that distort markets for goods
distortions leading and services
to misallocation of n Apply government savings to a wider social safety net for the bottom
resources 40% of households, prior to subsidy removal
n Create a Transformation Fund to assist distressed firms during the
reform period
128
CHAPTER 6
contribute to rising fiscal deficit. The large tax incentives granted by the government.
government outlay on subsidies – mostly While tax incentives are necessary measures
funded by petroleum proceeds – is not to encourage private investment, they
sustainable. The pricing of essential goods contribute to foregone tax revenue if used
and services in Malaysia does not reflect indiscriminately.
market prices. Price controls and subsidies
distort price signals, often resulting in The NEM recommends a steady removal
overconsumption and waste. of subsidies and price controls, with a
rationalisation of tax incentives. Removing
129
Provide a safety n Retain a residual role for safety nets to stabilise and correct periods
net to facilitate a and instances of market failure
smooth transition
n Apply government savings to a wider social safety net for the bottom
40% of households prior to subsidy removal
n Create a Transformation Fund to assist distressed firms during the
reform period
130
CHAPTER 6
less top-down and more decentralised as processes and procedures must be simplified
the complexities of business and society to improve their effectiveness and reduce
exceed the capability and effectiveness rent-seeking.
of traditional top-down management. Civil
society is playing an increasingly important Achieving the outcomes of the NEM
and influential role in public policy matters. critically depends upon the ability of public
Communication technology and the internet institutions to effectively implement the
are used widely to promote transparency and policies underlying the SRIs. Quality public
discourse. Effective partnerships between the institutions staffed with committed civil servants
state, market and society are gaining ground. are needed to create the big push of policy
131
Under the fiscal reform, distribution of revenue Public finance management must be made
in the forms of loans and grants to states more transparent. The current culture of
should be reviewed to align them better confidentiality must be replaced by timely
with state requirements. At the same time, dissemination and disclosure of assessments
the criteria for revenue sharing with states of fiscal outturn. There should be greater
should be standardised. In particular, royalties openness in government expenditure
from exploitation of natural resources such programmes. A special focus will be the
as oil should be transferred as established re-establishment of an open tender system
by clear criteria to the producing states. for all government procurements. This system
should be transparent at all stages and the
Strengthening revenue collection results of tenders should be made public,
taking into account confidentiality. The findings
Revenue leakage is a pervasive problem and of external audits of public finances should be
has an impact on overall revenue collection. disclosed. Where it is feasible, this solution
The current, largely manual approach to should be supplemented by greater use of
revenue collection is archaic, difficult to control independent external audits.
and open to abuses. The development and
implementation of effective technology-based Sanctions for poor budgetary management
revenue collection and management system and failure to observe accepted procedures
is a high priority of the NEM. on expenditures should be balanced by
recognition of prudent fiscal management
Improving budget management among agencies. Decentralisation of budgets
and its managements with proper accountability
The current government budgeting process and transparency will improve efficiency
needs to be reviewed and re-designed to meet and responsiveness among government
the demands of a high income economy. The agencies.
132
CHAPTER 6
states by the federal government should be governmental stakeholders such as private
undertaken. Allocation based solely on a per firms, NGOs and other civil society groups. The
capita criterion should be supplemented by NEAC believes that an effective mechanism
the use of more varied indicators such as that holds government agencies accountable
poverty levels in the respective states. In would lead to eradication of corruption and
this exercise, state governments should be wastage. The quantification of the economic
allowed to provide inputs into how federal costs of corruption and wastage will raise
funds are allocated to states. This will public awareness about their debilitating
contribute to improvements in the efficiency effects on society. The Auditor-General’s
and effectiveness of state expenditure Office is performing part of that role but the
133
Promote equal n Emphasise equitable and fair opportunities for employment, health
and fair access to and education and access to business opportunities
opportunities
n Apply government savings to wider social safety net for the bottom
40% of households prior to subsidy removal
n Create a Transformation Fund to assist distressed firms during the
reform period
n Set up an Equal Opportunities Commission to deal with possible
cases of unfair treatment and discrimination
134
CHAPTER 6
especially in Sabah and Sarawak, encourage add to economic growth. Rent-seekers are
reward on the basis of performance and engaged in unproductive activities and can
promote equitable and fair access to add sizably to the cost of doing business. The
opportunities. growth of bribery and corruption is closely
associated with the growth of rent-seeking
Affirmative action and equitable and fair in the economy.
