Thursday, August 25, 2011

Malaysia's Slowing Performance

By Greg Lopez, Asia Sentinel

In the 70 years since World War II ended, East Asian economies, including Malaysia, appear to have largely got performance right. Malaysia was also one of 13 countries identified by the Commission on Growth and Development in its 2008 Growth Report to have recorded average growth of more than 7 percent per year for 25 years or more. Malaysia achieved this spectacular performance from 1967 to 1997.

However, since the Asian Financial Crisis of 1997 and1998, Malaysia’s economic performance when compared to previous decades has been lackluster and most macroeconomic indicators are trending downwards. This was confirmed by Prime Minister Najib Tun Razak himself in the publication on March 30, 2010 of the New Economic Model – Part 1. This was a very brave move but a necessary one by the premier as he acknowledged publicly the failures of Malaysia’s current economic model in order to demonstrate urgency for reforms.

The New Economic Model identifies domestic factors such as weak investor confidence, capability constraints (weak human capital, entrepreneurial base and innovative capacity) , productivity ceilings and institutional degradation and external factors such as a sluggish global economy caused by the global financial crisis of 2008-2009 and the rise of neighbors in the region in contributing to the declining growth trajectory.

If we were to revisit the determinants of growth and agree that proper institutions form the overall structure that determines long-term sustainable growth, then the logical response is to reform Malaysia’s institutional set-up, as it must be the deepest determinant of what is hindering economic growth.

This view is further strengthened as Malaysia’s other deep determinants, geography and trade, are favorable. The country has abundant natural resources, is shielded from natural hazards and is well-located strategically both geopolitically and economically. Malaysia has also benefitted tremendously from being an open economy, especially in the merchandise sector.

The New Economic Model also reports that regional challenges from China, India and Vietnam, etc. are a cause for Malaysia’s declining economic performance. What has changed about these countries? They have all undertaken institutional reforms: China since 1978, India since 1992 and Vietnam since 1986. They are reaping the benefits while Malaysia has stalled in its institutional reforms since the 1990s, regressed in some ways and is suffering from the consequences.

The above points stress the importance of institutional reforms in Malaysia, something that Najib has ironically neglected in his signature policies – 1Malaysia, Government Transformation Programme and Economic Transformation Programme.

According to the Growth Commission report, “…fast sustained growth is not a miracle; it is attainable for developing countries with the ‘right mix of ingredients.’ Countries need leaders who are committed to achieving growth and who can take advantage of opportunities from the global economy. They also need to know about the levels of incentives and public investments that are necessary for private investment to take off and ensure the long-term diversification of the economy and its integration in the global economy…”

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