Malaysia must engage with Asia to manage its vulnerabilities

Mukul G. Asher, Singapore

Perceptions about Malaysia being a successful middle-income country are increasingly being coupled with concerns about its domestic and external vulnerabilities which, if not addressed urgently, could jeopardize growth, international competitiveness and indeed social and political cohesion.

Malaysia's vulnerabilities arise from competition for foreign direct investment (FDI) and manufacturing from China; for services from some of its neighboring countries, such as Singapore; inadequate quality and quantity of human resources for moving to higher value-added activities; and from its domestic institutions and political economy which give insufficient emphasis to economic efficiency.

These vulnerabilities are exacerbated by Malaysia's inexplicable reluctance to pursue inclusive economic diplomacy. This is exemplified by its reported opposition to include even India in the first "East Asia" summit it is hosting in December 2005.

Fortunately, Malaysia was reportedly persuaded by its ASEAN (Association of Southeast Asian Nations, with all ten Southeast Asian countries as members) partners (particularly Indonesia, Singapore and Vietnam) of the need for inclusive economic diplomacy. This augurs well for ASEAN both economically and strategically as well as for Asia as a whole.

Since the 1970s, Malaysia has relied on FDI and state-led domestic investment to generate economic growth. Its favorable natural resources (including oil and gas reserves) to population ratio has assisted in its rapid growth in the past; while current commodity and resources boom is helping to mask its vulnerabilities.

Malaysia's growth has primarily been inputs driven, with saving and investment rates of generally between 30 and 35 percent of GDP, but approaching 40 percent in some years. Its external debt to GDP ratio in 2003 at 50 percent is more than double that of Mexico (23 percent).

Relatively abundant resources permitting inputs driven growth and state-led investments meant that considerations of efficiency in allocation of resources to alternative uses (i.e. economic efficiency) and commercial viability of projects were given insufficient weight in economic decisions and in implementation of projects. Infrastructure projects such as airports, seaports, new capital city, dams and others have been impressively large.

The input-driven growth was achieved when Southeast Asia enjoyed demographic dividend (i.e. rising share of working age population to total population, and relatively low share of old- age population), and when Malaysia's reliance on foreign labor was quite high (reportedly more than quarter of the labor force at its height).

None of the above conditions are now present. Southeast Asia's demographic dividend, which by some estimates accounted for about two-fifths of the region's growth during the 1960-1995 period, has ended, and the many countries in the region will soon experience demographic burden phase.

Malaysia's neighbors, particularly Singapore, are nimble and willing to change fundamentally to sustain growth and competitiveness. This is vividly illustrated by Singapore's recent decision to build two casinos. This will also help sustain Singapore's status as Southeast Asia's primary air-hub and tourist destination, providing formidable challenges to Malaysia (and Thailand).

The above brief overview amply illustrates Malaysia's formidable domestic and external vulnerabilities. Addressing them will require reforming its political economy which relies on state-sponsored or at least supported projects with significant economic rents to favored groups. Malaysia needs to visibly demonstrate its determination to address political economy issues and move away from inputs intensive growth. It also needs to be even-handed in engaging all the major Asian economies, including India.

Deeper engagement with India may assist in addressing Malaysia's vulnerabilities. Malaysia has resources which India needs, while its resource exploitation and management capacity could find profitable avenues in India.

Malaysia has excess capacity in construction sector which it can further utilize in India thorough competitive bidding for infrastructure projects. Greater connectivity between the two countries, and facilitation of movement of natural persons could help use Malaysia's excellent infrastructure more efficiently, and help develop growth niches, particularly in IT related services.

Indian companies are increasingly becoming regional and global and Malaysia represents an opportunity for investments by Indian companies, particularly in resources intensive areas, pharmaceuticals, biotechnology and IT related activities. Malaysia Industrial Development Authority (MIDA) may consider setting up an office in India to attract investments. MIDA's Singapore counterpart, Economic Development Board (EDB) is also setting up an office in India for a similar purpose.

The writer is Professor of Public Policy, National University of Singapore and can be reached at sppasher@nus.edu.sg.