NEM a rehash of old policies?

If signals from the government are anything to go by, experts believe that the New Economic Model (NEM) will be a rehash of old policies.

Jomo KS (left) , the assistant secretary-general for economic development in the United Nations department of economic and social affairs, noted that much of the rhetoric about ‘greater value addition’  has already been said over the last two decades.

“But more worryingly, we are not told why these old policy recommendations are going to work this time,” he said.

Premier Najib Abdul Razak is scheduled to announce details of the first stage of the NEM tomorrow, and follow up with the second stage during the tabling of the 10th Malaysia Plan.

What the NEM should bring, Jomo said, is “a clear strategy based on what we are trying to achieve and how to go about it”.

One goal which the government appears bent on achieving is to escape the ‘middle income trap’, caused by policy mistakes of the 1980s.

“Following the mid-1980’s slowdown, Singapore opted for its Second Industrial Revolution and decided to relocate low-wage industries to Malaysia, Indonesia and elsewhere. (At the same time) we opened our boundaries to immigrant labour to keep costs down,” he explained.

Therefore, the first thing to do in solving this conundrum is to bring in a policy on skilled labour that de-emphasises low-skilled labour import for a high skilled one.

Failure to do so will render Malaysia ill-equipped to handle high innovation industries, which are pivotal to push the economy to high income status, said Ratings Agency Malaysia chief economist Yeah Kim Leng.

The lack of skilled labour is also making it harder for Malaysia to attract the foreign direct investment (FDI) that the government is vying for.

Like former finance minister Tengku Razaleigh Hamzah (right) who spoke on the matter last week, Jomo said the heavy focus on FDI may be misguided.

“Malaysian officialdom has long been preoccupied with this myth of its own making, that FDI leads…growth while domestic investors follow. The converse is true,” he said.

This is evident in the growth stories of the North-east Asian economies which, he noted, are principally driven by domestic investments, with very little FDI compared to the developing country average.

But, once again, the human capital issue is a hindrance to growth of domestic investment, said Yeah.

 

“To drive domestic investment we must (first) have strong indigenous technological capability…We don’t have this because we have skilled labour constraints,” he said.

In fact, he added, a stunted domestic sector exacerbates the problem of suppressed wages, this time for skilled workers.

Low wages for skilled workers have driven talent out of the country, and kept ‘foreign brains’ off our shores, he said.

This in turn has led to a dearth of human capital, making it difficult to ‘grow’ businesses and causing demand for skilled labour to be too low to raise wages.

“We are now in a ‘Catch-22’ and caught in a downward spiral,” Yeah said.

‘Unlock savings’

Stunted domestic growth has also contributed to the burgeoning problem of capital flight.

In 2008, Malaysia attracted a remarkable US$6 billion, but still suffered negative net investments due to outflows amounting to US$6.4 billion, the highest among Asean economies.

If small- to medium-scale enterprises are not able to grow, they will not be able to take over from large Malaysian companies that are expanding abroad, said DAP economic spokesperson Tony Pua (left) , an economist by training.  

Yeah, however, is quick to point out that there is still light at the end of the tunnel.

Malaysia has a high savings rate, with savings amounting to 35-38 percent of the GDP.

“Our investments only amount to 20-25 percent of GDP, meaning that we have excess savings of about 15 percent, among the highest in the world,” he said.

The challenge, however, is to unlock the savings which is mainly tied up in the Employees’ Providence Fund, and to channel it into high value investment growth areas.

Opinions are, however, split over where the government comes into the picture, in singling out industries for investment.  

Yeah believes that the private sector should be left to pick industry winners and losers, and not support specific industries.

“(Private investors will be the parties) taking the risk, so they will be able to sense which industries are most likely to be winners.

“If the private sector is not investing and is letting the government bear the risk then something is not right.”

He added that the government is only expected to step in if the private sector is constrained by the cost of technology, research or a lack of infrastructure.  

But Jomo said it would be “silly” to leave it all to the market.

He noted that while former prime minister Dr Mahathir Mohamad’s heavy industrialisation and Multimedia Super Corridor efforts were problematic, there was a sense of direction - something that is absent today.  

“(The policies) were not very effective to begin with, but (they) have been abandoned with little understanding of the errors of such policy,” he said.

In contrast, Brazil’s bio-diesel achievement was not an outcome of pure market forces but because of “deliberate and sustained technology policy, which is important for success”.

“Such development cannot be on the basis of whimsical policy associated with one leader and then dropped on the basis of costly trial and error. There must be policy coherence, consistency and continuity. Right now, we don’t have it,” he said.