NEW ECONOMIC MODEL for MALAYSIA Part 1

p art 1 NEW ECONOMIC MODEL FOR MALAYSIA

NEW ECONOMIC MODEL FOR MALAYSIA part 1

High Income

Rakyat Quality of Life

Inclusiveness Sustainability

NEAC National Economic Advisory Council Level 5 & 11, Menara Usahawan Persiaran Perdana, Precinct 2 NEAC NATIONAL ECONOMIC ADVISORY COUNCIL Federal Government Administrative Centre 62652 PUTRAJAYA MALAYSIA www.neac.gov.my

JD132294 MPEN BI COVER.indd 1 3/20/10 4:53:12 PM NEAC NATIONAL ECONOMIC ADVISORY COUNCIL CHAPTRE 1 NEW ECONOMIC MODEL FOR MALAYSIA

Part I: Strategic Policy Directions

JD132294 Title Page.indd 1 3/20/10 4:48:43 PM Copyrights Reserved

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JD132294 Title Page.indd 2 3/20/10 4:48:43 PM Preface

This report is the first of two documents Chapter 1: Why Do We Need the NEM by the National Economic Advisory Council and What Are Its Goals? briefly presents (NEAC) on the New Economic Model (NEM). the goals and characteristics of the NEM. This report presents an overall framework It also touches on the enabling actions of the NEM for transforming Malaysia from and the bold policy measures underlying a middle income to an advanced nation by the Strategic Reform initiatives (SRIs) of 2020. It was developed following a series the Economic Transformation Programme of meetings of the NEAC beginning in (ETP) to deliver the goals of the NEM. 2009 and consultations with stakeholders in the business sector, government, labour Chapter 2: Where Are We? sets forth unions, academia and others. It is intended Malaysia’s current position and the that this report will serve as the basis for challenges we face going forward. In the formulating the policy measures and the aftermath of the Asian financial crisis the implementation plan in the final document country has posted mediocre and subdued that follows. growth recovery, mainly attributed to low and stagnant private investment. While The independent work of the NEAC is an the export sector is an important growth important component of the government’s driver, outputs are mainly low value added, 1Malaysia concept and programme. The reflecting a lack of innovation, a low-skilled NEM will define the Strategic Reform labour force, and conditions that constrain Initiatives (SRIs) that will propel Malaysia business development. Commodities, which to the goals first set forth in Vision 2020. have benefited from price increases during In the Budget 2010 Speech in October the last half-decade, form the bulk of the 2009, the Prime Minister and Minister of remaining exports. Finance, YAB Dato’ Sri Mohd. Najib Tun Abdul Razak, emphasised high-skilled human capital, efficient public services, Chapter 3: What Is Happening Around a reinvigorated private sector and equal Us? focusses on the much more challenging opportunity for all Malaysians. The NEAC environment within which Malaysia must embraces these themes in the NEM. manage its affairs, in particular its economic management. The global landscape is The rest of the report is structured as changing with leading countries exhibiting follows. a new set of distinguishing characteristics; governments responding more rapidly to

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JD132294 Kand.indd 3 3/20/10 4:50:20 PM economic pressures; environmental issues Chapter 5: Where Do We Want To Be? driving policy considerations and competitive describes in detail the main objectives of advantages; profits and productivity being the New Economic Model. Malaysia wants driven by openness and leveraging networks; to be a developed and competitive economy and human capital advancing and flowing whose people enjoy a high quality of life between global markets more readily. having attained a high level of income which is the result of growth that is both inclusive and sustainable by 2020. Chapter 4: Which Advantages Do We Have? highlights some of the strengths that have contributed towards Malaysia’s Chapter 6: How Do We Get There? past successes and new ones that it can sets forth the transformation journey leverage to meet its present challenges. for the economy; the policy measures, The country’s advantages include its diverse institutional and regulatory reforms to population, rich biodiversity and resources, reshape the incentive structures to deliver strategic location in a high growth region, the eventual outcomes. This will require a well-established manufacturing base and political leadership to effect the necessary an attractive standard of living in urban push anchored by a set of strategic policy areas. initiatives.

Finally, Chapter 7: The Time for Change Is Now – Malaysia Deserves No Less outlines the next steps with regard to the development of specific measures for the ETP.

JD132294 Kand.indd 4 3/20/10 4:50:20 PM

______Tan Sri Amirsham A. Aziz Chairman

______Prof. Tan Sri Dzulkifli Abdul Datuk Dr. Hamzah Kassim Dr. Yukon Huang Razak Member Member Member

______Dr. Homi J. Kharas Datuk Dr. Mahani Zainal Prof. Dr. Danny Quah Member Abidin Member Member

______Datuk Seri Panglima Andrew Datuk Dr. Zainal Aznam Datuk Nicholas S. Zefferys Sheng Mohd Yusof Member Member Member

JD132294 Kand.indd 6 3/20/10 4:50:24 PM Contents

Executive Summary 1

1. Why do we need the NEM and what are its goals? 31 1.1 Goals of the NEM 35 1.2 Enabling the NEM 36

2. Where are we? 39 2.1 Malaysia is open – for better and for worse 42 2.2 The economic engine is slowing 44 2.2.1 Private investors have taken a back seat 45 2.2.2 Doing business in Malaysia is still too difficult 47 2.2.3 Our exports are still strong but not generating enough added value 48 2.2.4 Low-skill jobs equals low wages 50 2.2.5 Productivity is growing, but far too slowly 52 2.2.6 Efforts to innovate and create have been insufficient 52 2.2.7 We are not developing talent and what we do have is leaving 54 2.3 The gap between rich and poor is widening 57 2.4 Malaysia is stuck in a middle income trap… 59 2.5 …and these deficiencies are preventing us from getting out 60

3. What’s happening around us? 63 3.1 New global leaders are emerging and Malaysia must be one 65 3.2 Others are getting their houses in order – we should too 67 3.3 Malaysia should lead the global green revolution 69 3.4 Global business is bipolar – the large are getting bigger and smarter while the small are more nimble and faster 70 3.5 Growing our most important asset – people 72

4. Which advantages do we have? 75 4.1 We are not poor and have good infrastructure 77 4.2 We have established a world-class manufacturing base 78 4.3 Malaysia is at the heart of a vibrant region 79 4.4 Malaysia is a model of cultural, ethnic and biological diversity 80

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JD132294 Kand.indd 7 3/20/10 4:50:24 PM 5. Where do we want to be? 83 5.1 The New Economic Model – A sustainable, inclusive, high income economy 85 5.1.1 Breaking through to high income status 86 5.1.2 Generating benefits for all Malaysians 89 5.1.3 An economically and environmentally enduring solution 92 5.2 The ultimate beneficiaries: rakyat and businesses 94 5.2.1 Benefits for the rakyat 96 5.2.2 Benefits for businesses 97 5.3 Getting help to those who need it the most 98 5.4 Core characteristics of the NEM 98 5.5 The NEM – A new way of “doing business” in Malaysia 100 5.5.1 Greater reliance on productivity to drive growth 100 5.5.2 Shifting from state-led to private-led investment and production 102 5.5.3 Greater local autonomy – with accountability 102 5.5.4 Greater economies of scale from clustering 104 5.5.5 Attracting technologically capable firms 104 5.5.6 Tapping the emerging Asian and Middle Eastern dynamism 105 5.5.7 Embracing skilled talent 105

6. How do we get there? 107 6.1 Core enablers for the NEM 110 6.1.1 Unwavering leadership and political will 111 6.1.2 Getting the rakyat to drive change together 112 6.1.3 A “big push” of synchronised policy measures and initiatives 113 6.1.4 Measuring our performance and adjusting as we go 113 6.2 Managing adjustments – Aligning old expectations to the new reality 113 6.3 A close look at the Strategic Reform Initiatives 116 6.3.1 SRI 1: Re-energising the private sector to drive growth 118 6.3.2 SRI 2: Developing a quality workforce and reducing dependency on foreign labour 123 6.3.3 SRI 3: Creating a competitive domestic economy 128 6.3.4 SRI 4: Strengthening the public sector 130 6.3.5 SRI 5: Transparent and market-friendly affirmative action 134 6.3.6 SRI 6: Building the knowledge base and infrastructure 139 6.3.7 SRI 7: Enhancing the sources of growth 141 6.3.8 SRI 8: Ensuring sustainability of growth 146

7. The time for change is now – Malaysia deserves no less 149

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JD132294 Kand.indd 8 3/20/10 4:50:24 PM List of figures

Figure 1 – The four pillars of national transformation 33 Figure 2 – Goals of the New Economic Model 35 Figure 3 – Unlocking the value drivers 38 Figure 4 – Malaysia’s historical growth trends 43 Figure 5 – Average annual GDP growth 44 Figure 6 – Investment as percent of GDP, average (1991-2008; %) 45 Figure 7 – Private and public investment as share of GDP (1989-2008; %) 46 Figure 8 – Foreign direct investment (1989-2008; USD million) 47 Figure 9 – Export-oriented industries as share of manufacturing sector (2008; %) 49 Figure 10 – Use of high-skilled labour across industries (2002 and 2007; %) 50 Figure 11 – Highly-skilled and low-skilled labour (2007; %) 51 Figure 12 – Historical trends of GDP and education levels of population (USD, %) 51 Figure 13 – Number of researchers (2006) 53 Figure 14 – R&D articles (2006) 53 Figure 15 – Number of expatriates in Malaysia (2000-2008; no. of workers) 54 Figure 16 – Public expenditure on education (2008) 55 Figure 17 – First degrees awarded in Malaysia (2002-2007; no. of graduates) 56 Figure 18 – Number of graduates from vocational and technical schools (1999-2009) 56 Figure 19 – National household income (Average by segment, 1980-2008; RM) 58 Figure 20 – GNI Per Capita (1990 - 2008; USD thousand) 60 Figure 21 – The five dimensions of global changes 65 Figure 22 – Carbon dioxide emissions per capita (2003; tonnes per person) 70 Figure 23 – Companies in Forbes 2000 by region (2005; no. of companies) 71 Figure 24 – Incidence of poverty (1970-2007; %) 77 Figure 25 – Sector contribution to GDP (%) 79 Figure 26 – Real GDP growth (2008; %) 80 Figure 27 – Countries with mega-diverse earth’s species 81 Figure 28 – Goals of the New Economic Model 85 Figure 29 – The New Economic Model: Enablers and Strategic Reform Initiatives 109 Figure 30 – Hiring and firing index (1=Rigid, 7=Flexible) 127 Figure 31 – Inflows of low skilled foreign workers and outflows of expatriates 127

