Malaysian economy on the right track but with potholes

Malaysian economy on the right track but with potholes

One of Southeast Asia's rising economic stars is encountering potholes on the road toward development. Johanna Son of Inter Press Service reports.

KUALA LUMPUR (IPS): Malaysia's economy continues to speed along the development track, but warning lights are signaling problems that could choke its growth engine in the years ahead.

Signs of the country's wealth are easy to spot. Shopping centers are filled with people and even more cavernous malls are changing Malaysia's urban landscape. In bustling Kuala Lumpur, the world's tallest building is rising above highways crammed with brand new cars.

The statistics also reflect Malaysia's boom. The economy has been growing by eight percent annually in the last seven years and was projected to grow by 8.6 percent in 1994. It is expected to grow by 8.4 percent this year and by 8.2 percent in 1996.

Despite rivalry from Asia's new favorites like China and Vietnam, foreign investments in Malaysia rose by nearly 200 percent in the first nine months of 1994 compared to the previous year. Malaysian firms are themselves investing abroad.

The country of 19 million people also reached full employment in 1992 -- eight years ahead of the date set by government planners.

"Actually, we can give ourselves a pat on the back," Malaysian Prime Minister Mahathir Mohamad told the United Malays National Organization (UMNO), the lead party in the ruling National Front coalition, in November.

"Today Malaysia is seen as a model country," he said, because it has moved from a producer of raw materials to one where manufactured goods make up 78 percent of its industry exports.

When Deputy Premier and Finance Minister Anwar Ibrahim presented the 1995 budget in October, he submitted one that contained tax breaks and a bonus for civil servants and security forces because the government expected US$252.8 million budget surplus.

No one says Malaysia's boom will go bust soon, but experts say it is time to address deeper ills that may threaten the country's ability to sustain its impressive growth for the long haul.

"The Malaysian economy began to show signs of overheating after a period of rapid expansion since 1987," says Muthi Samudram of the Malaysian Institute of Economic Research (MIER), an independent think tank, in a study submitted to the Asian Development Bank (ADB).

Some of the danger signals are a worsening labor shortage, wage rises that are exceeding growth in productivity, imports that are galloping past exports, inflationary pressures and the need for more local investments.

Malaysia's industrialization has been such that it is running short of labor, drawing over a million foreign workers and becoming Southeast Asia's mecca for jobseekers. The nation will be short by two million workers by 2020 -- the year by which Mahathir says Malaysia would be fully industrialized.

International Trade And Industry Minister Rafidah Aziz has also expressed concern about very rapid hikes in wages: "This is an unhealthy situation as it will affect our competitiveness."

According to government figures, wages grew by 6.7 percent and outpaced a 5.3 percent rise in productivity from January to July 1994.

Likewise, the country may not be producing enough technically able talent to help sustain its growth curve. Says Muthi: "The declining trend in enrollment of students in science stream is very disturbing when the nation is embarking on the industrialization path."

The shortage of skilled labor is especially acute. Official figures expect a gap of 17,200 engineers for 1991-2000. Malaysia's Industrial Master Plan says the supply of engineers must increase from 12,000 in 1985 to 50,000 by 1995.

The Mahathir government has been trying to close the gap by encouraging technical training and proposing the use of English in schools to move up the technological ladder like the Asian tigers and build up a weak industrial base.

The economy's continued growth at full employment tends to push inflation, expected to hit 4.3 percent next year from this year's 3.9 percent. Still, as ADB senior economist Naved Hamid notes, four percent inflation is an achievement by itself.

Economists point to Malaysia's widening current-account deficit, spurred by a services deficit that was expected to reach $2.78 billion by end of last year as foreign investors repatriated profits and dividends.

There have been fears that foreign firms will pull out once labor costs start rising. But Hamid says, "Foreign multinational companies are not footloose in Malaysia. They are there to stay."

He believes the electronics industry -- one of the country's key strengths -- will go a long way in keeping Malaysia's economic machine revved up. The country remains among the world's major exporters of electronic products.

Instead of pulling out, foreign electronics firms have shifted labor-intensive products like black and white TVs to China or Vietnam but kept the higher technology ones in Malaysia.

Economists, though, caution against relying too much on foreign investments. Says Muthi: "It is important to recognize that Malaysia can no longer depend on the high inflows of FDI. Domestic investments have to be promoted vigorously and they need to play an important role for sustained economic growth."

The government targeted $31.75 billion in investments for 1991-1995 but hit $33.7 billion in July 1994. The country aimed to source 60 percent of this from abroad and the rest locally, but as of July 1994 ended up with the reverse ratio.

Hamid says Malaysia has already earned its tiger stripes. While the country may not have the industrial base of Japan or Korea or their per capita incomes, it is a tiger by its rapid growth in the past 30 years, exporting power and reducing poverty.

But while standards of living have indeed improved drastically in Malaysia in just a generation, such economic success is extracting a social price as incomes grow and youths leave farms for cities.

Problems like drug abuse, lepak (loafing by youths) and bohsia (a Hokkien phrase that literally means 'no sound' but refers to prostitutes) were serious enough to be discussed at UMNO's general assembly in November, not least because they are affecting Malay youth.

"Wealth and progress also have their problems," Mahathir said. "Our family institution has more or less been crippled. Exposed to urban living conditions with extraordinary freedom, many of our children are affected with social diseases."