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Economic Highlights
New Economic Model To Chart The Countrys
Development Ahead
31 March 2010
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Peck Boon Soon
(603) 9280 2163
[email protected] read important disclosures at the end of this report.
Malaysia
MARKET
DAT
ELINE
PP
7767/09/2010(025354)
The new economic model (NEM) to transform the country into a high-income nation by 2020 will be driven by eight
Strategic Reform Initiatives (SRIs).
The NEM sets a target to achieve an average economic growth of 6.5% a year over 2011-20. Although
the growth target set is more ambitious than an average growth of 4.3% a year achieved in 2001-09, it has
to be the case in order to encourage people to work harder and to surpass what was achieved in the last nine years.
However, we believe it is not an easy task.
The NEAC vows to adopt a new way of doing things in order to help it to achieve its growth target. However,
not all the approaches are new, in our view. Whilst some of these approaches are not new, they are still relevant,
in our view, and the key of their success still lies with the implementation.
For the NEM to succeed, it highlighted that political leadership must unite to break the logjam of vested
interest and it must overcome the scepticism.
The NEM projects private investment to bounce back and expand by a double-digit rate of 12.2% a year
during the period 2011-20, from a mere +0.3% a year achieved in 2001-09. Whilst the initiatives proposed under
the NEM are certainly helpful to promote private investment, we believe it will still remain a significant challengefor the country to drive private investment going forward.
Malaysia must improve its talent base and reduce the dependent on foreign labour.
The NEM recommends a steady removal of subsidies and price controls, with a rationalisation of tax
incentives.
Affirmative action programmeswill be revamped and it will be built on four principles, i.e. market-friendly,
merit based, transparent and needs based.
The NEM proposed to create an ecosystem for entrepreneurship, promote and environment for innovation and
establish stronger enabling institutions to drive entrepreneurship in the country.
The Government would only act as facilitator, ensuring distortions are not created, putting in place the required
enablers to support high value industries and giving special attention when required for specific sectors in order to
ensure that the private sector can allocate resources more efficiently.
The NEM places strong emphasis on preserving the countrys natural resources and safe-guarding the
interest of future generations.
The NEM has rightly pointed out the weaknesses of the Malaysian economy and mapped out comprehensive policy
measures to guide Malaysia in its next growth path. However, in our view, the key still lies with the execution
and the political will to force through changes.
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Eight Strategic Reform Initiatives Under The New Economic Model
During the Invest Malaysia 2010 Conference, the Prime Minister unveiled the new economic model (NEM) to transform
the country into a high-income nation by 2020. The NEM, to be achieved through an Economic Transformation Programme
(ETP),constitutes a key pillar which will propel Malaysia to be an advanced nation with inclusiveness and sustainability
in line with the goals set forth in Vision 2020. The ETP will be driven by eight Strategic Reform Initiatives (SRIs) which
will form the basis of the relevant policy measures. The eight SRIs are:
i) Reenergising the private sector to drive growth;
ii) Developing quality workforce and reducing dependency on foreign labour;
iii) Creating competitive domestic economy;
iv) Strengthening of the public sector;
v) Transparent and market friendly Affirmative Action;
vi) Building the knowledge base infrastructure;
vii) Enhancing the sources of growth; and
viii) Ensuring sustainability of growth.
A More Ambitious Real GDP Growth Target
The NEM sets a target to achieve an average economic growth of 6.5% a year over 2011-2020 (see Table 1).In the first five years from 2011-15, the NEM aims to achieve an average real GDP growth of 6.2% a year and the growth
is projected to strengthen to 6.9% a year in 2016-2020. The real GDP target sets for the first five years is more
ambitious thanan average of 5.5% a year projected by the Economic Planning Unit (EPU) under the 10 th Malaysia Plan
(10MP) (2011-15), when the figure was first announced in a closed-door briefing for captains of industry. Although the
growth targetset is more ambitious than an average growth of 4.3% a year achieved in 2001-09, it has to be the
case in order to encourage people to work harder and to surpass what was achieved in the last nine years. However,
we believe it is not an easy task given the presence of global imbalances and more and more countries such as China,
Vietnam, India and Indonesia have become attractive hosts for foreign direct investment (FDI). Also, policy measures
have to be well executed in order to ensure the success implementation of the NEM to bring about a more competitive
and higher income economy. Under the NEM, the Government aims to push the GNP per capita to US$17,725 by 2020,
from the current level of US$7,558 in 2010.