JD132294 Kand.indd 9 3/20/10 4:50:24 PM List of tables

Table 1 – Doing Business 2010 report (Global ranking) 48 Table 2 – Labour productivity growth of selected Asian countries, annual average change (1987-2007; %) 52 Table 3 – Sources of growth for Malaysia’s labour productivity, annual average change (1987-2007; %) 52 Table 4 – Incidence of poverty by ethnicity and strata, Peninsular Malaysia (1970-2007;%) 57 Table 5 – Gini coefficient by ethnicity and strata, Peninsular Malaysia (1970-2007;%) 58 Table 6 – Governance indicators (2008; Percentile rank) 68 Table 7 – Selected infrastructure indicators 78 Table 8 – Gross domestic product by expenditure category, 2010-2020 87 Table 9 – Gross domestic product by industry origin, 2010-2020 88 Table 10 – Benefits for the rakyat 96 Table 11 – Benefits for businesses 97 Table 12 – Approach to economic development: the old versus NEM 101 Table 13 – Firing up the private sector 118 Table 14 – Inspiring the workforce to draw out their best 123 Table 15 – Vibrant markets and greater choices 128 Table 16 – A lean and customer-focussed government 130 Table 17 – Escaping low income 134 Table 18 – Innovating today for a better tomorrow 139 Table 19 – Finding the economic sweet spots 141 Table 20 – The future is bright. The future is Malaysia 146

JD132294 Kand.indd 10 3/20/10 4:50:24 PM List of boxes

Box 1: Clustering is good for reducing spatial disparities – the Korean experience 103 Box 2: Targeted actions needed for micro-enterprises and SMEs 122

List of appendices

Appendix 1: Sustainability and the palm oil industry 153 Appendix 2: Managing adjustments – Aligning old expectations to the new reality 165 Appendix 3: Targeted actions needed for promoting micro-enterprises and SMEs 175 Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high value-added niche areas 179

JD132294 Kand.indd 11 3/20/10 4:50:24 PM Glossary of acronyms

APEX Accelerated programme for excellence ASEAN Association of South East Asian Nations BNM Bank Negara Malaysia DDI Domestic direct investment EDMC Energy Data and Modelling Centre, Japan Institute of Energy Economics E&E Electrical and electronics EPF Employees Provident Fund EPU Economic Planning Unit ETP Economic Transformation Programme FDI Foreign direct investment FPI Foreign portfolio investment FTA Free trade agreement GDP Gross domestic product GLC Government-linked company GNI Gross national income GNP Gross national product GST Goods and Services Tax GTP Government Transformation Programme ICT Information and communication technology IPR Intellectual property rights ITRI Indistrial Technology Research Institute, Taiwan KPI Key performance indicator KRIS Khazanah Research and Investment Strategy MDI Malaysian Development Institute MIDA Malaysian Industrial Development Authority MNC Multi-national corporation MOE Ministry of Education MOHE Ministry of Higher Education MPC Malaysia Productivity Corporation NEAC National Economic Advisory Council

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JD132294 Kand.indd 12 3/20/10 4:50:24 PM NEM New Economic Model NEP New Economic Policy NKRA National Key Result Areas OECD Organisation of Economic Cooperation and Development OEM Original equipment manufacturing PEMANDU Performance Management and Delivery Unit R&D Research and development SME Small and medium enterprise SPM Sijil Pelajaran Malaysia SRI Strategic Reform Initiative TFP Total factor productivity UNEP United Nations Environment Programme WDI World Development Indicators

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JD132294 Kand.indd 13 3/20/10 4:50:24 PM JD132294 Kand.indd 14 3/20/10 4:50:24 PM Executive Summary

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is i c l l GP t srnte pbi srie i the in services public strengthen to (GTP) the Malaysians to face the challenges ahead and Now Performance First, over launched been the past year. have They are the pillars other Two are caughtinamiddle income trap–we considerably.weakened have prospects We half-century has slowed and economic growth But the progress we have made over the past any previousgeneration. have than technologies modern to access greater and more travel longer, live They educated. better and wealthier are people Our globally. exporter major a become and infrastructure world-class a build poverty, eradicate largely people, its of and education health the for provide to Malaysia permitting performance, outstanding of The old growth model provided three decades goAlS? iTS ArE WhAT ANd NEM ThE NEEd WE do Why to beunveiledlaterthisyear. the is pillar National Key Result Areas (NKRAs). The last Government Transformation Programme 0h aasa ln 2011-2015 Plan Malaysia 10th concept to unite all unite to concept 1Malaysia, 1Malaysia, People 3/22/10 11:02:45 AM 3 Executive Summary are not amongst the top performing global sustainable (Figure B). The NEAC believes economies. Amid changes in the external that by consistently implementing bold policies environment, many of the policies and across eight SRIs, the fundamentals of doing strategies we used to achieve the current state business in Malaysia will be changed from of development are now inadequate to take the old approach, enabling the private sector us to the next stage. Our economic growth to step up and make a full contribution to has come at considerable environmental cost growth. and has not benefited all segments of the population. The government must confront But the NEM strives for broader goals than these realities and make tough decisions. just boosting growth and attracting private investment. The NEM takes a holistic We urgently need a radical change in our approach, focussing also on the human approach to economic development which dimension of development, recognising that will be sustainable over the long-term, will while we have substantially reduced poverty, a reach everyone in the country and will hefty 40% of Malaysian households still earn enable Malaysia to reach high income status. less than RM1,500 a month. Income disparity The NEM will be the catalyst to unleash must still be actively addressed. Measures are Malaysia’s growth potential. The ETP is needed to narrow the economic differences designed to drive Malaysia forward from prevalent in Sabah and Sarawak as well as its current stagnant situation to be a high in the rural areas of the Peninsula. income economy which is both inclusive and This report examines critically the question Figure B – Goals of the New Economic ‘Where are we?’ within the context of ‘What is Model happening around us?’ and ‘Which advantages do we have?’ to present the case for the +LJK,QFRPH urgent changes required. The NEM has a clear vision about ‘Where do we want to 7DUJHWV86 SHUFDSLWD be?” and highlights the tough decisions and E\ bold measures in charting the path to ‘How do we get there?’ The time for change is now – Malaysia deserves no less.

5DN\DW 4XDOLW\RI/LIH (QDEOHVDOO 0HHWVSUHVHQW FRPPXQLWLHVWR QHHGVZLWKRXW IXOO\EHQHILWIURP FRPSURPLVLQJ Where are we? WKHZHDOWKRIWKH IXWXUH FRXQWU\ JHQHUDWLRQV Malaysia is and will remain an open economy ,QFOXVLYHQHVV 6XVWDLQDELOLW\ – for better and for worse. Openness to the world economy enabled strong economic

