Malaysia sticks to development planning

Malaysia sticks to development planning

Zainal Aznam Yusof outlines some of the trends in the
Malaysian economy, and its prospects in the years ahead.

With all the razzmatazz over liberalization, the fetish of
market forces and the laying out of the red carpet for the
private sector to sustain economic growth, one would have thought
that these would spell the demise of economic planning. Not so.
At least not for Malaysia, where development planning is taken
seriously. The recently published Seventh Malaysia Plan, 1996-
2000 (SMP) is testimony to the longevity of development planning.

The SMP has set targets of 8 percent growth per annum and
growth in investment of 5 percent per annum, with a higher target
for private investment (at 7.8 percent per annum). If the targets
are achieved, then private investment's share of total investment
will reach 73.6 percent by 2000. And the share of total
investment in GNP will reach 42.5 percent by the year 2000 as
compared with 34.1 percent in 1990. The burden of mobilizing
financial resources will fall on the private sector, with the
share of private savings expected to increase from 18.7 percent
of GNP in 1995 to 27.4 percent in 2000.

If we are to take a slightly longer historical perspective,
the SMP seems to embody a more clearly and freshly enunciated
shift towards a strategy of maintaining rapid growth by raising
productivity and, for the first time, announcing a target for
total factor productivity (TFP) contribution to growth. Focus
will be put on " ... accelerating productivity, and efficiency,
primarily through private sector initiatives. Special emphasis
will be given to skills upgrading, capital deepening and
technological development".

The growth targets and financial resources will continue to
raise the level of industrialization. The manufacturing sector is
slated to grow at 10.7 percent per annum, and although this is
less than the Sixth Plan (13.3 percent), its share of GDP would
thus increase to 37.5 percent by 2000, compared to 26.9 percent
in 1995. Gross manufactured exports are expected to increase by
16.9 percent per annum, more than total exports (14.4 percent).
Reflecting the pace and depth of industrialization, the share of
manufactured exports is planned to increase from 76.6 percent in
1995 to 88.6 percent in 2000.

If the growth target of 8 percent is achieved, it would mean
that the Malaysian economy will have succeeded in growing at more
than 8 percent per annum for more than 10 years. That would be an
achievement, and one which is even more laudatory because it
would have been attained on the back of low inflation.

Worries over relatively poor productivity growth has, finally,
persuaded the planners than an explicit productivity target
should be embedded in the SMP. There has been a strong populist
and academic consensus recently, largely due to the work of the
World Bank, that Malaysia and a few other countries including
Singapore, Thailand and Indonesia, are "investment driven"
economies as opposed to "productivity driven" ones such as South
Korea, Taiwan and Hong Kong. And the endogenous growth theory
could tell a slightly different story. It would be easy to
succumb to the temptation to put aside the arcane technical
quarrels over measuring the TFP and all that goes with it in the
interest of brevity and space. But it does matter because the SMP
has the ambitious target of raising the contribution of TFP to
growth to 41.3 percent during the plan period, compared with 28.7
percent during the first half of the 1990s. Is this achievable?

It would seem that, according to some sources, over the 1974-
1995 period, TFP grew at an average annual rate of 1.6 percent,
contributing 23 percent of the growth of the economy. A mature
industrial economy would have about half of its growth coming
from TFP. One suspects that sheer factor accumulation and,
therefore, labor and capital's contribution to growth, would
still be sizable, that is more from "perspiration" rather than
"inspiration".

A long-standing target of the Malaysian political economy is
equity within a pluralistic society. Just how do you cope with
growth so that it will not be so injurious to equity and ethnic
relations? Development planning has explicitly taken this
sensitive concern and successive plans have reported on the
progress that has been achieved on this front. Planning has
assiduously tracked the progress in reducing racial economic
imbalances in income, employment and ownership. The equity story
has been a good one, with the level of absolute poverty falling
from about half in 1970 to about 8.9 percent, and with just about
2.2 percent labeled as "hard core poor", in 1995.

There is thus a new worry about the distribution of income.
Not only is overall income inequality widening but the racial
income imbalance between the bumiputras and the non-bumiputras
has been widening too. The mean household income of bumiputras
grew at 9.3 percent per annum between 1991-1995 while the Chinese
household income increased by 10 percent per annum and the Indian
mean income grew by 10.1 percent. So the bumiputra-Chinese income
ratio went from 1:1.74 in 1990 to 1:1.81 in 1995. Rural-urban
income disparities also widened because rural household income
grew much slower than urban household income. Rapid economic
growth, therefore, has been accompanied by a worsening in the
distribution of income.

Interestingly, the official evidence of a widening of income
inequality has not attracted much attention and the bells and
whistles have been rather muted. Why? One would hazard the guess
that after almost 20 years of rising tempers, anger and obsession
over poverty, inequality and the restructuring of society,
interest has waned. Perhaps there is inequality fatigue.

Maybe Malaysians have become more tolerant of inequality so
that statistics on inequality are greeted with yawns, especially
as opportunities for material advancement are still mushrooming.
They are sharing the growth and never mind if some are getting
more than others. It would be heartening if this is a genuine and
durable popular attitude but it would be wise to anticipate
reversals in sentiment. It is a fragile tolerance.

Dr. Zainal Aznam Yusof is Deputy Director-General (Economics),
Institute of Strategic and International Studies, Malaysia.