Friday, August 31, 2007

In the League of Advanced Economies

In the League of Advanced Economies

For a country that began its independence in 1957 as a culturally and ethnically diverse nation of 6.3 million people, Malaysia has much to celebrate 50 years on with an enviable and internationally recognised record of social, political and economic achievements.

What will the country be like come 2057? What will future generations, who will descend from the present 26 million Malaysians, be toasting about in 50 years’ time?

The answer to this crystal ball gazing lies in how well political stability is maintained and national unity forged around an economic development agenda that harnesses the forces of globalisation, competition and various other technological, economic and environmental changes towards becoming an advanced economy. Conversely, it could be subsumed by these forces, leading to a status quo scenario that perhaps may be just slightly better than present day conditions.

Twin Curses Avoided in the First 50 Years
Well-endowed with natural resources, including crude oil, Malaysia avoided the “resource curse” that trapped many natural resource-rich countries. Either the oil, timber or mineral resources were squandered, benefited a few who re-invested their wealth in safe havens overseas or there were little incentives to diversify or upgrade the economy as long as the windfall from the resource extraction continued.

Malaysia escaped being caught in such a “low equilibrium” development trap due in part to visionary leadership and to the adoption of appropriate development policies – rural development, outward-orientation and a foreign direct investment-based export thrust that transformed a larger part of its subsistence agriculture and almost non-existent manufacturing sector into large modern industries that were plugged into the global production and supply system.

Another curse skirted so far is the “Winner’s Curse” akin to a Pyrrhic victory where the fight for political or economic supremacy results in devastating cost to the victors.

Such hollow victories are exemplified by many strife-torn countries around the world caught in a vicious cycle of poverty-violence-political instability.

Initial Conditions for the Next Half Century
Having overcome the twin curses, what Malaysia will be like in 2057 will be determined firstly by the current initial conditions, endowments and institutional setup.

Secondly, the development strategies and policies being pursued to harness the endowments and resources to the fullest will in turn shape the country’s destiny as a First Tier or a Middle Tier economy. Finally, the ability to cope with the forces of change and competition will determine where the country will stand in the global arena.

Some of the initial conditions and assumptions about the changing trends include human capital development, savings and investment efficiency, market liberalisation and the integration of natural resources, ICT and environment as drivers of future industries and businesses.

Malaysia’s “young” population profile with a declining dependency ratio is projected to continue until mid-way around the 2020 to 2025 period before it begins to rise as the 65-and-above age group increases above 10% of the total population. Meanwhile, female participation rate should continue to rise till then. By 2057, the country would have an estimated 55 to 58 million people with a mature profile where senior citizens comprise around 17% to 18% of the population.

Rather than numerical advantage in the global competition for trade and investment, human quality, skills and innovativeness will drive national competitive advantage for mid-sized economies like Malaysia. While the country’s oil and gas reserves will be inadequate to meet domestic demand by 2020, its other natural resource endowments, particularly the biodiversity and gene pools of its tropical rainforests, will become a major source for economic and scientific advancements because of growing scarcity and its importance to global environmental stability.

Another key driving force is the country’s high savings rate, which currently averages above 35% of GNP. Although projected to decline gradually to between 28% and 32%, it is still more than adequate to finance healthy domestic growth if invested efficiently and coupled with efforts to raise productivity growth and deepen the financial and capital markets.

From Developed Nation Status to the League of Advanced Economies
Out of 173 countries in the world, there are 30 advanced economies with per capita income estimated at US$36,160 based on purchasing power parity prices in 2007.

Over the last 20 years these advanced economies grew at 5.3% compared to 6.6% per annum for Malaysia.

In like terms, Malaysia’s per capita income is estimated at US$12,582 in 2007. If the same growth rates are maintained over the next 50 years, Malaysia’s income gap will narrow from 35% to 66% of the advanced economies’ income level. However, if Malaysia can widen the growth differential by another percentage point, our future generation could toast the closing of the income gap by 2057.

Based on the current favourable initial conditions, Malaysia could join the league of advanced economies in the next half century. First and foremost, it will need to overcome the complacency of middle age and leap over the “middle income squeeze” caused by the rapid advancement of other developing economies. Public sector efficiency, public-private sector collaboration in education, training and research, and the shift to private sector-led growth will need to be stepped up.

Besides accelerating policy and market reforms to enhance growth, productivity and competitiveness, the road to an advanced economy will include capitalising fully on its diverse resources, talents and culture, and harnessing the global winds of change. These include fostering technological change and innovation, nurturing global enterprises, talents and skills, integrating into a borderless world, tapping opportunities in globalised markets, and creating a culturally rich, environmentally safe and secure place to live and for talents to thrive in.

If the urgency of facing the external competitive threat is raised and parochial interests marginalised, Malaysia is envisioned to find a niche as a seedbed for innovation of new products and services involving technology, natural resources, people, arts and culture which are expected to dominate the social and economic landscape in a borderless Asian community that is likely to emerge by 2057.

Source: Dr Yeah Kim Leng, The Sun, Thursday, August 30, 2007
Related Blog: Malaysian Economy Update

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