JD132294 Executive.indd 4 3/20/10 4:47:21 PM JD132294 Executive.indd 5 as an investment destination. destination. investment attractiveness an its as losing is country the that indicating previously, 21st from report 2010 the in 24th to dropped Index Competitiveness on returns potential the Global within place Malaysia’s investment. the and investing, of cost bureaucratic the both affected have lengthy procedures and Cumbersome difficult. too is still in Malaysia business Doing investment. private discouraged has presence (GLC) company linked some In factors. industries, heavy government several and government- to due stagnant remaining investment private with decline, to as a share of GDP in Malaysia has continued seat. investment back aggregate crisis, a Asian the Since taken have investors Private has investment recovered. while not countries, crisis- affected other eroded. than lower steadily been has has Growth region the economic in an leader as position Malaysia’s 1997- 1998, of crisis financial Asian the Since engine economic Malaysia’s income. and employment national on effects negative with ground lose to likely are exports abroad, those with pace on keep impact can Malaysia in productivity and costs direct production unless have Similarly, prices. domestic food, or fuel crises. like past prices, commodity the international in during Increases seen as external to shocks, susceptible been has Malaysia economy, small and open an income. being However, capita per rising and development is slowing. slowing. is Efforts to innovate and create have been been have create The weak of track record insufficient. domestic and innovate to Efforts growth. output to and stagnant education productivity in factor shown total by as contribution – innovation and creativity lacks still Malaysia that reality stark position. pole the highlights growth productivity the weak The lost since has It growth. productivity labour in region the leading was Malaysia crisis, financial Asian the slowly.Before too far but growing is Productivity growth. dampened wage largely also have services. factors and These products added value low of production from profits generate – to government policies by possible made – resources of unskilled pool available readily a on instead many relying In skills, for pay not do industries. employers instances, across declined has labour skilled of share the and created been In Malaysia, not enough high wage jobs have are most often synonymous with higher wages. jobs Skilled wages. low equal jobs skills Low low. been has product final the added to value the exports, in manufactured content the import large the given However, commodities such as petroleum and palm oil. and (E&E) electronics products and on primary electrical on mainly focussed has structure export Malaysia’s 2008. in 2.2 of ratio GDP trade-to- a and 1.2 of ratio export-to-GDP an with markets, external on dependent highly is economy The added. value enough generating not but strong still are exports Our foreign workers and underpriced underpriced and workers foreign 3/20/10 4:47:21 PM 5 Executive Summary innovation in Malaysia is reflected by the and English proficiency, consistently ranks comparatively low number of researchers. high among the top obstacles faced by Low R&D expenditure results in a lack firms according to studies on Malaysia’s of innovation in the industrial and export investment climate. sectors. The gap between rich and poor is widening. We are not developing talent and what we In the past few decades, against the have is leaving. The human capital situation backdrop of strong economic growth and the in Malaysia is reaching a critical stage. The New Economic Policy (NEP), Malaysia has rate of outward migration of skilled Malaysians significantly reduced overall poverty levels is rising rapidly. Just as serious is the fact across all ethnic groups. Despite slower that the number of expatriates working in growth post-Asian crisis, the incidence of the country has been steadily declining. poverty continued to decline to 3.6% in At the same time, the education system 2007. Inequality, however, remains a real is not producing the skills demanded by challenge for Malaysia. Moreover, household firms. The Department of Statistics reports income surveys suggest that income growth that in 2007, 80% of Malaysia’s workforce has been strong only for the top 20% of received education only up to Sijil Pelajaran Malaysian income earners. The bottom 40% Malaysia (SPM). Skill shortage, together of households have experienced the slowest with complaints about inadequate creativity growth of average income, earning less than RM1,500 per month in 2008.

Figure C – GNI Per Capita (1990-2008; USD thousand) *1,3HU&DSLWD 86'WKRXVDQG 86'WKRXVDQG .RUHD &]HFK5HS 6ORYDNLD 3RODQG 3RODQG +LJK,QFRPH %RXQGDU\ &KLOH $UJHQWLQD 0DOD\VLD 7KDLODQG ,QGRQHVLD

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JD132294 Executive.indd 6 3/20/10 4:47:21 PM JD132294 Executive.indd 7 corruption, which needs to be addressed addressed be to earnestly. needs which corruption, government pervasive engendered has This opaque procurement. often and patronage rent-seeking, to due business doing of cost the raised inadvertently and increasingly also imbalances. However, its implementation has economic inter-ethnic addressed substantially problems. worked created also issues policies implementation but economic Ethnic-based stagnation. of painful the possibility faces and spiral downward a this of in poised growth are economic decade. But Malaysia runs the imminent risk Asia high East achieve of to economies all from Almost trap. us income middle the of out getting preventing are shortcomings Our income ‘middle the trap’. termed been has that – a phenomenon category of income middle the out many break to unable plans, new been have reform countries Without strategic and emerge. niches centres other low-cost when ends that is moment fleeting advantage a cost low the But attract to investment. advantage cost low natural or their of resources use good make they to when country income status income middle low to transition been the make a has for it easier much Historically, since C). sluggish (Figure become then but has 1992, economy by its status income middle upper attain to ladder the trap. climbed income briskly Malaysia middle a in stuck is Malaysia The NEP has reduced poverty and and poverty reduced has NEP The

hi got strategy. growth their revisiting are the countries many in and future near slower grow will countries the crisis, advanced financial global the around to Due happening us. is what understand appreciate to and need we effectively, act To happening What’s position our further. any before deteriorates now act must We improved build for to wages productivity. higher pay disinterest and chain, strong skills value a the hence up and move to processes and products innovating in interest of lack R&D, in investment low by reflected is This growth. future drive will that services and products in investing not is sector private The profits. short-term on focus sector private a encourage distortions policy and pricing by possible made models business Low-cost subsidies. approach broad-based than rather targeted more a for time is It has off. it well but the including group, wider groups a benefited vulnerable to not the meant is support were – subsidies The proceeds sustainable. petroleum mostly by – subsidies funded on large outlay the time, government same the At wastage. and consumption excessive to leads mispricing The in prices. market services reflect not does and Malaysia goods essential of pricing The misallocations. subsidies resource and in result systems pricing Controlled us? around 3/20/10 4:47:21 PM 7 Executive Summary New global leaders are emerging and Malaysia a world-class infrastructure in Malaysia. must be one. The global financial crisis is Good infrastructure has contributed to the creatively destroying the old order, opening leadership that Malaysia enjoys in E&E up opportunities in the new. The pre-crisis manufacturing and major natural resource era of overwhelming economic dominance exports, which can be leveraged for more by the G-7 is over. The new world growth high value added activities. It also provides engines, such as ‘BRIC” (Brazil, Russia, India Malaysia with the potential to further develop and China) and other emerging economies its logistics sector. like Indonesia, will grow faster and richer, have strengthened their voice in the G-20 We have established a world-class and are set to play a more prominent position manufacturing base. Manufacturing has been on the world stage. the fastest growing sector of the economy over the past. Manufacturing was primarily Globalisation has created a fierce competition focussed on the E&E sector by attracting for talent, forcing companies and government large inward investment by multinational to recognise that people are the most firms. The E&E sector spawned the growth valuable assets. To compete on a regional of other sectors in supply, logistics and and global scale, Malaysia must retain and services. Malaysia has become a major attract talent. Malaysia must be seen by its exporter of consumer and industrial electronic people and by others as a land of equal products. It is now poised to make the next opportunity to earn a good living and provide technological leap to more innovative and a secure, happy life for each individual and higher value added, cutting-edge technology the family. industries.

Malaysia is at the heart of a vibrant region. Which advantages do we have? Malaysia’s strategic location will serve to attract investment to build transportation and While Malaysia faces daunting challenges logistics hubs. Malaysia’s rich endowments amid rapid global changes, we can draw on a will help to attract foreign direct investment number of strengths and unique advantages (FDI) and foreign portfolio investment (FPI) as we take purposeful policy actions to from China, India and East Asia as these move forward. countries seek currency stability through diversity, access to natural resources, and We are not poor and have good infrastructure. niche markets that reinforce bilateral ties. As a nation, Malaysia largely eradicated poverty and moved into the upper middle Malaysia is a model of cultural, ethnic and income category in the early 1990s. Substantial biological diversity. Malaysia’s rich and unique investment has resulted in the building of cultural heritage – and even its colonial

JD132294 Executive.indd 8 3/20/10 4:47:21 PM JD132294 Executive.indd 9 do Wher products. nutritional and applications pharmaceutical generate recreation, tourism, from to benefits economic harnessed be can biodiversity industry rich Malaysia’s and markets. same those in tourism links of development support the to help networks language diverse East and Indonesia. Furthermore, Malaysia’s Middle the India, China, of economies growth high the in especially countries, many with relationships forging for assets are – history Nor can we completely leave things to market market to things leave completely we can Nor sustainable. not is which resources, from natural wealth the with take pump-priming of cannot we short-cut goals, to those striving In achieve others. the of expense the at achieved be should goal one No D). (Figure 2020 by sustainability and inclusiveness with nation advanced income high a become will The main goals of the NEM are that Malaysia Figure we WKHZHDOWKRIWKH IXOO\EHQHILWIURP FRPPXQLWLHVWR (QDEOHVDOO FRXQWU\ ,QFOXVLYHQHVV want – D 7DUJHWV86 t SHUFDSLWDE\ h Nw cnmc oe: ol ad characteristics and Goals Model: Economic New The +LJK,Q o 4XDOLW\RI/LIH 5DN\ be? FR DW PH 6XVWDLQDELOLW\ IXWXUHJHQHUDWLRQV 0HHWVSUHVHQW FRPSURPLVLQJ QHHGVZLWKRXW robust pace. Investment will be the main main the be will a Investment at grow pace. to robust have will demand aggregate achieved, be to is target growth GDP the If path. growth this economic major from economy Malaysian the derail another to crisis be not will globally that there assumes scenario This 2020. by USD17,700 about to rise will GNP Per capita period. 2011-2020 the over annum per 6.5% of average an to rate growth real lifting efficiency, boost and productivity labour drive investment, unlock will measures reform bold that foresees NEAC The 2020. by economy income a high into transformation drive Malaysia’s will NEAC the by proposed measures reform of implementation full and Sustained status income high to through Breaking 2020. beyond well efforts continuous require will position that nation maintaining status, advanced achieving After harmony. social preserve to need the ignore and forces 5HJLRQDOO\,QWHJUDWHG &KDUDFWHULVWLFVRI 0DOD\VLDLQ (QWUHSUHQHXULDO : 0DUNHW/HG HOO*RYHUQHG ,QQRYDWLYH