opportunities
Affirmative action would still be desirable in
Progress has been made on the affirmative the light of persistent inequalities. Affirmative
135
136
CHAPTER 6
to replace or supplement the instruments low income groups. Exchange rate policy
that are in place. The policy measures or should aim at maintaining an orderly and
instruments can be divided into the following stable exchange rate. Households dependent
categories: on the export sector for employment and
n Macro-economic income would be favoured with a depreciating
exchange rate which could boost exports.
n Affirmative action programmes and
Quotas
Affirmative action programmes and quotas.
n Prices Quotas have been used extensively in the
137
138
CHAPTER 6
Policy Purpose Possible Policy Measures
Create an n Easing entry and exit of firms as well as high skilled workers
ecosystem for
n Revamp the seed and venture capital funds to support budding
entrepreneurship
entrepreneurs
139
140
CHAPTER 6
Policy Purpose Possible Policy Measures
Create value from n Identify E&E subsectors to build depth and foster new niche
first mover and industries, and to capture a greater share as a distributional hub as
other comparative intra-regional trade expands
advantages
n Focus on palm oil-related downstream industries to develop
indigenous technology and innovation or acquire technology to meet
new market demands
n Promote products and services that comply with Islamic tenets e.g.
finance, pharmaceutical
Develop greater n Integrate education services with industrial development, for example
integration a centre of engineering excellence in the E&E cluster
between products
n Further prioritise the logistics industry, leveraging on roads, ports
and ICT infrastructure readily available in Malaysia
141
The old emphasis has been for Government schemes (e.g. financial and tax breaks) to
to identify the sources of growth, usually promote their growth (e.g. education, tourism
through the 5-year Malaysia Plans and the and shipping).
Industrial Master Plans which then provide
the incentives to drive the growth sectors/ The new emphasis within the framework
industries. This was the case in developing to transform the economy would be to
the commodities and later the manufacturing strengthen overall competitive capacity of
sectors, in particular the electronics sub-sector. the private sector and remove the barriers
In the late 1980s and over the following for private sector to drive sectoral growth.
two decades, selected services sectors The Government’s role would be facilitative,
were identified as having export potential ensuring distortions are not created in order
and again, government introduced incentive that private sector can allocate resources
142
CHAPTER 6
for specific sectors. degradable plastics.
In the context of the new mode by which n In the E&E sector, early mover advantage
the Government supports sectors/industries should be leveraged through national
with high growth potential, the approach approaches to taking advantage of the
would be to identify criteria that will make skill set and concentration of firms to
sectors/industries as important sources of further develop high value add segments
growth, as well as the necessary support within the sector. The transformation
and facilitative arrangements that must be requires a change from the low and
143
144
CHAPTER 6
emphasis to asset- as well as collateral-based This issue is dependent on policy decisions
lending by shifting to partial guarantees. affecting growth and employment being based
The financial sector must build capacity to primarily on economic considerations. A host of
evaluate companies’ performance through measures to improve efficiency in government
the use of project and cash flow credit agencies and adopting transparency rules and
assessment. Action now is required for processes in the government regulations will
financial institutions to become sophisticated be required. A move to benchmark against
and to help drive economic growth. Similarly, international standards for all delivery of
priority funding for technology and green tech products and services will raise quality and
firms requires financial institutions to build prices of exports. Setting up a Complaints
145
146
CHAPTER 6
While progress and development is all management should be undertaken within
important, government must not overlook a medium-term budgeting framework to
the value of careful usage of its natural underpin sustainability.
resources by applying appropriate pricing,
regulatory and strategic policies to manage A green technology platform must be supported
non-renewable resources sustainably. by financial facilities to fund investment
in this area. Malaysian banks must move
A green economy platform policy for away from collateral-based credit. For that
development must be set by the government. to happen, Malaysian financial institutions
147
7
The time for change
is now – Malaysia
deserves no less
CHAPTER 7
no less
W h y d o we n e e d th e NE M a nd what are its goals?