At the same time, the National Economic Advisory Council (NEAC) vows to adopt a new way of doing things in order
to help it to achieve its growth target. These elements of the new and bold approaches (see Table 2) are inter-related
and linked. However, not all the approaches such as growth through productivity, private sector-led growth, cluster
economic activities and retain skilled workers are new, in our view. These approaches have been adopted in the last
few Malaysia economic plans, but the results left much to be desired, partly because of greater competition for FDI from
other emerging economies, the lack of skilled labour and less business friendly public delivery system. Take for example
the approach of promoting private sector-led growth. Although the Government has been pushing for the private sector
Average annual
growth rate (%) % share
2011-15 2016-20 2011-2020 2010 2020
GDP 6.2 6.9 6.5
Consumption: 6.1 7.8 6.7 67.9 70.6
Private 6.7 8.6 7.7 54.7 60.7
Public 3.1 3.9 3.5 13.3 9.9
Total investment 8.9 8.4 8.6 23.3 28.3Private 13.2 11.2 12.2 10.6 17.8
Public 4.6 4.5 4.6 12.6 10.5
Goods & services:
Exports 8.2 8.2 8.2 101.5 118.1
Imports 8.3 9.3 8.8 93.3 115.3
Source: NEM & RHBRI
Table 1Real GDP By Expenditure 2010-2020 (2000=100)
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Page 3 of 10
to take over the driver seat, the
performance remained lacklustre. As
a result, the role of state participation
in the economy has become more
dominant. Similarly, Malaysia has
been pushing for total factor
productivity (TFP) to drive growth for
sometime. Although we had seen
some improvement towards this endunder the Second Outline Perspective
Plan (OPP2), 1991-2000, it has not
been able to achieve it under the
Third Outline Perspective Plan
(OPP3), 2001-10 (see Table 3), due
to various challenges such as keener
competition for FDI, the countrys in
ability to retain and attract talent and
a drop in the countrys education
standards. Whilst some of these
approaches are not new, they are
still relevant, in our view, and thekey of their success still lies
with the implementation.
Also, for the NEM to succeed, it
highlighted that political
leadership must unite to break
the logjam of vested interest and
it must overcome the scepticism and
convince the people that the country
is embarking on a path that will
improve their lives and those of
generations to come.
Table 2Approach To Economic Development:
The Old Versus NEM
Source: NEM
Re-energising The Private Sector To Drive Growth
The NEM expects the private sector demand to drive the countrys economic growth. Within the private sector, the NEM
projects private investment to bounce back and expand by a double-digit rate of 12.2% a year during the
period 2011-20, from a mere +0.3% a year achieved in 2001-09. The NEM outlined six initiatives (see Table 4) in amove to almost double private investments share to 17.8% of GDP by 2020, from a low of 9.4% in 2009. Private
investment has remained lacklustre for a long period, falling to an average of around 11% of GDP a year in the last
decade (2000-09), compared with an average of 29% a year (1990-97) before the 1997/98 Asian currency crisis.
Although the Government intended to raise the share of private investment to 24.4% of GDP by 2010, from 13.4% in
OPP 1 OPP 2 OPP 3 Target Achieved
1971-1990 1991-2000 2001-2010 2001-2007(e)
Contribution % of total Contribution % of total Contribution % of total Contribution % of total
GDP 6.7 100.0 7.0 100.0 7.5 100.0 5.1 100.0
Labour 2.4 36.1 1.7 24.3 1.6 20.9 1.6 31.9
Capital 3.4 50.9 3.5 50.2 2.7 36.6 1.9 37.5
TFP 0.9 13.0 1.8 25.2 3.2 42.5 1.6 30.6
Source: OPP3 & RHBRIs estimates (e)
Table 3Contributions Of Factors Of Production
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2000, through various initiatives
under the Third Outline Perspective
Plan (OPP3), 2001-10, it has not
been able to do so. Whilst the
initiatives proposed under the
NEM are certainly helpful to
promote private investment, we
believe it will still remain a
significant challenge for thecountry to drive private
investment and hence economic
growth, as more and more countries
such as China, Vietnam, India and
Indonesia have become attractive
hosts for FDI. In addition, local
investors have moved up the
learning curve and become more
confidence to invest abroad in search
for better returns, as indicated by a
sharp rise in direct investment
abroad, which rose from a low ofRM5.2bn in 2003 to a high of
RM50.2bn in 2008, before easing to
RM30.5bn in 2009. Earlier, in a move
to promote private investment, the
Government has also liberalised 27
services sub-sectors on 22 April
2009. It had also repealed the
Foreign Investment Committee (FIC)
guidelines and relaxed the 30%
Bumiputera equity participation at the
point of initial public offer (IPO) on
30 June 2009. Whilst these changes are helpful in promoting private investment, much remains to be done before we
can expect significant transformation of the economy to exploit new sources of growth.
