Hard choices

The volatility of the global economy forces our policymakers to strike a difficult balance between the immediate imperative of shoring up short-term economic growth, with the long-term need for economic restructuring.

Ziad Razak, The Malaysian Insider

Malaysia is certainly facing tough times. The political upheavals which have rocked the country since March 8, 2008, seem to continue unabated.

As I write this, we are faced with the prospect of yet another by-election, this time in Penanti, a state seat within the PKR stronghold of Permatang Pauh.

Lost amidst all the political manoeuvring is the urgency of economic restructuring.

Discussions concerning the need for a radical overhaul of Malaysia's economic model have been circulating for quite a while now. Since the days of the Mahathir premiership, the Government has spoken about the need for a knowledge-based economy. The Abdullah Badawi administration took this idea further, with its focus on innovation and human capital.

So when Datuk Seri Najib Tun Razak, in his capacity as Finance Minister, spoke about the need to emphasise the development of the services sector as part of a retooling of Malaysia's economic model, it came as no surprise.

While Malaysia has derived significant long term benefits from the adoption of a low cost, export-oriented, resource- and manufacturing-based economic model in the 1970s and 1980s, we are fast approaching a point of diminishing returns.

Today, Malaysia is highly dependent on exports of oil and gas, palm oil and electronics – the holy trinity of the Malaysian economy.

Taken together, these three mainstays of Malaysian exports amounted to about 63 per cent of total Malaysian exports in 2007. Clearly, a slump in price for any one of these three main exports would have a deleterious effect on the Malaysian economy.

Malaysia's emphasis on low-cost manufacturing has also led to a national dependency on a foreign labour workforce, which is now estimated to make up almost one-fifth of the entire Malaysian workforce in 2007.

Such high dependency – some analysts are already calling it an "addiction" – on a foreign workforce not only presents high costs in terms of capital outflow due to remittances, but is also putting a heavy social cost on local communities.

Just as troubling is Malaysia's continued reliance on low value-added economic activity, at the expense of creativity and innovation.

While the "Made in Malaysia" tag was certainly a badge of honour in the 1980s and 1990s, it can no longer remain a basis for national competitiveness, in a global economy that is intent on making China and Vietnam its low-cost workshops. Malaysia has no choice but to move up the value chain.

Restructuring the Malaysian economic model will not be easy. While it is true that times of crisis often throw up opportunities for dynamic restructuring, the challenge of reinventing Malaysia's economic model will certainly prove to be akin to fixing an aircraft engine in mid-flight.

Our budget deficit – currently projected to rise to 5.2 per cent of GDP in 2009 as a result of pump-priming – presents a huge constraint on the Government's ability to invest towards developing new sources of growth.

The volatility of the global economy forces our policymakers to strike a difficult balance between the immediate imperative of shoring up short-term economic growth, with the long-term need for economic restructuring.

The Government must also contend with the inevitable pushback from special interest groups that have a stake in the status quo. While the Government must continue to be pro-business, it must remain so in a way that prioritises the public interest.

Reforming a national economic model is a difficult endeavour in the best of times. In these days of crisis, we need strong leadership that can live up to the Kiplingian challenge of keeping its head up while others are losing theirs and blaming it on the Government.

So far, it is fair to say that the Government has been making the right moves.

PM Najib's decision to quicken the pace of liberalisation in the services sector, and the strengthening of MITI's role in SME (small and medium enterprises) development is certainly a move in the right direction. While Malaysia has already embarked on a number of initiatives to develop new sectors of growth – including investments in biotechnology, Islamic finance, modern agriculture, and the development of new growth centres such as Iskandar Malaysia – such efforts need to be redoubled.

The emphasis on value-add is also important. Najib's exhortation for the nation to move from "Made in Malaysia" to "Designed in Malaysia" is welcome, and long overdue. Malaysia certainly has the talent – Jimmy Choo is just one example. The greater challenge is to create the right environment and provide the right incentives so that our talents can bloom.

The Government's move to study the current arrangement for toll prices are also a step in the right direction, as Malaysia begins the hard work of rationalising the allocation of resources to eliminate wastage and corruption. Moving forward, we must ensure that special interests can no longer rake in the cash by winning sweetheart deals, at the expense of the nation's long-term economic development and the public interest.

It is clear that the challenge of restructuring the Malaysian economy will not be easy, and must involve a number of hard choices. The Prime Minister recognised this, when he outlined "Performance Now" as a critical element of his approach to government. We can only hope that Najib has the fortitude, wisdom and courage to lead our nation through such difficult times.

Ziad Razak was formerly a Special Officer to the Fifth Prime Minister of Malaysia, from 2007 to 2009. He has since returned to the private sector. The views expressed here are his own, and do not reflect his professional or voluntary affiliations.