3/20/10 4:47:22 PM 9 Executive Summary driver of economic growth through 2020. outstanding feature and this ethnic diversity The contribution from private investment will always be with us. But the excessive focus must return rapidly to a significant level on ethnicity-based distribution of resources last seen in 1997, reaching almost a fifth has contributed to growing separateness of GDP by 2020 compared with about a and dissension. tenth in 2010. A key challenge of inclusive growth is the Sustained growth will also be supported design of effective measures that strike a by fiscal prudence. The NEM calls for a balance between the special position of further reduction of the fiscal deficit to a bumiputra and legitimate interests of different near-balance by 2020. The fiscal deficit of groups. Hence, the market-friendly affirmative the Federal Government, at 7.4% of GDP, action programmes in line with the principle reached a peak in 2009 and is expected of inclusiveness will: to decline to 5.6% of GDP in 2010. Market sentiment will further improve if the fiscal n Target the assistance to the bottom deficit is brought down even lower. 40% of households – of which 77.2% are bumiputera and many are located Generating benefits for all Malaysians in Sabah and Sarawak

n Ensure equitable and fair opportunities Inclusiveness is the second goal and a key part through transparent processes of the NEM. It is a prerequisite for fostering a sense of belonging. Pro-poor growth will n Allow access to resources on the basis of warrant that no groups will be marginalised needs and merit to enable improvement and the essential needs of the rakyat will be in capacity, incomes and well-being satisfied. Families will be endowed with the n Have sound institutional framework opportunity and capabilities to pursue their for better monitoring and effective aspirations in connected, sophisticated modern implementation cities, townships and villages. They will live, work and study in localities free from the Transparent and market-friendly affirmative fear of crime, the indignity of discrimination, action programmes focus on building capacity and the anxiety of need. Inclusiveness will and capability of low-income households enable all communities to contribute to and and small businesses, instead of imposing share in the wealth of the country. While conditions to meet specific quotas or targets. perfect equality is impossible, an inclusive The ETP will provide for mechanisms to society will ensure that inequality does not strengthen the capability of the bottom 40% so worsen. that they can take advantage of opportunities to secure better jobs, raise their productivity Ethnically divided societies are more prone to and grow their income. This group will be violent conflicts. The multi-racial composition assisted with programmes to build skills so of the Malaysian population is still its that they can use their entrepreneurial instincts 10

JD132294 Executive.indd 10 3/20/10 4:47:22 PM JD132294 Executive.indd 11 focussed. focussed. customer- more it making and public services of efficiency the increasing to key be service, civil will retraining, the and up-skilling staff including of reform Ongoing NEM. the of component key a is and fiscal sustainability long-term of component important an and financial stability. Public discipline sector reform is fiscal balance the macroeconomic to safeguard needed of establishment the Economic sustainability will be ensured through environment. and the whole, course a of as economy on the impact society, the long-term their of full consideration after made be only will and decisions investment policy mean model, new does the it under But that production. component national key of a be not should resources natural is of exploitation This not that suggest to clearly dimension. not is either on growth sustainable of engine primary the as consumption resource natural on and economic environmental model terms. Malaysia’s dependence both in new sustainable the be must under defined measures NEM proposed the of the all that ensure to of meant is component sustainability The solution An economically and enduring environmentally will activities discontinued. be patronage and pervasive and rent-seeking unhealthy to rise gave practices that Past livelihood, prospects. and their chances life improve significantly will This businesses. their grow and up start to segments of the population may perceive perceive may some population meantime, the the of In segments time. of period a over realised be will benefits various the that however, recognise must fully We and implemented. consistently are NEM measures the if policy Malaysians all to accrue would that a of benefits series The anticipates NEAC businesses and Rakyat beneficiaries: ultimate The and oil and resources. water, gas of management the to relevant will be particularly This new approach resources. non-renewable and environment natural the of preservation and stewardship effective by generations future compromising withoutpopulation the of needs ongoing the The NEM seeks sustainable growth that meets concerns. environmental to address measures of environment design the appropriate on the and growth of of impact consideration the proper allow will concept GDP’ ‘Green the of development recent society to costs does arising the from environmental degradation. The account growth into take not economic of measurement GDP conventional The and growth. environment economic the of protection both placed on be must In emphasis equal later. future, the environment the with dealing first, and growth delivering on focussed policies pastenvironment, the for concern of veneer a been has there to Although environment. the approach neglected grossly has that traditional growth economic the rejecting by achieved be will sustainability Environmental 3/20/10 4:47:22 PM 11 Executive Summary greater negative impact than benefit, or that will put in place an enhanced safety net and they are receiving less benefits than others. a transformation fund to cushion the various The government must be able to convey the communities in the transition period before ultimate equity of the benefits over time, urge the benefits are fully realised. The public a commitment to the process, and create a will need to better appreciate that orderly vision of the long-term common good. adjustments and changes must take place if the goals of the NEM are to be achieved. In consideration of the need for proper timing Benefits for the rakyat from the NEM are and sequencing of policy actions, the ETP listed in Table A.

Table A – Benefits to the rakyat

In a high income All rakyat will feel included A sustainable economy, the rakyat can as a result of: approach will expect: provide the rakyat with:

• More choices and higher • Living and working in safe • Confidence in the purchasing power surroundings government

• Better quality of life • Equal and easy access to • Improved information environment • Opportunities for upward mobility • Mutual respect and • Sustained growth individual dignity • Reward for innovation • Sound and creativity • Every part of the nation – management and be it a state, a city, a town preservation of • Greater confidence in or a village – matters resources the robustness of the economy • The poor will not be forgotten

Benefits for businesses will result from effective ecosystem and a more efficient greater equity in the environment, a more market to facilitate investment and operations (Table B).

JD132294 Executive.indd 12 3/20/10 4:47:22 PM JD132294 Executive.indd 13 hie includes: thrive will investors which in environment equitable An • • • • • • Business akt Transparency. Market businesses small to proportionate and appropriate are Regulations Property. Intellectual partners choose and businesses own fully to Freedom of Rule owners business of responsibilities and rights of recognition SME SME protected be will assets Intellectual O system legal credible and fair a of assurance the with businesses manage akt principles market on based businesses to support with quotas, and rent-seeking of Absence wnership Freedom. Freedom. wnership R ecognition. ecognition. Law. Rights. Ability to to Ability Due

al B – B Table include: will operations business for ecosystem effective An • • • • • • • • einl champions. regional into grow to support and market regional integrated ulc Services. Public Regional period transition economic the during assistance special to access Fair Fund. Transformation disputes legal of resolutions Courts. Efficient rules governance strong under funding SME to access prompt Funding. pay to ability on based talent best the to access Capital. Human networking and clustering industry through scale from derived Clusters. Dynamic burden regulatory undue and licensing unnecessary of Elimination Efficiency. Licensing board the across approvals eeis o businesses to Benefits lxbe and Flexible Integration. Improved Faster Swift Swift Benefit

An An

through: opportunities growth and investment provide will market efficient An • • • • • n GLCs and sector public the with collaborate to opportunities More Partnership. Public-Private law competition a of enactment the by created field playing level a on operate to Ability ar competition. Fair sectors. all of Liberalisation Free. Barrier eliminated be will controls price and subsidies exceptions, minimal With Pricing. Market Fair tenders government of fairness and openness the in Confidence Transparency.

3/20/10 4:47:22 PM 13 Executive Summary Core characteristics of the NEM Private firms, non-government entities and civil society will aspire to internationally What will Malaysia look like in 2020? The accepted governance standards. The NEM NEM will create a Malaysia in the future that will provide the framework and environment will be renowned for vibrant transformation to engender the entrepreneurial spirit to arising from the resourcefulness of its people make the most of growth opportunities exemplified by its harmonious diversity and from available financing. Innovative and rich cultural traditions. The economy will state-of-the-art technology will generate be market-led, well-governed, regionally high value added products, services and integrated, entrepreneurial and innovative. creative processes in the technical, social and institutional areas. All these will feed into The private sector will be the main driver an expansion of markets through regional of growth in market-led investment and integration in trade and services and by production increasingly dominated by high shaping cross-border production networks value added goods and services in a and supply chains. competitive environment. The government will be an efficient facilitator through a streamlined, The NEM – A new way of ‘doing business’ proportionate, market-focussed and supportive in Malaysia regulatory framework. Government will retain a role to manage disruptions from In moving Malaysia towards the core inevitable market failures. Well-governed and characteristics of the NEM, the NEAC leaner government institutions will be held advocates a new and bold approach to accountable to performance-based outcomes unleash the country’s growth potential. in line with the GTP and have highly qualified This new approach is best illustrated by staff with multi-tasking capabilities while a contrast to some elements of the old showing flexibility as well as dynamism. approach (Table C).

JD132294 Executive.indd 14 3/20/10 4:47:22 PM JD132294 Executive.indd 15 1 4 7 3 2 6 5 combination with low skilled labour labour skilled low with combination . Grant preferential treatment treatment preferential Grant firms. Part of production chain to supply supply to chain production of Part Export dependence on on dependence Export . Large direct public public direct Large economy. the consumer goods and components components and goods consumer D Fa ta frin talent foreign that Fear workers. etaie srtgc planning. strategic Centralised Favour specific industries and and industries specific Favour Guidance and approval from the the from approval and Guidance R across states to spread benefits benefits spread to states across federal authorities for economic economic for authorities federal uoe n Jpn markets. Japan) and Europe ominant state participation in in participation state ominant . Focus Focus accumulation. capital investment (including through through (including investment estrictions on foreign skilled skilled foreign on estrictions in the form of incentives and and incentives of form the in and physical infrastructure in in infrastructure physical and ol dslc lcl workers local displace would iacn t slce entities selected to financing ipre cnmc activities economic Disperse GLCs) in selected economic economic selected in GLCs) o lw au add exports added value low for aacd einl growth. regional Balanced on investment in production production in investment on al C – C Table G rowth primarily through through primarily rowth o rdtoa markets traditional to ld Approach Old rm development from decisions sectors prah o cnmc eeomn: h od ess NEM versus old the development: economic to Approach G 3 ( -3 U S, S, authorities to develop and support growth growth support and develop to authorities . Focus on on Focus productivity. through Growth of private investment and talent, for high high for talent, and investment private of Cluster- and corridor-based economic economic corridor-based and Cluster- . Grant incentives incentives Grant firms. and industries to revive private investment and market market and investment private revive to nbe nepeer t dvlp higher develop to enterpreneurs enable to support innovation and risk-taking to to risk-taking and innovation support to innovative, high value added economy economy added value high innovative, ehooy spotd y elh level healthy by supported technology, innovative processes and cutting-edge cutting-edge and processes innovative better provision of supporting services services supporting of provision better ntaie, n ecuae competition encourage and initiatives, competition across and within sectors sectors within and across competition activities. sa ad ide at orientation. East Middle and Asian local and foreign, needed to spur an an spur to needed foreign, and local activities for economies of scale and and scale of economies for activities Promote growth. sector-led Private . Embrace talent, both both talent, Embrace professionals. au add rdcs n services and products added value Develop and integrate actively into into actively integrate and Develop clsd uooy n decision- in autonomy Localised making. Favour technologically capable capable technologically Favour networks to leverage on flows of of flows on leverage to networks einl rdcin n financial and production regional services and goods added value netet tae n ideas and trade investment, R etain and attract skilled skilled attract and etain ewe localities between

moe sae n local and state Empower Concentration of economic economic of Concentration New Approach New dynamism

