Malaysia must engage with Asia to manage its vulnerabilities
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.