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.