: Super User; Malaysia; 20 December 2011; Hits: 1636

Continuing Reforms Vital to Malaysia's Growth

IS THE Malaysian economy about to enter another period of strong growth? For years, critics have decried the apparent inability of the country to build on the stellar economic expansion of earlier decades. A series of recent developments, however, suggests things might be about to change.

This is especially so if upcoming national elections strengthen reformist Prime Minister Najib Razak’s grip on Umno, the senior partner in the ruling Barisan Nasional coalition government.

Malaysia’s recent economic history has been disappointing. From an annual average of 9.1 per cent between 1990 and 1997, the economy grew by about 5.5 per cent annually between 2000 and 2008 – a period when many other Asian economies grew much faster.

Sometime in the late 1990s, it seems, Malaysia became stuck in what is often referred to as the "middle income trap". This is a condition in which a country finds itself unable to move up the value chain. Foreign and domestic investments falter, and the economy remains stuck with the low-technology, low-value-added industries that gave it an initial economic boost.

From more than a third of GDP in the mid-1990s, private investment in Malaysia now accounts for a little more than 10 per cent. Attempts to encourage foreign investor interest through government- sponsored megaprojects like the multi- media supercorridor have had only limited success.

Critics also point to the problem of capital flight. Last year, a report by Swiss bank UBS highlighted the fact that in 2009, Malaysia’s foreign exchange reserves dropped by 25 per cent, despite the fact that the country recorded a surplus in its balance of payments with foreign parties.

Recently, however, aspects of Datuk Seri Najib’s New Economic Model, which focuses on market-oriented reforms, have begun to bear fruit. In October, a report by the World Bank on the ease of doing business showed Malaysia moving up five notches in the bank’s annual global ranking. The report ranked Malaysia as fifth in Asia after Singapore, Hong Kong, South Korea and Thailand.

A study released by management consulting firm A.T. Kearney earlier this month underlined the point, placing Malaysia among the world’s top 10 most attractive destinations for foreign direct investment (FDI).

Under Mr Najib, foreign banks have been permitted to set up fund management and advisory operations, and the minimum quota for Malay ownership in publicly traded companies has been lowered.

Official figures show that foreign investment has risen markedly. Total investment approvals in the first 10 months of this year are valued at RM26.4 billion (S$10.8 billion), putting the country on course to exceed the previous peak of RM29.5 billion in 2007.

Sustaining this investment surge, however, could be difficult – and not only because the global economy is expected to slow next year. Current investor interest may simply be the result of the implementation of previously delayed projects. Malaysia is just emerging from a dark period in its history, when political tensions prompted investors to postpone their plans. Since then, however, political risks appear to have declined. Improved relations with Singapore may also have contributed to a rise in investments in the Iskandar development region of the southern Johor state.

But even at these higher levels, foreign investment still lags behind many neighbouring countries. Sadly, the fundamental problems widely regarded as placing Malaysia in the middle income trap in the first place remain unchanged. These include a lack of skilled, English-speaking workers, and ethnic-based quotas that complicate hiring practices.

Fortunately for Malaysia, higher oil prices have driven up government revenues. But while this is helping to finance the expenditure needed to drive growth, it also means that any drop in global energy prices could have a big impact on future budgets. And when that happens, borrowing money to finance further stimulus measures could prove expensive. Malaysia’s debt to GDP ratio is already one of the highest in the region.

All this suggests that the reform effort must continue if the current momentum is to be sustained. Several measures foreshadowed last year have either stalled or yet to fully materialise. Chief among these is the promise that ethnic quotas would be further relaxed.

On this issue, however, Mr Najib faces strong resistance from within his own party. "We have to cross the bridge of the next general election," he told a forum late last month, arguing that further economic reform would only be possible if the government under his leadership gets a solid endorsement from voters.

He may well be right.

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Key Political Risks

Now that the general assembly of UMNO, the senior partner in the ruling National Front coalition government, is over, the long-awaited general election could be held at any time. Constitutionally, Prime Minister Najib Razak has to call elections before April 21st 2012, after which the Elections Commission must hold the election within 60 days.

Widely expected to be the most hotly contested in Malaysian history, the polls will pit Mr Najib's government against a rival political coalition led by charismatic opposition leader Anwar Ibrahim.

While the opposition Pakatan Rakyat alliance attacks what is says are the corrupt and authoritarian ways of the government, Mr Najib has been describing the opposition coalition as an unnatural alliance of Islamic fundamentalists and multi-ethnic and liberal parties.

The strong economy is likely to favour the government.

WATCH OUT FOR:

The size of the expected government victory, particularly the ability of the ruling party to retake control of key states such as Selangor. Mr Najib needs to win convincingly if he is to implement long-delayed economic reforms. These include reducing oil and food subsidies and introducing a goods and services tax to boost government revenue.
The ability of Mr Najib to placate conservative elements of his Muslim-based UMNO party who disapprove of his policy of boosting national unity through greater inter-faith and ethnic tolerance.
The extent to which the government is able to convince the public that the coming elections will be free and fair. If the election result is close, influential organisation such as Bersih could declare them illegitimate, and stage major protests.