Meanwhile, the NEM projected that private consumption will grow by 7.7% a year during theperiod, faster than
+6.7% a year achieved in 2001-09. Indeed, the Government has been pushing private consumption to drive the countrys
economic growth since the 8th Malaysia Plan (8MP) (2001-05). As a result, private consumption as a share of GDP has
risen to a high of 53.7% in 2009, from 43.8% in 2000, and is projected to reach around 58% in 2015. Similarly, the
share of household debt rose from 63.9% of GDP in 2008 to 76.6% in 2009. The sharp jump was due partly to the
effect of a lower denominator as GDP contracted in 2009. Bank Negara, however, was not alarmed by the sharp rise
in household borrowings given that asset quality of household loans remained sound and it has set up a debt negotiation
agency, Credit Counselling and Debt Management Agency, to help borrowers to deal with late payments and financial
difficulties. At the same time, it believes banks themselves should have the capability and capacity to manage risks
associated with household debts, and they could easily check borrowers borrowing status before granting them any new
loans through a data system set up by the Bank Negara that captured all outstanding loans. Still, the above development
suggests that there could be a limitation going forward for the Government to continue promoting private consumption.
On the external front, the NEAC projects real exports to grow at a faster pace of 8.8% a year during the period,
compared with +3.1% in 2001-09. The projection appears reasonable but there could be some downside risk to the
projection given that the global imbalance has yet to be resolved and risk of rising protectionism remains.
Developing Quality Workforce And Reducing Dependency On Foreign Labour
The NEM highlighted that Malaysia must improve its talent base and it cannot miss the opportunity to put its most
valuable resource to work. Therefore, Malaysia must remove barriers preventing its brightest people from gaining skills,
while enticing these gifted people to remain within its borders. In the same vein, a quality education system, which
nurtures skilled, inquisitive, and innovative workers to continuously drive productivity forward, is the foundation of
sustained economic growth. Indeed, the NEM highlighted that in 2007, 80% of Malaysias workforce received
education only up to Sijil Pelajaran Malaysia, while 75% of the labour force is low-skilled (see Chart 1).
Table 4Firing Up The Private Sector
Source: NEM
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Chart 1Highly-Skilled And Low-Skilled Labour (2007,%)
Source: NEM
7 5
5 1
6 7 6 5
2 5
4 9
3 3 3 5
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
M a la ys ia S in g ap o r e T a iw an K o r e a
Highly-skilled
Low-skilled
Page 5 of 10
Shortage of skilled labour, together with
complaints about inadequate creativity and
English proficiency are among the top
obstacles faced by companies. Hence, to
help the country develops its human
resources and reduce the dependent
on foreign labour, the NEM proposed the
following initiatives (see Table 5).
Creating Competitive Domestic
Economy
A large proportion of the Governments
financial resources are being allocated to
subsidies, which accounted for
22.9% of total operating
expenditure in 2008 and the amount
is estimated at around 15.3% in
2009. This is a heavy burden to
the Government and contributes
partly to rising fiscal deficit. Thelarge government outlay on
subsidies, mostly funded by
petroleum proceeds, is also not
sustainable in the long run. At the
same time, it distorts market pricing
of essential goods and services in
Malaysia. The NEM, therefore,
recommends a steady removal
of subsidies and price controls
(see Table 6), with a rationalisation
of tax incentives. Savings from
the removal of subsidies are
proposed to be used to fund a
social safety net scheme targeted
at beneficiaries from poor
households and vulnerable groups.
This savings can also be applied to
a Transformation Fund to help firms
displaced by the reforms to adjust
to the new market environment.