3/20/10 4:47:22 PM 15 Executive Summary How do we get there? resistance which could stall progress. Once reforms are started, continuous feedback Malaysia needs urgent transformation. This is necessary to fine-tune policies and stay will be provided by the NEM through eight on course. SRIs and the ETP. The most important enablers of the NEM are political will and Unwavering leadership and political will leadership to break the log-jam of resistance by vested interest groups and preparing Political will and leadership must put emphasis the rakyat to support deep seated changes on coherent explanation of the vision and in policy directions (Figure E). With these agenda of the NEM and transformation enablers in place, a ‘big push’ in policy process. This requires the path of the NEM actions and initiatives is needed to kick start to be laid out in detail, including indications of where actions may negatively affect the transformation process. The push must different segments of society. The aim is create enough momentum to overcome the

Figure E – The New Economic Model: Enablers and Strategic Reform Initiatives

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JD132294 Executive.indd 16 3/20/10 4:47:24 PM JD132294 Executive.indd 17 Garnering the support of stakeholders a is NEM stakeholders the for of Malaysians ordinary support and the change Garnering drive to rakyat together the Getting temporary, but likely, ETP. the the from disruptions of midst the in Malaysia in preserved be proper must harmony and Peace of government’s situation. political the of the measure management to large a importance assigns NEAC The board. on everyone bring to NEM the of is it reason vision this the communicate clearly to important For “losers”. of or perspective “winners” the from NEM the at look to be tempted will player individual Each object. lifestyle and threatened stable feel may firms a protected from and have jobs that secure those enjoyed and strongly, react might grantsand subsidies government for qualify way. old Some segments of the the business doing at labour, subsidies, experts of and foreign beneficiaries of holders, licence employers industries, from protected including come community to business the likely is Resistance course. when action resistance is encountered and prompt stay the take must government The decisions. tough the these of some making in involved about trade-offs clear be must leadership in political put meaningfully The measures. bold of to mass critical a place order in tough extremely decisions make to has it that is aware government the process, this start vision. to this But for society of support of segments all wave from unstoppable an create to who no longer longer no who rakyat manner. deliver to tandem sustainable and inclusive an in income high in move must with SRIs line in the measures policy The SRIs. the of nature be cross-cutting the with would inconsistent policy and of introduction Piecemeal incoherent immediately. commence must preparation this preparation However, period. longer date a later require a they at because introduced be may Others implemented. immediately be policy could Some actions results. and impact achieving for crucial is actions policy of sequencing the Initiatives, Reform Strategic the of nature SRIs the from must be announced. Due to the derived cross-cutting measures policy of a and leadership the With initiatives and measures policy synchronised of push’ A ‘big process. transformation this of to be at the forefront continue must leadership At the same time, the political and see intellectual to actions. in second, policy and improvement refinement and communication; clear for two reasons: first, to foster buy-in through is important with all stakeholders Engagement stakeholders. all to ETP the of progress the on reporting for information gather to process technical a in rigorous put ETP place the must team of implementation the same monitoring with the tasked proceeds, communication public that as even But ETP. the andimplement for prepare this to in engagement steps national critical of number a envisions by understood best However,NEACleadership. the political the one process, political i push big in the form of a critical mass mass critical a of form the in on board, board, on rakyat 3/20/10 4:47:24 PM 17 Executive Summary Measuring our performance and adjusting Reform Initiatives (SRIs). At this time, the as we go NEAC only sets forth the broad parameters under each SRI, which over the coming period Most reform efforts have strategies and will be further refined following consultations implementation plans but often lack a and engagement with all stakeholders. rigorous feedback mechanism to assess implementation effectiveness and allow We have identified eight SRIs that are for adjustment measures. Often, while a fundamental to achieving the NEM (Figure policy or strategy is being implemented, the E). The NEAC fully recognises that many circumstances for achieving the objectives of the policy measures supporting the SRIs may have changed and rendered earlier are either being planned or have been policy actions less viable. Without a formal initiated by the government. The NEAC feedback mechanism, policy adjustments recommendations aim to add value by may become ad hoc and uncoordinated, augmenting and supplementing ongoing resulting in diffused implementation with little policy work. accountability and limited channels to deal with public complaints. The result is reform SRI 1: Re-energising the private sector failure which in turn affects credibility and gives rise to questions about accountability The private sector needs to step up and of the implementing institution. The NEM assume a heightened profile in the nation’s must have a rigorous feedback mechanism to monitor its progress, its acceptability by transformation. Throughout recorded history, the public as well as the need for adjustment economies have experienced self-sustained, and fine-tuning in response to domestic and long-term growth primarily through the international circumstances. entrepreneurial initiatives of the private sector, guided by economic incentives which Strategic Reform Initiatives (SRIs) encourage individuals to take the long view and refrain from short-term opportunism. The NEAC believes that it is critical to Some of the possible policy measures related seek stakeholder buy-in of the detailed to re-energising the private sector can be implementation plans for each of the Strategic found in Table D.

JD132294 Executive.indd 18 3/20/10 4:47:24 PM JD132294 Executive.indd 19 business doing to cost and R services and product added value high Target champions champions regional Creating growth SME Promote competition healthy through efficiency Encourage innovation and entrepreneurship for eco-system Create emove barriers barriers emove oiy Purpose Policy Table n n n n n n n n n n n n n n n n n

Improve leverage of FTAs FTAs of leverage Improve China, ASEAN, private-sector East – Middle networking India, with regional aggressive Pursue partnerships GLC companies Encourage activities business for funding to access timely Facilitate technologically areas and advanced innovative in SMEs for support Provide law Support a stronger competitive environment with competition through settings sector standard private the transparent for field playing the Level levels all at procurement government for process transparent and efficient Implement of free basis commercial interference government strict a on operate GLCs Ensure is sector private roll-out broadband Economy-wide the where industries effectively state operating in GLCs and Divest local economy the in participation state include direct Reduce to through portals process governments licensing e-Government ‘Single-Window’ a Introduce negative a with system imports of Permit list Approved of including replacement licensing, and regulation in distortions Remove industries/sectors emerging in DDI and FDI Facilitate firm each of needs the meet to incentives Tailor effects spill-over generate added which activities value high in investment foster to incentives Align Frn u te rvt sector private the up Firing – D osbe oiy Measures Policy Possible

3/20/10 4:47:24 PM 19 Executive Summary SRI 2: Developing a quality workforce and and innovative workers to continuously reducing dependency on foreign labour drive productivity forward is the foundation of sustained economic growth. High income Labour markets must work well: jobs and emanates from skilled people applying their workers must be matched efficiently to talents to successfully meet the economic increase productivity and thus raise wages challenges faced by society. Malaysia cannot for all. Labour market adjustment must be miss the opportunity to put its most valuable smooth: the right workers need quickly to resource to work. Therefore, Malaysia must find the right jobs; the right jobs must rapidly remove barriers preventing its brightest attract the right workers, including those from abroad. Simultaneously, Malaysia’s talent people from gaining skills, while enticing base must improve. A quality education these gifted people to remain within its system which nurtures skilled, inquisitive, borders (Table E).