The preceding chapters outline the main Transformation Programme’ initiatives. The
elements of the proposed NEM and the key big push will also reassure Malaysians that
changes required to drive Malaysia to an change has indeed begun. Only real change
inclusive high income economy. But this is and clear economic improvements, however,
151
1
Sustainability
and the palm oil
industry
APPENDIX 1
and the palm oil
industry
W h y d o we n e e d th e NE M a nd what are its goals?
The following case study on how to develop Factors that contributed to Malaysia’s success
the Palm Oil industry is an illustration of include political stability, ideal climate and
how to achieve the sustainability goal of agronomic conditions.
the NEM.
In 2009, Malaysia produced 17.7 million tonnes 1. Land scarcity: From urbanisation
of palm oil. Palm oil covered 4.69 million and industrialisation
hectares in Malaysia in 2009 and contributed 2. Labour scarcity: Over dependence
3.2% of real GDP in 2008, increasing from on foreign workers while local workers
2.9% in 2000. Exports of palm oil grew by are reluctant to enter this sector.
13.8% a year since 2005 to RM38.5bn in 3. Rising production cost: Land, labour
2009, capturing a share of 7% of exports and input costs are on an increasing
compared to 4.3% in 2005. trend
Malaysia was the ‘first-mover’ in the large- Relative importance of the palm oil
scale commercial planting of the African oil industry
palm, Elaeis guineensis, in the 1960s, and
was the largest producer of palm oil, until While palm oil activity is on the rise, the
the emergence of Indonesia, which relative share of electrical & electronics (E&E) to GDP
to Malaysia has the advantage of a larger had declined from 12.2% of GDP in 2000
land mass and cheap labour. Latin America to 9.4% in 2008. E&E exports amounted
has started commercial oil palm plantations to RM227.5bn, accounting for 41.1% of
and Western Africa is also beginning to exports in 2009 (49.6% in 2005). NEAC
expand acreage and production, but from estimates show that unless the E&E sector
a low base. is dramatically upgraded, the palm oil sector
155
) )
6RXUFH&(,& 6RXUFH&(,&
will become a larger component than E&E currently have lower yields than commercial
rising in nominal terms to 12.2% of GDP estates. The initiatives by the Government
by 2020 (7.6% in real terms) (Figure I). and market leaders should aim to help
smallholders, chiefly by timely replanting of
The palm oil sector fulfills the three goals old, low yielding palms with better yielding
of the NEM stock. This, together with better maintenance
and upkeep will serve to ensure that the
High income: Industry calculations suggest smallholders in this sector generate higher
that the sector’s share of real GDP can yields and thus income. This will help achieve
grow to 7.6% by 2020 if the value-added the inclusivity goal of the NEM.
gains from efficiency and innovation can
be realized. This would translate into a Sustainability: Research & Development
yearly growth of 13.7% from 2009-2020. (R&D) efforts in the Palm Oil sector will
Palm oil exports can also grow by 7% p.a. improve the productivity of the sector, enable
to RM84.6 billion by 2020, probably more if better conservation of the environment and
new palm oil-based products and services lower the net carbon impact of operations.
can be successfully marketed. Better use of land should see high value
timber and other crops planted on hilly terrain
Inclusivity: This sector employs 590,000 which is not suitable for oil palm, but can
direct workers compared to 316,956 in the yield significant value through future sales
E&E sector. More than one third of palm of timber from managed forests. Similarly,
oil production comes from smallholders, who riverine reserves should be rigorously
156
APPENDIX 1
sector including mechanization, biomass, new investments in the industry, including
biofuel, moving downstream and carbon in research and development. The NEAC
trading initiatives that will help achieve this recommends that new forms of cooperation
goal. But two appear to have the quickest be initiated with the key stakeholders in the
win and highest value added potential. industry to unlock resources and to break-
These are the Genome research in unlocking through barriers in the commercialization of
the full potential of palm oil production and research and development of the industry.
upgrading smallholding production. New forms of co-operation are particularly
relevant where genome research is concerned.