We view these proposals positively,
as price controls and subsidies will
distort price signals, resulting in
inefficient use of valuable
resources, overconsumption and
waste as well as making businesses
complacent. At the same time,
removing subsidies and price
controls can reduce operating
expenditures over time and help
the Government to improve its
fiscal deficits. However, the
removal of subsidies, however,
should be done over time in order
to reduce its impact on the
economy. Indeed, we believe it is
probably the right time for the
Government to consider
reducing the fuel subsidy from
Source: NEM
Table 5Inspiring The Workforce To Draw Out Their Best
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Table 6Vibrant Markets And Greater Choices
Source: NEM
Table 7A Lean And Customer-Focussed Government
Source: NEM
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the current 30 sen/litre to 20 sen/
litre and allow it to fluctuate according
to international crude oil prices even
though the restructuring of fuel
subsidy has been scrapped.
Strengthening Of The Public
Sector
The NEM highlighted that public
institutions must be re-engineered
and they must not duplicate functions
better provided by the private sector.
Instead, public institutions should seek
to undertake those tasks that the
private sector cannot perform. As a
result, the NEM projects the share of
public investment to drop to 10.5%
of GDP in 2020, from 12.6% in 2010,
while growth will be maintained at an
average of 4.6% a year during theperiod, compared with +4.4% a year
achieved in 2001-09. The delivery
of government services must be
efficient and effective, using a
whole of government approach to
facilitate the operations of the private
sector. At the same time, fiscal
management must be strengthened
to include greater transparency and
to provide the right incentives, while
the Governments revenue base must
be diversif ied and expenditure
streamlined to foster better utilisation
of revenue. Towards this end, the
NEM proposed a number of measures
(see Table 7). Among them, the
proposal to widen the tax base via
the introduction of the goods and
services tax (GST) is worth noting.
The NEM highlighted that one of the
aims of the tax reform is to enable
the Government to lower the rates of
personal and corporate taxes, which
will incentivise individuals and firms
to increase their income and profits.
The Government initially planned to
table the GST for the second reading
in Parliament in March, but has since
delayed it, as it indicated that it needs
to ensure the people have a clear
picture of the tax prior to its
introduction.
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Transparent And Market Friendly
Affirmative Action
A key component of inclusiveness is
the fostering of equal and fair
economic opportunities. In this
respect, affirmative action
programmes and institutions will
continue in the NEM. However, it willbe revamped to remove the rent
seeking and market distorting
features, which have blemished the
effectiveness of the programme, and
to be in line with views of the main
stakeholders (see Table 8). The
renewed affirmative action policy will
consider all ethnic groups fairly and
equally as long as they are in the
low income 40% of households. In
this regard, an Equal Opportunities
Commission will be established toensure fairness and address undue
discrimination when occasional
abuses by dominant groups are
encountered.
According to the Prime Minister, the
renewed affirmative action policy will
be built on four principles, i.e.
market-friendly, merit based,
transparent and needs based.
The Prime Minister said that one
important consideration will be
developing a competitive and
transparent tender process, with set
and clear rules for the whole
Bumiputera community, made of both Malay and other indigenous groups. This is set out as a common-sense enhancement
of our policies for a new economic reality and where Inclusiveness is a key component in our new economic model. In
practice, the Prime Minister is of the view that the approach will mean greater support for the Bumiputera, a greater
support based on needs, not race. In addition, in assessing the results, fair distribution must encompass the whole
spectrum of measuring wealth such as equity ownership, other financial and non-financial assets, and access to wealth
creating opportunities such as long-term concessions and contracts. Even in measuring ownership, it should go beyond
equity to include other properties, business assets such as retail, landed properties, commercial building, intellectual
property and other services as well as managerial positions. A valuable example would be the redevelopment of
Kampung Baru, a holistic opportunity of wealth creation and value enhancement that goes deeper and well beyond equity
ownership, the Prime Minister said. Unlike the National Vision Policy (NPV) under the OPP3, which clearly stated that
one of its targets is to achieve effective Bumiputera participation and equity ownership of at least 30% by 2010, the NEM
is silent on the quota.
Table 8Escaping Low Income
Source: NEM
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Building The Knowledge Base
Infrastructure
Economic transformation in the
industrial, agricultural and services
sectors is a process requiring
continuous innovation and
productivity growth with significant
technological advancement andentrepreneurial drive. The adoption
of processes in line with best
practices and international standards
wil l improve the chances for
Malaysian firms to succeed in the
global market place. Hence, the NEM
proposed to create an ecosystem
for entrepreneurship, promote
an environment for innovation
and establish stronger enabling
institutions (see Table 9). We
believe this is important to driveentrepreneurship in the country, as
anecdotal evidences suggest that
there is lack of entrepreneurship
among Malaysian businesses and
many are thinking of early retirement
rather than continue to strive to help
the nation to scale greater heights.