Table E - Inspiring the workforce to draw out their best

Policy Purpose Possible Policy Measures

Increase local talent n Review the education system – shift educational approach over time from ‘rote learning’ to ‘creative and critical thinking’ n Increase emphasis on reintroducing technical and vocational training colleges n Identify and nurture talent through a demand-driven process n Improve autonomy and accountability of educational institutions n Encourage R&D collaboration between institutes of higher learning and industry n Enhance English language proficiency n Deliver high quality education, within reach of all localities

Re-skill the existing n Upgrade skills of the bottom segment of the Malaysian the labour force labour force through continuing education and training n Establish a labour safety-net for displaced workers n Industry to partner with government in encouraging ‘Continuous Employment Training’ (CET) n Formalise international quality standards and certification of skills n Allow wage levels to be reflective of the skill level

JD132294 Executive.indd 20 3/20/10 4:47:25 PM JD132294 Executive.indd 21 incentives which have lost their original original their lost have of myriad which a of and incentives greater controls elimination price the subsidies, from experience will competitiveness and removed economy be the would distortions Many economy domestic competitive a Creating 3: SRI oeg labour foreign R global talent talent global Access and Retain growth growth wage constraining distortions market R educe reliance on on reliance educe emove labour labour emove oiy Purpose Policy

n n n n n n n n n n

labour in line with sectoral needs needs foreign sectoral with unskilled line for in targets labour achieve to system levy a Use foreign and labour local for standards of labour equal Enforce regulation not gains, productivity wages through pay Raise hiring facilitate to firing and framework institutional and legal Revise flexibility market net, labour safety encouraging while stronger a through jobs, not workers, Protect arrangements recognition mutual through services professional Liberalise procedures immigration and permit work simpler through professionals skilled of mass critical up Build to practice expatriates coherent enable and labour foreign of their oversight Centralise and ex-Malaysians for families residence permanent Offer home return to overseas Review existing programmes to attract highly-skilled Malaysians Possible Policy Measures Measures Policy Possible

ud Tbe F). (Table fund enhanced an transformation a special and net safety place social in putting bold a by such measure of impact the cushion to firms and individuals help will ETP The objectives. 3/20/10 4:47:25 PM 21 Executive Summary Table F - Vibrant markets and greater choices

Policy Purpose Possible Policy Measures

Improve economic n Strengthen the competitive environment by introducing fair efficiency through trade legislation competition n Improve competition law to safeguard the interest of domestic firms before liberalisation of sectors to foreign firms

n Set up an Equal Opportunity Commission to cover discriminatory and unfair practices

n Review remaining entry restrictions in products and services sectors

n Adoption of international best practices and standards for local industries to become highly competitive

Build n Revamp the seed and venture capital funds to support budding entrepreneurship entrepreneurs

n Simplify bankruptcy laws pertaining to companies and individuals to promote vibrant entrepreneurship

n Provide financial and technical support for SMEs and micro businesses, to move them up the value chain

Remove market n Phase out price controls and subsidies that distort markets for distortions leading goods and services to misallocation of n Apply government savings to a wider social safety net for the resources bottom 40% of households, prior to subsidy removal

n Create a Transformation Fund to assist distressed firms during the reform period

SRI 4: Strengthening the public sector of government’ approach to facilitate the Public institutions must be re-engineered. operations of the private sector. Fiscal Public institutions must not duplicate functions management must be strengthened to include better provided by the private sector but greater transparency and to provide the instead should seek to undertake those right incentives. The government’s revenue tasks that the private sector cannot perform. base must be diversified and expenditure The delivery of government services must streamlined to foster better utilisation of be efficient and effective, using a ‘whole revenue (Table G).

JD132294 Executive.indd 22 3/20/10 4:47:25 PM JD132294 Executive.indd 23 making processes processes making decision- Improve moh transition smooth a facilitate to net safety a Provide costs’ R delivery I mprove service service mprove educe ‘friction ‘friction educe oiy Purpose Policy Table A en n csoe-ousd government customer-focussed and lean A - G n n n n n n n n n n n n n n n n

Create a Create duringTransformationfirms distressed assist to Fund the for net safety social wider a to savings government Apply correct and stabilise to nets safety of for role process residual a Retain transparent and efficient open, an Implement practices best Codify structures governance weak underlying Address corruption for tolerance zero Have Modernise human resource management to match qualifications multitask to them enable to staff of skills Upgrade delivery- and consultative, lean, be to government the Reform and productivity driving in effective more be to MPC Revamp to one-stop-agency effective an become to MIDA Empower monitoring implementation, effective for economic process in a Develop authority and input tasks local their greater perform to Encourage entities local and state integrated Empower provide to approach ‘whole-of-government’ Use h rfr period reform the removal subsidy to prior households of 40% bottom failure market of instances and periods levels all at procurement government jobs with focussed improvements efficiency investment foreign facilitate measures policy of evaluation and needs and differences regional support to development locally services osbe oiy Measures Policy Possible 3/20/10 4:47:25 PM 23 Executive Summary Policy Purpose Possible Policy Measures

Strengthen n Widen the tax base (e.g. GST) public finance n Lower personal and corporate income tax rates management n Implement standardised criteria for state revenue receipts n Use results-based budgeting n Implement programme-based, medium-term budgeting n Adopt international standards for fiscal transparency

n Use technology for efficient collection of duties and taxes

SRI 5: Transparent and market-friendly affirmative action

A key component of inclusiveness is are in the low income 40% of households. the fostering of equal and fair economic Affirmative action programmes would be opportunities. Affirmative action programmes based on market-friendly and market-based and institutions will continue in the NEM but, criteria together taking into consideration in line with views of the main stakeholders, the needs and merits of the applicants. An will be revamped to remove the rent seeking Equal Opportunities Commission will be and market distorting features which have established to ensure fairness and address blemished the effectiveness of the programme. undue discrimination when occasional Affirmative action will consider all ethnic abuses by dominant groups are encountered groups fairly and equally as long as they (Table H).

Table H - Escaping low income

Policy Purpose Possible Policy Measures

Reduce income n Continue support programmes for disadvantaged groups disparity n Focus on the bottom 40% of households and business owners

n Shift focus towards relative poverty

l Continue growth as a means of poverty reduction

l “Growth Elasticity of Poverty” – inequality can reduce impact of growth on poverty

JD132294 Executive.indd 24 3/20/10 4:47:25 PM JD132294 Executive.indd 25 and productivity growth with significant significant with growth technological advancement and entrepreneurial innovation productivity continuous and requiring process a is sectors services industrial, and the agricultural in transformation Economic and infrastructure base knowledge the Building 6: SRI action action affirmative friendly market- Create opportunities opportunities to access fair and equal Promote performance of basis the on reward Encourage differences regional Narrow oiy Purpose Policy

n n n n n n n n n n n n

Set up an Equal Opportunities Commission to deal with with deal to Commission Opportunities Equal an up Set firms distressed assist to Fund Transformation a Create the for net safety social wider to savings government Apply employment, for opportunities fair and equitable Emphasise and seeking rent to contributed that approaches out Phase and merit account into take to action affirmative Redesign removing by economy the in competition greater Encourage better through levels income raise to measures Enhance economic of development effective with scale Leverage and seeking rent to contributed that approaches out Phase of building promote to means a as action affirmative Use criteria and procedures transparent Use possible cases of unfair treatment and discrimination discrimination and treatment unfair of cases possible period reform the during removal subsidy to prior households of 40% bottom opportunities business to access and education and health patronage needs liberalisation sectoral accelerating and protection excessive education in Sarawak and services Sabah in especially social health, and quality of provision and access Sarawak and Sabah in especially inequalities, regional reducing of means a as clusters patronage capability and capacity osbe oiy Measures Policy Possible (Table I). I). (Table place market global the in succeed to firms Malaysian for chances the standards improve will international and practices best with line in processes of adoption The drive. 3/20/10 4:47:25 PM 25 Executive Summary Table I - Innovating today for a better tomorrow

Policy Purpose Possible Policy Measures

Create an n Easing entry and exit of firms as well as high skilled workers ecosystem for n Revamp the seed and venture capital funds to support budding entrepreneurship entrepreneurs

n Simplify bankruptcy laws pertaining to companies and individuals to promote vibrant entrepreneurship

n Harness Web-based expertise and industry networks

Promote an n Improve access to specialised skills environment for n Ensure protection of intellectual property rights innovation n Incentivise firms to embrace technology and move up the value chain

n Enforce strict adherence to global standards and benchmarks

n Fostering R&D links between the institutions of higher learning and the private sector

n Immediately roll out nationwide fast broadband connectivity

n Review and consolidate all present government R&D funding

n Align R&D to national growth objectives particularly in innovative and hi-tech fields

n Open access to funding to competition among researchers

n Ensure public procurement supports local innovation

n Establish KPIs for universities based on commercialisation

Establish stronger n Set up a technology research powerhouse and centre of enabling institutions excellence run on a commercial basis e.g. ITRI Taiwan cluster model

n Operationalise the National Innovation Model announced by the government in 2007

n Balance the technology-driven innovation approach with market- led policies such as global procurement through technology intermediaries

JD132294 Executive.indd 26 3/20/10 4:47:25 PM JD132294 Executive.indd 27 There must be a focus on economies of of economies on focus a be must There effects. spillover with growth added value high drive which platforms production establish to advantages arising from its natural resource endowment comparative the with together location strategic its on build must Malaysia growth of sources the Enhancing 7: SRI ewe products between integration D advantages comparative other and mover first from value Create evelop greater greater evelop oiy Purpose Policy Fnig h eooi set pt spots sweet economic the Finding - J Table n n n n n n n n n

Improve seamless tourism services by ensuring quality quality ensuring by services tourism seamless Improve cluster E&E the in excellence engineering of centre a example for development, industrial with services education Integrate pharmaceutical finance, e.g. tenets Islamic with comply that services and products Promote services and products recyclables e.g. mitigating change climate Promote partnerships regional and domestic through markets ecotourism and tourism medical education, the of share greater a Capture develop bunches fruit to fresh yielding higher innovation technology upstream Encourage technology demands acquire market new or meet to innovation develop and to technology industries indigenous downstream oil-related palm on Focus expands trade intra-regional as hub distributional a as share greater a capture to and industries, niche new foster and depth build to subsectors E&E Identify aey o travellers) for safety personal improving and services taxi quality poor of revamp the as such (examples chain value the along services roads, Malaysia on in available readily leveraging infrastructure ICT industry, and ports logistics the prioritise Further

osbe oiy Measures Policy Possible tourism, alternative energy generation and and J). (Table mitigation change climate generation energy alternative tourism, eco- outputs, agricultural downstream as such markets new into energise expansions to promising corridors growth through scale 3/20/10 4:47:25 PM 27 Executive Summary Policy Purpose Possible Policy Measures