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in the sector.
157
Out of these value added activities, the Palm oil cultivation has been
quick wins are: instrumental in the socio-economic
development of Malaysia:
1. Realising full potential of small holders
and; • Overcoming rural poverty
and improving the livelihood
2. Genome qualities of rural areas by
1. Realising full potential of small providing food security and
holders employment
158
APPENDIX 1
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Figure IV: Trait stacking to increase the retail value added per hectare
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* Trait stacking is when two traits like herbicide-tolerance and insecticide-tolerance are introduced simultaneously
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into a crop in one transformation event.
160
APPENDIX 1
stocks:
We can see that the emissions from peatland
1. Removal of the original above and
clearly outweigh the carbon stock remissions
below-ground biomass (e.g. forest)
in plantations.
increases carbon emissions
2. Growing oil palm to store carbon Based on the above rough and preliminary
reduces carbon emissions. estimations, Malaysia should consider:
3. O p e r a t i n g p l a n t a t i o n s o n p e a t 1. Intensifying efforts to get plantation
requires ongoing drainage causing land to be recognised internationally
peat oxidation, leading to increasing as natural carbon sinks.
161
162
APPENDIX 1
Appendix 1: Sustainability and the palm oil industry
163
2
Managing
adjustments
– Aligning old
expectations to the
new reality
APPENDIX 2
expectations to the new
reality
W h y d o we n e e d th e NE M a nd what are its goals?
The NEM paves the way for more opportunities some regions benefiting more than others –
for advancement across the spectrum of increasing pressures for social services to
society especially the private sector. More rectify differing regional needs.
flexible labour markets and better use of
167
168
APPENDIX 2
such as education and health. Yet others
n The portion of social spending targeting
do not see how related programmes such
poor households is quite limited;
as pensions and training services or new
n Targeting criteria should be refined to programmes such as unemployment insurance
achieve more equitable and consistent schemes might complement or enhance the
outcomes; effectiveness of the overall response capacity.
n The structure of systems and programmes Thus there is a need for a clear vision on
differs across agencies and needs to be what would be a suitable comprehensive
made more consistent. social safety net across agencies.
Currently, there is a general lack of Currently the bulk of social safety net
understanding about modern social protection resources are being spent on risk coping
mechanisms and inconsistent approaches programmes in the form of energy and
across agencies. Fragmentation and the food subsidies. The economic case for
resulting dilution of other social assistance eliminating price subsidies for energy
programme budgets increase the probability products is compelling and the Government
of targeting errors, both of exclusion and is currently considering various options. To
inclusion. Implementing agencies, such as the the extent that protecting the poor is a goal
Ministries for Women, Regional Development, of the policy—there are more efficient ways
and Housing, have differing views about to achieve this objective. However, lack
objectives and structure and this is causing of political support and effective offsetting
misconceptions. Some policy makers worry mechanisms can be serious impediments to
about creating an entitlement culture- forgetting reform. Consequently, reduction in energy
that the current poorly targeted system subsidies should be gradual, accompanied
169
170
APPENDIX 2
treatment as well as hospitalisation benefits workers. As such government interventions via
to their staff. The Malaysian Employers active labour market policies are important to
Federation (2007) reported that the staff’s minimise information asymmetries and labour
medical expenses were fully borne by the market inefficiencies. Such policies consist
more than half of the respondent companies, mainly of training for new or restructured
while others paid medical expenses subject positions; targeted subsidies for job creation;
to an upper limit for medical consultation better labour market information systems and
and hospitalisation benefits. In summary, improved employment services. Nonetheless,
although firms compete by selling their it is also recognised that such programmes
Making labour markets more efficient is Dealing with the possibility of increasing
part of the solution unemployment during down turns is a
special concern with political implications.
