Friday, August 31, 2007

Flexibility Key to Our Competitiveness

Flexibility Key to Our Competitiveness

A nation's 50th anniversary is perhaps a useful benchmark to take stock of the country’s 50 years of developments, in order to assess its future growth path.

Malaysia is a young and forward-looking nation, which has the essential qualities of ingenuity and enterprise to push the nation forward.

For the past 50 years, the checks and balances of a diversified economy have paid handsome dividends as well as provided the needed cushion to weather the swings and vagaries of external cycles. The facts and figures are compelling by international standards.

At the time of independence in 1957, per capita income was US$200. Fifty years later today, it is expected to hit US$5,806. Bank Negara Malaysia’s international reserves, a measurement of the country’s overall wealth accumulation, ballooned to US$98.4 billion as at end-May 2007, a multiple of 289 times of 1959’s US$340 million.

There were, of course, challenges, obstacles and problems that had to be overcome during the last 50 years. And the journey ahead will be even more challenging and demanding.

The Malaysian economy is still growing and undergoing structural changes. Globalisation has intensified interdependence and competition between economies. It is thus clear that a globalising economy, while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and developments in the rest of the world.

Hence, it is crucial for policymakers to plan and formulate economic, fiscal, monetary or social policies with more certainty and confidence.

The writing is already on the wall. Our economy has to move into fast-growth gear and economic and financial transformation needs to be accelerated. Malaysians must be bold and brave enough to adapt radical policy changes and reforms in order to become a truly competitive global player. The key for the future is whether the economy is flexible enough to adjust and adapt. There is no easy way out.

From today’s vantage point, I would like to see the following transformations take place over the next 50 years. The next 10 to 15 years are important milestones for Malaysia to make a quantum leap in its quest to attain developed nation status by 2020.

First, a nation blessed with well-being, equitable wealth and income distribution, and balanced development between growth and the environment.

The yardstick of a developed country is not only benchmarked against real GDP growth and income per capita, but most importantly, against the attainment of good quality of life, strong human capital development, a caring society, the sharing of economic prosperity, credible public institutions and solid corporate governance.

Second, high quality economic development to be spearheaded by a dynamic, competitive, innovative and risk-taking private sector.

Malaysian indigenous companies continue to make a strong presence as competitive contenders in the global sphere, covering plantation, Islamic finance, construction as well as other services providers.

Central to the government’s strategy to promote private sector investment is the liberalisation of restrictive laws and practices, as well as the deregulation of cumbersome rules and regulations.

Third, an accelerated pace of transformation within sectors of the economy. Malaysia was already sufficiently diversified in the manufacturing and agriculture sectors. We need to accelerate the pace towards building a modern, dynamic, as well as competitively priced service-oriented economy. Having the world class hardware and software infrastructure is not good enough.

What is lacking is getting the right person to do the job. The challenges ahead are related more to our efforts at deepening and value adding to the broad-based services sector, backed by a knowledge-based, information savvy and versatile workforce.

Fourth, a world class education system that produces knowledge workers with the right attitude, mindset and character for our nation building. We must be open-minded, practical and creative.

Lee Heng Guie, TheSun, Thursday, August 30, 2007
Related Blog: Malaysian Economy Update

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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

Malaysia Among the Ranks of the Developed

Malaysia Among the Ranks of the Developed

Looking 50 years into the future is like star gazing with a touch of science fiction, and is actually a dizzy activity in hazardous guessing. Half a century from now, Malaysia in all probability, will be a post-industrial society which will increasingly be knowledge-based, that is, we have attained, possibly by 2020, what is now considered the status of a developed country, joining the ranks of the high income group, and moved beyond that for another more than 30 years of industrial growth. The pace of economic growth for the 2021-2057 period could be in the 3-3.5% per annum range, compared with the expected slightly more than 6% per annum growth for the 2006-2020 phase - halving the average gross domestic product (GDP) expansion rate as the growth curve tapers off.

By 2020, the manufacturing sector’s share of GDP will be slightly more than a quarter (28%), agriculture 7% and services about two thirds. Beyond 2020 in a post-industrial society, agriculture in the economy will keep on shrinking but what remains will be very modernised and producing new high-tech agricultural products, as rural industrialisation picks up pace. Employment in agriculture will decline as farms are expected to be much larger and technology use will displace labour.

Employment in the manufacturing sector will also fall but it will produce much more high-tech products, especially non-resource based products. New products, for example, for semiconductors, industrial electronics and consumer electronics, will appear and new technologies will be utilised as we move up the value-added chain.

We will still remain an open economy and be dependent on exports to world markets but the shape of the world’s trading pattern will change. China and India will be new economic forces, and other emerging, but as yet unidentified economies and competitors, will appear.

Services will probably take up more than 72% of GDP by 2057 and Malaysia will be a service economy. Financial services and wholesale and retail services will be even more important. New services will certainly crop up to meet new and changing tastes with the rise in incomes. Foreign direct investment in services has been increasing and this trend will probably persist. The liberalisation in services to increase the competitiveness of the economy will be a key determinant for the long-term growth of the economy.

Over the past 50 years, Malaysia’s population increased almost fourfold from about seven million in 1957 to 26 million in 2006. In 50 years time, with the decline in population growth rate, there will probably be about 52-55 million people in Malaysia.

Far more Malaysians than now, irrespective of race, will be residing abroad as they become more global and rootless in outlook. The bumiputra population will rise to more than two thirds of the total population while the number of non-bumiputra will decline. Urbanisation will continue to rise, and there will be a convergence of urban agglomeration and industrial conurbations, and the share of rural population will shrink.

Average life expectancy is likely to increase further and reach 76-78 years in the post-industrial society.

These developments will mean that absolute poverty, as we know it today, will disappear but new forms of relative poverty and deprivation will emerge, even in high income countries. Structural changes in the economy will mean that new sources of wealth will emerge, especially for income earned from financial and physical assets as income from labour will be reduced.

However, there is no certainty, as income increases in the post-industrial growth phase, that this will be a linear trend. There can be episodes of widening inequality, as the top 5%-10% of households increase their share of total income. In absolute terms, however, income disparities will be persistently large. What all these will mean for the welfare and happiness of Malaysians is anyone’s guess.

Source: Datuk Zainal Aznam Yusof, The Sun,Thursday, August 30, 2007
Related Blog: Malaysian Economy Update