Create new n Capture greater share as a distributional hub as intra- markets regional trade expands

n Improve maritime and port services, leveraging on technology

n Move into alternative energy generation as well as energy saving products and services

n Expand service-oriented industries to regional markets based on Malaysia’s inherent biodiversity

Build scale of n Promote corridor-based development around spatially dense industries and poles and adjacent hinterland, especially for electronics production n Encourage competition between localities networks for specialisation n Cluster industries to leverage on integration, scale and connectivity

n Exploit economies of scale through networking of production and supply chains leveraging on location - ‘Speed to market’

n Establish global presence through international acquisitions of companies in the same field

Harness n Adopt an open innovation system to acquire technology and innovation expand networks potential n Support rapid transformation of SMEs with potential for innovation

n Develop industries that support sustainable development such as use of traditional plants and herbs for modern applications

Integrate real n Develop the commodities trading platforms and products for sector industries domestic producers to benefit from financial innovation and with financial expansion services n Offer Malaysia as a regional hub for both futures and spot markets for commodities

n Develop Islamic-based financial products to support domestic production and risk management of prices and production

JD132294 Executive.indd 28 3/20/10 4:47:25 PM JD132294 Executive.indd 29 pricing, regulatory and strategic policies to to policies manage non-renewable resources efficiently. strategic and regulatory pricing, and appropriate applying by facilitated be must resources natural of the generations future interest safeguarding our Preserving growth of sustainability Ensuring 8: SRI gen investment’ ‘green for financing and lending bank Facilitate commitments international Meet services and products added value high for advantages comparative L resources resources natural Preserve everage on on everage oiy Purpose Policy h ftr i bih.Te uue s Malaysia is future The bright. is future The - K Table n n n n n n n n n n

investment using non-collateral based criteria criteria based green non-collateral for using approvals investment credit assess to capacity banking Develop mitigation pollution i.e. commitment Enforce clean air government and water standards in utilising with natural resource line in footprint carbon Reduce policy energy comprehensive a Develop production added value high services and downstream on focus Increase policy energy comprehensive a Develop processes and in production technology’ to ‘green to embrace sectors all Encourage policies strategic and sustainably resources regulatory non-renewable manage pricing, appropriate Use Support green technology investment with greater emphasis on on funds capital emphasis venture greater with financial investment technology in green Support specialising experts projects technology green of viability foreign of analysis of entry Liberalise osbe oiy Measures Policy Possible balance and financial stability (Table K). K). (Table stability financial and balance is overruns, the cornerstone to maintaining macroeconomic cost and wastage of reduction through necessitates finances which discipline, fiscal stringent public of Sustainability 3/20/10 4:47:25 PM 29 Executive Summary Policy Purpose Possible Policy Measures

Ensure sound n Use appropriate pricing, regulatory and strategic policies to public finances manage non-renewable resources sustainably

n Reduce wastage and avoid cost overrun by better controlling expenditure

n Establish open, efficient and transparent government procurement process

n Adopt international best practices on fiscal transparency

The time for change is now – Malaysia deserves no less

The discussion above outlines the main The work of the NEAC is not complete. The elements of the proposed NEM. The SRIs next step is for the NEAC to help formulate represent the key changes required to drive and detail policy with key stakeholders, in Malaysia to an advanced nation. But this is support of the proposed SRIs. The details of not the end of the journey, just a signpost the policy measures will be set forth in Part to the beginning. The way ahead, however, 2 of the New Economic Model for Malaysia is clear and Malaysia will lose its way if report, to be submitted for government urgent action is not taken. consideration later this year.

JD132294 Executive.indd 30 3/20/10 4:47:25 PM CHAPTer 1

Why do we need the NEM and what are its goals?

JD132294 Chap 1.indd 31 3/20/10 6:34:12 PM JD132294 Chap 1.indd 32 3/20/10 6:34:12 PM JD132294 Chap 1.indd 33 goals? and whatareits need theNEM Why dowe which will deliver the outcomes defined under defined outcomes the deliver will which the Government is Transformation Programme pillar (GTP) stakeholder second The Government. key the of the represent collectively Now theprinciples in of is embodied pillar first The four keypillars(Figure1). on based is that development of stage next its has crafted a blueprint to move the country Government towards The path. development its Malaysia Why doweneedtheNEM and what are itsgoals? Mlyi, epe is, Performance First, People 1Malaysia, en t uie l Mlyin who Malaysians all unite to meant has reached a defining moment in moment defining a reached has 3HUIRUPDQFH1RZ HUKDQFHPHQWRIXQLW\LQ 0DOD\VLD 3HRSOH)LUVW 3UHVHUYDWLRQDQG $SULO GLYHUVLW\ Figure 1

– The fourpillarsofnational transformation 3URJUDPPH *73 7 -DQXDU\ *RYHUQPHQW UDQIRUPDWLRQ JRYHUQPHQWVHUYLFHV 1DWLRQDO.H\ (I 5HVXOW IHFWLYHGHOLYHU\RI 1.5$V 9 $UHDV LVLRQ 3URJUDPPH (73 KLJKLQFRPHLQFOXVLYHDQG 7 1HZ(FRQRPLF0RGHO 6WUDWHJLF5HIRUP eeoe ad opttv eooy whose economy competitive and a developed into 2020 by Malaysia transform to meant f oh h Government transformation programmes. the both operationalisation of policy first the represent 2011-2015 Plan Malaysia the is pillar fourth The sustainable. inclusive and both is that growth from income of people enjoy a high quality of life and high level oe (E) eutn fo a ambitious an Programme Transformation from Economic resulting (NEM) Economic Model New the be will pillar critical third The (NKRAs). Areas Result Key National the UDQIRUPDWLRQ 0DUFK VXVWDLQDEOHQDWLRQ (FRQRPLF ,QFOXVLYHQHVV ,QLWLDWLYHV 65,V +LJK,Q DLRILI DN FR D PH 6XVWDLQDELOLW\ $ 6PRRWKLPSOHPHQWDWLRQRI GHYHORSPHQWSURJUDPPH JURZWKWDUJHWV 0DFURHFRQRPLF -XQH H[SHQGLWXUH JRYHUQPHQW¶ WK PRIME MINISTER’SDEPA DOORFDWLRQ 0DOD\VLD 3ODQ RTMENT , MALA YSIA V 1M) hc will which (10MP) n economic and (ETP) 10th

3/22/10 11:03:56 AM 33 Why do we need the NEM and what are its goals? CHAPTER 1 The Commission on Growth and Development costs to one that is driven by innovation and in its report titled “The Growth Report: productivity. The present incentive structure is Strategies for Sustained Growth and Inclusive perverse. It promotes a dependence on cheap, Development” recognised Malaysia as one of low-skilled labour including foreign labour only 13 countries in the world to have sustained that neither induce nor reward human capital growth of more than 7% for more than 25 years development. As a result, Malaysian talent since the Second World War. This is indeed move abroad. Of late, even Malaysian capital a singularly remarkable achievement, one has flowed outside the country. that has practically eradicated poverty and transformed the economic and social landscape While Malaysia has benefited from continuity of the country. of policies, such continuity can be seriously constraining in a changing world. Indeed, the The country successfully navigated various combination of static policies and weakened economic as well as political crises throughout institutional structures pose serious risks to the last 50 years, but the aftermath of the Malaysia’s ability to transform its economy 1997-1998 Asian financial crisis saw the towards a new growth trajectory. Delayed economy slowing despite the global economy actions mean Malaysia will be left behind and being robust during the same period. For a this will threaten the very fabric of Malaysian small open economy, this is symptomatic of a society. The Growth Report cited earlier supply problem; investor confidence, capability cautioned that of the 13 countries that have constraints, productivity ceilings and institutional recorded over 7% growth over 25 years, only degradation have resulted in a declining growth six countries eventually managed to become trajectory. The economy is caught in a middle high income countries. income trap – caught between low-wage producers and highly-skilled innovators and A New Economic Model is required as a catalyst caught without a viable high-growth strategy. to transform the economy and its attending The policies and strategies used to achieve institutions. Vision 2020 with a new economic the current state of development are now model is not possible without a transformation inadequate for the next stage of development. of the economy, the supporting policies, and The economic growth has also come at effective delivery of government mandates. considerable cost to the environment, and it has The NEAC advocates a new, bold approach not benefited all segments of the population. to obtain the right eco-system where efficient markets can operate to produce equitable There is a serious risk that the economy may outcomes. The vicious cycles of vested interests regress if fundamental changes are not made. have to be broken to remove distortions and The growth thesis for the economy has to change rent-seeking activities, all of which undermine from one that is driven by the accumulation of productivity and entrepreneurship so vital in physical capital and the dependency on low creating a vibrant economy. The economic

JD132294 Chap 1.indd 34 3/20/10 6:34:13 PM JD132294 Chap 1.indd 35 eeoe ad opttv eooy whose economy competitive and developed a be to Malaysia for is NEM the of goal The 1.1 equitably be accessible. opportunities and out spread inclusiveness requires development be equally agglomeration, and density economic on lever actively addressed. While economic growth will between ethnic groups and regions must still be disparities mobility.Income upward achieve to order in development interventions capability on especially policy specific This month. requires a group RM1,500 than less earning largely Malaysian has households of remain in the low income category, 40% hefty a poverty eradicated, been absolute Although encourage risk-taking. and change for allow to lowered be must too failures of costs the lowered, be firms. Not only must the costs of doing business displaced on impact the mitigate to necessary be also may funds transformation industrial of form some Furthermore, workers. displaced for also but elderly the and disabled the just net programmes will be enlarged to include not safety social of provision the and refining need will net safety social of definition The firms. for period can be painful for households as well as transition the that recognises also NEAC The in Vision 2020. contemplated as economy new a achieve and barriers the and break we ETPcan comprehensive drastic a through Only change. to will have economy the of model growth and logic