Pressures on the social safety net are reduced The unemployment rate has been relatively
if the labour market functions well: low at about 3-4% of the total labour force
over the past decade (concentrated among
n In an efficient labour market, workers
those with primary and secondary education).
are likely to find jobs quickly that match
Nonetheless, the share of unemployed
their skills. At the same time, upward
graduates compared to non-graduates has
movements in wages must not outstrip
risen sharply. Total graduate unemployed
labour productivity otherwise no firm
has increased an annual average of 15%
could survive.
in recent years, to account for about 18%
n Labour markets also need to minimise the of total unemployed persons compared with
costs of job loss and associated risks. less than 5% a decade ago.
The international experience is that an
effective unemployment insurance can With increased competition and restructuring,
provide a short-term solution and usually unemployment is likely to rise in the future.
does a better job than strict reliance on Currently, there is no formal unemployment
severance payments. insurance system since severance payments
are seen as providing the needed support.
171
172
APPENDIX 2
to another as the economy moves up the to support the cushioning of adjustment
value chain. Hence, training needs to be costs would provide tangible recognition
emphasised during periods of significant of the government’s intent to foster more
economic adjustment. Ongoing programmes inclusive outcomes. This holding account or
in the Human Resource Development Fund fund would initially be the recipient of the
(HRDF), which supports training for companies potentially large savings from cutting back
in the manufacturing and services should wasteful subsidies such as those for energy
be evaluated for how they can be more and food products and rationalizing of other
supportive of emerging needs. public expenditure programmes.
173
3
Targeted actions
needed for promoting
micro-enterprises and
SMEs
APPENDIX 3
promoting micro-
enterprises and SMEs
W h y d o we n e e d th e NE M a nd what are its goals?
Actions to re-energise the private sector must individuals who, but for the lack of knowing
be accompanied by programmes to build how, wish to better their lot in life.
up the bottom segments of the domestic
private sector based on needs and merit. While there are some 30 government
177
Informal • Off the radar screen and not • Engage and provide advice on
registered business opportunities
• Unaware of aid schemes • Training, education and support
• Low business skills network
Rural • Lack capital & financial ability • Access to loans/ grants
• Subsistence farmers; Small • Assistance in business
holdings development
• Migrating to urban poverty • Job training and resettlement
Women • Financially stressed • Microfinancing
• Marginalised • Empowerment and mentoring
• Lack of child care networks
• Unaware of opportunities • Child Care Centres
• Exposure and access to
information
Micro • High illiteracy rate • Facilitation and counseling in
• Use rudimentary technology business development
• Low skills • Microfinancing
• Motivated but unaware of • Education, especially with regard
opportunities to management and planning
• Bottom 40% income group skills
• No business acumen
Small • Need for incubation • Provide office space
• Lack access to financing • Skills development, including
• Lack entrepreneurial skills financial training
• Poor management/marketing • Credit guarantee schemes
skills • Schemes to help raise
• Low networking presence productivity through upgrading
• Poor ICT usage • Linkages and exposure to
opportunities with local firms
and MNCs through effective
networking
Medium • Need training • Skills training
• Need capacity building • Build inter-firm linkages,
• Not fully exploiting ICT especially with large firms, to
• Poor growth strategies provide opportunities for market
• Lack financing and product expansion
• Low technology • Encourage adoption of ICT
• Low networking applications
• Encourage more technology,
innovation and R&D
178
4
Leveraging 40 years
of manufacturing
experience to bridge
into high value added
niche areas
APPENDIX 4
into high value
added niche areas
W h y d o we n e e d th e NE M a nd what are its goals?
Summary
The manufacturing sector has been at the center Of utmost importance is the alleviation of
of Malaysia’s growth and transformation story serious structural constraints that are holding
181
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1
Rajah Rasiah, Hamdan Majeed and G.N. Gopalan (2009), Background Report to Positioning Penang; A World Bank-
Khazanah National Berhad collaborative study.
182
APPENDIX 4
manufacturing total factor productivity (TFP) Atom Chip, which is the core of the Netbook
growth has been flat over the past seven years revolution. Malaysia also hosts ASIC’s design
(see Zeufack, 2009)2. The industry seems company, Altera, which is the group’s largest
to have reached a point of saturation and its offshore R&D Centre, involved in designing
survival depends critically on its capacity to next generation FGPA chips.
climb up the technological ladder.
