Najib’s economic reforms – Part 2(a)

The structure and performance of the Malaysian economy

The Malaysian economy was considered a miracle economy until the fateful event of the 1997/98 exposed its fundamental weaknesses. In its 1993 publication, the World Bank recognised Malaysia as one of the “East Asian Miracle” economies. Furthermore, The Commission on Growth and Development in its report titled, “The Growth Report: Strategies for Sustained Growth and Inclusive Development” recognised Malaysia as one of only thirteen countries in the world to have sustained growth of more than 7% for more than 25 years since the second World War (NEM 2010) (Refer to Figure 1 - Performance of the Malaysian Economy)

The BN government successfully transformed the Malaysian economy away from agriculture and resources based towards resources based and manufacturing. More importantly, the high growth was effectively translated into poverty reduction. Absolute poverty rates now stand at around 3% in 2007 with a GDP per capita of US$6,942, qualifying Malaysia as an upper middle-income economy.

Table 3: Structure of the Malaysian economy (contribution to GDP)

Sector	1960 (GDP %)	2005 (GDP %)	2010 (GDP %) (e)
Agriculture, forestry, livestock & fishing	37.9	8.2	7.8
Mining & quarrying	5.9	6.7	5.9
Manufacturing	8.7	31.4	32.4
Construction	3	2.7	2.4
Services	44.6	58.1	59.2

Source: EIU

Weakening economic fundamentals

Notwithstanding the successes noted above, the 1997/98 East Asian Financial Crisis (EAFC) exposed several structural weaknesses in the Malaysian economy. The conventional view of the EAFC is that the proximate cause was the sudden reversal of portfolio capital in Malaysia through the selling down of currency and equity due to the ‘contagion effect’ which was triggered by the devaluation of the Thai baht. However, the fundamental economic causes which exacerbated the EAFC were exchange rate misalignment, financial fragility, weak corporate sector governance and declining total factor productivity (TFP) (Athukorala 2001 & 2008).

“The New Economic Model – Part 1: Strategic policy directions”, a report commissioned by the Prime Minister Najib Razak, identified the following trends which clearly indicates structural problems in the Malaysian economy: (i) declining private investments; (ii) cumbersome and corrupt bureaucracy; (iii) low value added industries; (iv) low-skilled jobs and low wages; (v), stagnating productivity growth; (vi) insufficient innovation and creativity and (vii) lack of appropriately skilled human capital (NEAC 2010) affirming the diagnostics of several other authoritative analysis of the Malaysian economy such as Yusuf and Nabeshima (2009) and the World Bank’s Malaysia Economic Monitor (2009 & 2010). In short, Malaysia is “stuck in the middle.”

The export oriented economic model that had delivered success to Malaysia in the past, has since the EAFC, been on a persistent decline. Malaysia has not recovered to pre – crisis level in any of the key economic indicators. Export growth, average GDP and per capita GDP growth for the period 2000 – 2006, have all been at their lowest since the 1960s.

Table 4: Historical economic performance

	Average GDP growth (%)	Average per capita GDP growth (%)	Average Export Growth (%)
1960s	6.6	3.5	6.0
1970s	7.7	5.2	8.2
1980s	5.9	3.2	9.2
1990s	7.3	4.5	12.7
2000-06	5.2	3.2	7.2

Source: Yusuf and Nabeshima (2009)

To address the problems with the current model, the World Bank – which captures the consensus and conventional view – has recommended the following in its two reports. In the first report, “Repositioning for Growth” (2009), the report calls for:

• Promoting further specialization of the economy;
• Improving the skills base of the labor force;
• Making growth more inclusive;
• Bolstering public finances

In its follow-up report released earlier this year, “Growth through Innovation” (2010), the report recommends that innovation performance can be strengthened in three dimensions:

• Improving innovation capabilities by ensuring that firms have sufficient access to talent, technology and finance for innovation;
• Enhancing the driving force of innovation by promoting and protecting the process of competition;
• Amplifying the impact of innovation by focusing on promising product niches and concentrating activity in geographical clusters.