Enhancing Sources Of Growth
The old way of doing thing has been
for Government to identify the
sources of growth and then provide
the incentives to drive the growth
sectors/ industries. This was the case
in developing commodities and later
the manufacturing sector, in particular
the electronics sub-sector. In the late 1980s and over the following two decades, selected services sectors were identified
as having export potential and again, the Government introduced incentive schemes (e.g. financial and tax breaks) to
promote growth in these sectors (e.g. education, tourism and shipping).
The new approach under the NEM would be to strengthen overall competitive capacity of the private sector, identify criteria
that will make sectors/industries as important sources of growth and remove the barriers for private sector to drive
sectors/industries with high growth potential (see Table 10). The Government would only act as facilitator, ensuring
distortions are not created, putting in place the required enablers to support high value industries and giving special
attention when required for specific sectors in order to ensure that the private sector can allocate resources more
efficiently.
In developing further sectors and industries which can lead growth, the NEAC believes that Malaysia must harness its
natural endowment, sectors with comparative advantage, and industries where Malaysia has developed early mover
advantages as the main sources of high value added growth with spillover effects into new areas of activities.
Table 9Innovating Today For A Better Tomorrow
Source: NEM
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Ensuring Sustainability Of
Growth
The NEM places strong emphasis
on preserving the countrys
natural resources and safe-
guarding the interest of future
generations. While progress and
development are all important, theGovernment must not overlook the
value of careful usage of its natural
resources by applying appropriate
pricing, regulatory and strategic
policies to manage non-renewable
resources sustainability. Also, a
green economy platform policy for
development must be set by the
Government. At the same time,
greater efforts are needed to put
in place pollution mitigation
practices, enforce clean air andwater standards, as well as
maximise the stewardship of the
countrys scare natural resources.
Fiscal discipline is needed for sound
and sustainable public finances in
order to maintain macroeconomic
balance and facilitate financial
stability.
A Great Model, But TheKey Still
Lies With The Execution
As a whole, the NEM has rightly
pointed out the weaknesses of the
Malaysian economy and mapped
out comprehensive policy measures
to guide Malaysia in its next growth
path. However, in our view, the
key still lies with the execution
and the political will to force
through changes. The weak
execution was reflected in the
implementation of the NVP under
the OPP3. The NVP has touched
on, among others, to develop a
knowledge-based economy as a
strategic move to raise value add
of all economic sectors and
optimising the brain power of the
nation, strengthening human
resource development to produce
competent, productive and
knowledgeable workforce,
strengthening the sources of growth
and enhancing competitiveness to
meet the challenges of globalisation
and liberalisation. We believe some
Table 10Finding The Economic Sweet Sports
Source: NEM
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OPP 2 OPP 3 Target Achieved
1991-2000 2001-2010 2001-2009
GDP 7.0 7.5 4.3
Consumption: 5.5 7.1 7.0
Private 5.5 7.4 6.7
Public 5.5 5.9 8.4
Total investment 6.0 8.1 2.4
Private 2.9 12.7 0.3
Public 10.5 0.9 4.4
Goods & services:
Exports 12.4 7.1 3.1
Imports 11.4 7.0 3.5
Source: OPP3 & RHBRI
Table 11Real GDP By Expenditure
OPP 2 OPP 3 Target Achieved NEM
1991-2000 2001-2010 2001-2009 (2000=100)
GDP 7.0 7.5 4.3 6.5
Agri culture 0.5 3.5 3.0 2.8
Mining 3.4 -2.7 0.9 1.1
Manufacturing 10.4 8.3 2.7 5.8
Construction 6.4 6.6 1.9 3.5
Services 8.3 8.4 6.1 8.0
Source: NEM, OPP3 & RHBRI
Table 12Real GDP By Industrial Origin
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IMPORTANT DISCLOSURES
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of the policy thrusts outlined in the OPP3
were forward looking and are probably still
relevant today. However, it was not an
easy task to execute and the country is
estimated to achieve a growth of only 4.3%
a year during the period, compared with
the target of 7.5% set under the OPP3 (see
Tables 11 & 12). Meanwhile, the NEM could
still be fined tune after a robust andthorough consultation with various groups.
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