: Super User; Malaysia; 02 February 2011; Hits: 1288

What lies beneath Malaysia’s FDI surge?

“THIS (rise in foreign investment) demonstrates the belief of investors that the Malaysian government is able to deliver.” That, at least, was the explanation Malaysian International Trade and Industry Minister Mustapa Mohamed gave last month, commenting on a report by the United Nations Conference on Trade and Development (Unctad), which revealed that foreign direct investment into the country had surged.

Politicians routinely take credit for a nation’s economic achievements, regardless of whether or not this is justified. But before statements like Datuk Seri Mustapa’s are dismissed as little more than self-serving rhetoric, it seems reasonable to examine the extent to which government action may indeed have been responsible for the sudden jump in foreign investments last year.

Foreign direct investment (FDI) in Malaysia totalled US$7 billion (S$8.9 billion) last year, compared with US$1.4 billion in 2009. The 2010 figure represented a 400 per cent increase, the highest among the 153 economies surveyed by Unctad in its report on global FDI trends. The rebound seems all the more significant given the fact that global FDI inflows last year remained relatively stagnant.

Could it be that fresh government initiatives are helping Malaysia break out of the “middle-income trap” so often cited as being at the heart of the country’s economic problems? Malaysia moved quickly from being a raw commodity exporter in the 1960s to an exporter of low-value added electronic and industrial products in the 1970s and 1980s. Since then, however, it has experienced slower productivity growth, stagnating exports and a deterioration in its global market share in the face of competition from low-cost producers such as China.

The decline in Malaysia’s attractiveness to foreign investors began long before the 2008 global financial crisis. Unctad figures show that both Thailand and Indonesia were attracting more foreign investment than Malaysia in 2007, a situation that could hardly have been imagined 10 years previously.

Investors were impressed by Prime Minister Najib Razak’s New Economic Model (NEM), drawn up by the National Economic Advisory Council (NEAC) and first announced in March last year. The NEM offered the hope of systematic liberalisation and deregulation in order to promote competition. The decades-old affirmative action policy in favour of ethnic Malays, which many observers blamed for hampering growth while encouraging the emigration of talented non-Malays, was also to be scaled back.

There has been some backtracking since, of course. But there have also been several important reforms. The powers of the foreign investment committee in the Prime Minister’s department have been curtailed, and the minimum quota for Malay ownership in publicly traded companies has been reduced from 30 per cent to 12.5 per cent.

Another theme of the Najib administration worthy of note is the determination of the Prime Minister to circumvent the inertia and lack of imaginative thinking within the nation’s bureaucracy. In drawing up the NEM, for example, the NEAC effectively took over the role traditionally played by the economic planning unit in the Prime Minister’s own department.

Then there is the National Economic Council (NEC), a body set up by the Prime Minister soon after he took office in April 2009, and chaired by him. It comprises 12 members, including Cabinet ministers. Meeting every Monday morning, the NEC often considers and approves major foreign investments, effectively sidelining bodies such as the Malaysian Industrial Development Authority.

Meanwhile, Cabinet ministers are kept on their toes by the performance management and delivery unit headed by Datuk Seri Idris Jala. Currently the Minister without portfolio in the Prime Minister’s Office, Mr Idris’ management skills are well known. Appointed chief executive of ailing Malaysia Airlines in December 2005, he is credited with turning the company around to achieve record profits before taking up his current appointment.

There is, however, another explanation for the surge in FDI. It may simply be a statistical anomaly reflecting the political uncertainties in Malaysia following the 2008 election in which a powerful opposition emerged to challenge the ruling Barisan Nasional. FDI inflows fell drastically in 2009. Last year’s recovery may simply be evidence that investors have now become more comfortable with the new political scene.

This may well be the most likely explanation. While the US$7 billion chalked up last year was impressive, it barely matched the US$7.32 billion that flowed into Malaysia in 2008.

Clearly, Malaysia will need to do much more to save itself from the middle-income trap. Mr Najib may be on the right track. But numerous reforms await implementation, many of them highly controversial. The struggle to transform the Malaysian economy has barely begun.

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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.