BN/UMNO’s response

The BN’s response to the results of the 12GE can be divided into two phases – the Badawi phase and the Najib phase. BN went into the 12GE knowing that the Malaysian economy was floundering as it adjusted to the unfolding of the 2008 Global Financial Crisis. Moreover, since 2005, the surge in international oil prices had impacted the domestic political situation as the government capped subsidies on fuel products. This lead to rising inflation which peaked in the third quarter of 2008, at 8.4% the highest since the last oil crisis in the 1970s.

The BN’s response to the economic conditions since the 12GE is influenced mainly by the results of the 12GE and long term trends in the Malaysian economy. The short-term response were mainly through the annual budget and stimulus plans reflecting BN’s need to please the voters and ensure the patronage system works while longer response came through various administrative and economic policy reforms such as the Government Transformation Programme (GTP), several minor liberalisation measures, the New Economic Model and the 10^th Malaysia Plan which indicates deeper liberalisation measures.

Badawi’s response
The Badawi phase was one of disarray with retaining power the focus. Badawi had no time to focus on medium or long term issues. UMNO and Barisan Nasional’s position as the ruling party was in jeopardy as the de facto opposition leader, Anwar Ibrahim, threatened to form government on the 16^th of September 2008, through defections of BN members of parliament. Hence, the immediate response by then Prime Minister and Finance Minister, Abdullah Ahmad Badawi – whose own position was untenable as he fought clamours for resignation from within his own party – was to provide a populist RM204.7 billion budget 2009 in August 2008, to appease an angry electorate and legislators, especially those from East Malaysia who were planning to defect, in case Anwar’s threat came through. The populist 2009 budget had the following features:

• Low-wage earners–those earning a taxable income of M$35,000 (around US$10,000) per year or less–will be able to claim a higher tax rebate;

• The marginal tax rate for medium and high earners will be cut by one percentage point;

• Free electricity from October 1st 2008 until end-2009 will be provided to the lowest users;

• Civil servants will be given a bonus equivalent to one month’s salary;

• The eligibility criteria for welfare assistance have been raised from a monthly household income of M$400 (US$115) to M$720 for households in peninsular Malaysia;

• Additional funds will be allocated to the states of Sabah and Sarawak, totalling M$580m (US$167m) and M$420m respectively for infrastructure upgrading; and

• An extra M$6bn (US$1.7bn) will be allocated to the five economic development regions.

[Source: EIU Sept 2008]

The budget caused a 4.8% deficit (of GDP). Badawi however did not last long and was asked to leave, making way for Najib.

Najib’s response

Najib replaced Badawi as Finance Minister in November 2008 as part of a transition plan which then saw him become Prime Minister in April 2009. Najib started out positively attempting to meet short, medium and long-term economic issues. His overarching policy on economic reforms as suggested by his speeches at the UMNO General Assembly of March 2009 and the Special Assembly in October of the same year, speeches at various economic forums and press conferences discussing economic issues points towards kick-starting the Malaysian economy by dismantling the vestiges of the New Economic Policy and Malaysia’s vast subsidy system. Najib however was careful to assuage fears that the economic reforms would undo the UMNO and BN’s patronage system.

Upon becoming Premier, Najib announced a slew of signature policies. First, as Finance Minister, he put forward a RM7 billion stimulus plan in November 2008 to address the Global Financial Crisis (GFC). This was followed by a second stimulus plan of RM60 billion in March 2009. Najib also announced liberalisation measures in 27 sub-sectors within the services sector, the Government Transformation Programme and upped the ante on Government Linked Corporations (GLCs) reforms. He also promised to deliver a new economic policy, called the New Economic Model in order to move the Malaysian economy into the high income category. On his 100^th day in office, he announced the 11 gifts to the Rakyat – a populist measure.

Najib’s economic manoeuvres were calculated to address the following issues. It had to kick-start the Malaysian economy facing the immediate threat of recession caused by the GFC and also address persistent long-term economic decline. This had to be done while bearing in mind the results of the 12GE (refer to Part 1). Hence any economic measures must not alienate UMNO’s base and at the same time entice the non – Malay communities that had deserted the BN. Furthermore, Najib must also please the new kingmakers from East Malaysia. These are to be done while ensuring macroeconomic stability and curbing a ballooning deficit caused by eleven years of continuous deficit spending. Finally, Najib had to ensure that the opposition coalition would not become a viable opposition.

Read also: Najib’s economic reforms (part 1) and Najib’s economic reforms (part 2b)