Some segments of manufacturing, in the
There is anecdotal evidence that a nucleus E&E industry for example, are ‘World
of E&E firms are upgrading and clambering Class’and could serve as a bridge to higher
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2
Albert Zeufack and G. N. Gopalan (2009), Background Report to Positioning Penang; A World Bank-Khazanah National
Berhad collaborative study.
183
Figure III: Skills intensity manufacturing and electronics, Penang Cluster (1980-2007)
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India for example has skipped the manufacturing stage
184
APPENDIX 4
group’s global shared services.
The need to avoid ‘premature exit’, a
n AMD now have its global shared services common mistake of countries ‘caught in the
and design centre in Malaysia middle income trap’
n Agilent conducts activities like R&D to
supply chain management in Malaysia, Malaysia is strategically located and should
accounting for more than 60 percent of the leverage its geography and excellent
group’s turnover. infrastructure to benefit from regional growth.
Malaysia could position itself to attract more
n Dell Penang supplies 95 percent of laptop
185
186
APPENDIX 4
status. order to cope with the lack of security, firms
spent around 3% of their sales in Malaysia
Regulatory and infrastructure bottlenecks- on security-related charges, more than any
Findings from firm surveys suggest that the other neighboring country and more than they
proportion of firms ranking electricity and spend on R&D. Similarly, while Malaysia has
telecommunications as a major business made great strides in improving the investment
obstacle remains high in Malaysia. In addition, climate, business regulations can be further
the need for broadband bandwidth and speed streamlined.
at affordable price is a severe constraint to E&E
187
188
APPENDIX 4
Allow flexibility for entry, exit • Introduce a fast-track • Follow the H1 Visa
and residence for highly skilled procedure for work system in the US to
professionals and domain permits for high-tech/ attract talent
experts with clear deliverables. skills businesses and
Universities
189
• Establish high end research • Establish CEE as a pilot • ITRI (Taiwan), Cambridge
centre to nurture & retain center in collaboration with Science Park, A*Star
talent, attract global talent global research centres (Singapore), R&D labs in
• Provide a suitable work like IIT with free access to Bay Area. CEE is a hybrid
environment for the foreign talent and flexible learning from these four
diasporas mechanism to involve the models
diasporas
190
APPENDIX 4
• Enhance virtual connectivity • Establish globally competitive • Ensure seamless
with high speed data and ICT infrastructure connectivity both virtually
voice connection and physically
• Increase bandwidth and • Upgrade Penang’s logistical
virtual connectivity to enhance capabilities such as
connectivity to tech hubs warehouses and airport so
that the export infrastructure
• Improve physical • Establish flights to regional would better support the
connectivity through cities and enhance port / rail E&E sector
• Create a viable and vibrant • Improve security for both • Adopt a city strategy to
urban centre the living and business reinvent Penang as a leader
• Focus on establishing Penang environment for sustainability
as leader on sustainability and • Enhance the George Town
liveability Conurbation
• Redevelop the waterfront
and ensure seamlessness
like Hong Kong-Kowloon
191
• Set up ‘One Stop Agency’ to • Reduce the regulatory • Benchmark against EDB
handle all matters relating to burden (Singapore) and IDA
the E&E industry • Abolish the system of (Ireland)
Approved Permits and
replace it with a short
negative list
• Introduce a ‘single-window’
system to manage all
matters
• Adopt an ‘Asset Light’ • Appoint a trust company to • The unlocking of asset value
approach to unlock asset manage the ‘Asset Light’ must be supported by a
value approach on a selective clear set of deliverables on
basis the part of the recipient
192
NEAC Secretariat
G. Jeevakumar
Lee Chee Sung
Liew San Yee
Mary Artylan Fernandez
Nur Farhana Md. Marzuki
Tong Yee Siong
Yassif Nagim Mustapha
NEAC Chairman’s Office
193