Malaysia must engage with Asia to manage its vulnerabilities<\/p>\n
Mukul G. Asher, Singapore<\/p>\n
Perceptions about Malaysia being a successful middle-income
\ncountry are increasingly being coupled with concerns about its
\ndomestic and external vulnerabilities which, if not addressed
\nurgently, could jeopardize growth, international competitiveness
\nand indeed social and political cohesion.<\/p>\n
Malaysia's vulnerabilities arise from competition for foreign
\ndirect investment (FDI) and manufacturing from China; for
\nservices from some of its neighboring countries, such as
\nSingapore; inadequate quality and quantity of human resources for
\nmoving to higher value-added activities; and from its domestic
\ninstitutions and political economy which give insufficient
\nemphasis to economic efficiency.<\/p>\n
These vulnerabilities are exacerbated by Malaysia's
\ninexplicable reluctance to pursue inclusive economic diplomacy.
\nThis is exemplified by its reported opposition to include even
\nIndia in the first \"East Asia\" summit it is hosting in December
\n2005.<\/p>\n
Fortunately, Malaysia was reportedly persuaded by its ASEAN
\n(Association of Southeast Asian Nations, with all ten Southeast
\nAsian countries as members) partners (particularly Indonesia,
\nSingapore and Vietnam) of the need for inclusive economic
\ndiplomacy. This augurs well for ASEAN both economically and
\nstrategically as well as for Asia as a whole.<\/p>\n
Since the 1970s, Malaysia has relied on FDI and state-led
\ndomestic investment to generate economic growth. Its favorable
\nnatural resources (including oil and gas reserves) to population
\nratio has assisted in its rapid growth in the past; while current
\ncommodity and resources boom is helping to mask its
\nvulnerabilities.<\/p>\n
Malaysia's growth has primarily been inputs driven, with
\nsaving and investment rates of generally between 30 and 35
\npercent of GDP, but approaching 40 percent in some years. Its
\nexternal debt to GDP ratio in 2003 at 50 percent is more than
\ndouble that of Mexico (23 percent).<\/p>\n
Relatively abundant resources permitting inputs driven growth
\nand state-led investments meant that considerations of efficiency
\nin allocation of resources to alternative uses (i.e. economic
\nefficiency) and commercial viability of projects were given
\ninsufficient weight in economic decisions and in implementation
\nof projects. Infrastructure projects such as airports, seaports,
\nnew capital city, dams and others have been impressively large.<\/p>\n
The input-driven growth was achieved when Southeast Asia
\nenjoyed demographic dividend (i.e. rising share of working age
\npopulation to total population, and relatively low share of old-
\nage population), and when Malaysia's reliance on foreign labor
\nwas quite high (reportedly more than quarter of the labor force
\nat its height).<\/p>\n
None of the above conditions are now present. Southeast Asia's
\ndemographic dividend, which by some estimates accounted for about
\ntwo-fifths of the region's growth during the 1960-1995 period,
\nhas ended, and the many countries in the region will soon
\nexperience demographic burden phase.<\/p>\n
Malaysia's neighbors, particularly Singapore, are nimble and
\nwilling to change fundamentally to sustain growth and
\ncompetitiveness. This is vividly illustrated by Singapore's
\nrecent decision to build two casinos. This will also help sustain
\nSingapore's status as Southeast Asia's primary air-hub and
\ntourist destination, providing formidable challenges to Malaysia
\n(and Thailand).<\/p>\n
The above brief overview amply illustrates Malaysia's
\nformidable domestic and external vulnerabilities. Addressing them
\nwill require reforming its political economy which relies on
\nstate-sponsored or at least supported projects with significant
\neconomic rents to favored groups. Malaysia needs to visibly
\ndemonstrate its determination to address political economy issues
\nand move away from inputs intensive growth. It also needs to be
\neven-handed in engaging all the major Asian economies, including
\nIndia.<\/p>\n
Deeper engagement with India may assist in addressing
\nMalaysia's vulnerabilities. Malaysia has resources which India
\nneeds, while its resource exploitation and management capacity
\ncould find profitable avenues in India.<\/p>\n
Malaysia has excess capacity in construction sector which it
\ncan further utilize in India thorough competitive bidding for
\ninfrastructure projects. Greater connectivity between the two
\ncountries, and facilitation of movement of natural persons could
\nhelp use Malaysia's excellent infrastructure more efficiently,
\nand help develop growth niches, particularly in IT related
\nservices.<\/p>\n
Indian companies are increasingly becoming regional and global
\nand Malaysia represents an opportunity for investments by Indian
\ncompanies, particularly in resources intensive areas,
\npharmaceuticals, biotechnology and IT related activities.
\nMalaysia Industrial Development Authority (MIDA) may consider
\nsetting up an office in India to attract investments. MIDA's
\nSingapore counterpart, Economic Development Board (EDB) is also
\nsetting up an office in India for a similar purpose.<\/p>\n
The writer is Professor of Public Policy, National University
\nof Singapore and can be reached at sppasher@nus.edu.sg.<\/p>",
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