Goals oftheNEM Figure 2 integrated, regionally market- entrepreneurial andinnovative. be well-governed, will led, economy Malaysian The tomorrow. collective desire of Malaysians to build a better a and time right the at decision right the take to Malaysians of courage the exemplifies NEM The 2). (Figure sustainable and inclusive both is that growth from resulting income of level high a and life of quality high a enjoy people conal t promnebsd outcomes performance-based to accountable held be will institutions government leaner and effective regulatory framework. and the custodian of public interests through an goods public of provider the be generally will government the while creativity and innovation rewards that environment market a in of growth driver main the be will sector private The WKHZHDOWKRIWKH IXOO\EHQHILWIURP FRPPXQLWLHVWR (QDEOHVDOO ,QFOXVLYHQHVV FRXQWU\ – Goals oftheNewEconomicModel 7DUJHWV86 +LJK,Q 4XDOLW\RI/LIH SHUFDSLWD E\ 5DN\ FR DW PH 6XVWDLQDELOLW\ Well-governed 0HHWVSUHVHQW FRPSURPLVLQJ QHHGVZLWKRXW JHQHUDWLRQV IXWXUH

3/20/10 6:34:13 PM 35 Why do we need the NEM and what are its goals? CHAPTER 1 in line with the GTP. They will be staffed with is expected from beneficiaries of all kinds of highly qualified, flexible, dynamic individuals rent-seeking activities. Resistance from these with multi-tasking capabilities. Private firms, groups must be met head on, but there must be non-government entities and the civil society will a process to allow for feedback and review. aspire to internationally accepted governance standards. Preparing the rakyat

The NEM will provide the framework and To garner the support of stakeholders and environment to engender the entrepreneurial ordinary Malaysians, the NEAC will recommend spirit to make the most of growth opportunities an engagement framework to prepare the from available financing.Innovative and state- rakyat for change in the second phase. The of-the-art technology will generate high value NEAC places great importance on informing added products and services, and creative the public and providing coherent explanations technical, social, and institutional processes. about the vision and agenda of the NEM and All these will feed into an expansion of the transformation process. This important markets through regional integration in trade groundwork will include sufficient details on the and services and by shaping cross-border disruptions, bumps and hiccups likely to befall production networks and supply chains. business firms, households and individuals.

1.2 Enabling the NEM The path forward to attain future progress will result in major adjustments in the economy The ETP will not be a painless journey and which will inevitably lead to groups of winners hard decisions must be taken and trade-offs and losers. Firms and individuals will have to managed. It is a journey that will require: 1) cope with the new market realities and many the steadfast commitment by the government companies will either have to restructure or to stay the course; 2) the preparedness of the be phased out. Workers in these firms may rakyat to embrace the difficult changes; and 3) become redundant and may need to re-skill to a ‘big-push’ of strategic policy measures, not be employable. Changes in sources of growth incremental changes. are often geographically imbalanced with some regions benefiting more than others. The Political will phasing out and elimination of price controls and subsidies will affect some groups directly The political leadership must be committed and others indirectly. These are just a few of and steadfast in its will to decide and follow the disruptions expected. through with implementing the SRIs. The government will face resistance from many Big push of policy measures quarters but it must have the determination to break down the log-jam of vested interests and With political commitment and the rakyat opposition of short-sighted factions. Opposition prepared for deep-seated changes, a critical

JD132294 Chap 1.indd 36 3/20/10 6:34:13 PM JD132294 Chap 1.indd 37 sustained growthandhigh income. high in investment value added products and services, in generating jump a stimulate will growth drive to sector private the Re-energising 1: SRI Reform Strategic eight Initiatives (SRIs). following the by The NEAC’s recommendations will be anchored Strategic ReformInitiatives(SRIs) and interests vested unexpected impactonvulnerablegroups. from resistance the necessary adjustments. They will also manage for recommendations make to and measures, of effectiveness the on feedback process to constituted be will professionals and experts economy. A strong monitoring team of the technical to contribute better to capacity their build and society cushion of segments to vulnerable most place the in be also will nets safety social Enhanced environment. market new the to toadjust individuals and ETP firms support will society The consultations. civil envisages a and and for campaigns programmes government suggest effective will NEAC The Managing winnersandlosers will nothavethesameeffect. real for change. Piecemeal needed and incremental measures derived, momentum benefits the the sustaining on effect multiplier a create will measures these of implementation concurrent and early solutions, potential the the to Due cross-cutting nature of both the challenges and simultaneously. measures implemented policy bold of mass special transformation fund Frn u te rvt sector private the up Firing –

ut be must that rus il e uhoe wt a enhanced social safetynet. an with cushioned be will groups vulnerable the on will impact The out. phased incentives be distortion-creating of myriad domestic competitive – economy a Creating 3: SRI removed. and indiscriminate use of foreign labour, will be excessive as such distortions, market labour wage-restraining while economy knowledge high-value a of needs the meet to workforce talented a generating on focus labour will Policies – foreign on dependency reducing and workforce quality a Developing 2: SRI n scos f oprtv avnae as advantage comparative of sectors and endowment natural its leverage will Malaysia growth of sources the Enhancing 7: SRI and innovation nurtures technology. quality that high of education delivery by the innovation strengthening for environment an promote and infrastructure base knowledge the Building 6: SRI have limitedtheireffectiveness. which features distorting market and seeking rent- the removing by objectives their achieve affirmative action programmeswillcontinuebut will aimto opportunities, economic fair and market-friendly action and affirmative Transparent 5: SRI focussed delivery government. and consultative lean, a by making decision up speed and improve to continue will programmes reform sector Public sector public the Strengthening 4: SRI usde, rc cnrl ad a and controls price Subsidies, Te e fcs ee s to is here focus key The – T tuy otr equal foster truly To – – – 3/20/10 6:34:13 PM 37 Why do we need the NEM and what are its goals? CHAPTER 1 the main sources of high value added growth The path to an advanced nation maximising spillover effects into new areas of activities. These SRIs will incentivise economic actors to make decisions in ways that will increase private SRI 8: Ensuring sustainability of growth investment and increase productivity that will – Preserving our natural resources and safe- result in real GNP growth at an average annual guarding the interest of future generations pace of 6.5% or higher from now until 2020 will be complemented by sustainable public (Figure 3). The NEAC has set forth the main finances through stringent fiscal discipline. principles and broad measures of the NEM, but its work is not finished. The Council will now seek and incorporate feedback and collaborate with all stakeholders over the next few months to further analyse and detail the policy measures and implementation frameworks.

Figure 3 – Unlocking the value drivers

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JD132294 Chap 1.indd 38 3/20/10 6:34:13 PM CHAPTER 2

Where are we?

JD132294 Chap 2.indd 39 3/22/10 8:58:51 AM JD132294 Chap 2.indd 40 3/22/10 8:58:51 AM JD132294 Chap 2.indd 41 Where arewe? ae a patcly avd nt vn taking even (not halved practically has rate growth GDP Malaysia’s however, 1997, Since annually. 9% than greater rate average an grew at GDP Malaysia’s crisis, 1997 financial the Asian to run-up the in 1990s, mid the In has certainlydeterioratedprecipitously. performance economic recent because more policy the all unlikely; is improvement transformation, on radical depends Without now. undertaken be to actions Malaysia for will growth improve economic future the in Whether it before go becomes anadvanced,highincomeeconomy. to has still Malaysia far how of reminder 2020 asobering provide before figures these — years 10 NEP, after three — decades independence after century a Half the even than USD7,600 annualGNP figuresuggests. worse far is life Malaysians, that of the richest 20%. For millions of ordinary earn incomes, on average, barely one-seventh line. The poorest 40% of Malaysian households poverty the below live Malaysians rural of 7% in1970s. 50% Currently almost from 4% of all Malaysians and over coefficient Gini the in month. a reduction a with even high, remains Inequality RM2,200 or annually about USD7,600 is capita per GNP Malaysia’s Today,

n hn, ita, n Idnsa ece or reached Indonesia and Vietnam, China, in asinvestment —even crisis financial global reaching just 20% of GDP right fallen, before the 2008 steadily has it 1997 Since 1990s. mid Investment was 40% of GDP in Malaysia in the crisis). financial global 2008 the account into ih osrcin emt — s ut specific just as — permits construction with starting dealing and of contracts, enforcing difficulty businesses, The depleting. now rapidly are resources resource these by natural However, wealth. part been large in have financed public development infrastructure investment sizeable for capital and relatively expenses operating nation’s The in Malaysia’s pathofeconomicdevelopment. up stored already weaknesses structural highlighted simply have — account own their on been have they though damaging — crisis Asian financial crisis or the 2008 global financial 1997 the as such events international Indeed, external. just not are growth Malaysia’s back holding now circumstances the clear, be To less thanone-thirdofitspre-1997peak. to declined GDP of private fraction a 1997, as investment after decade the in strength: private than rather direction state from come has investment Malaysian in remains life little what Worse, peaks. pre-1997 their exceeded 3/22/10 8:58:51 AM 41 Where are we? CHAPTER 2 examples — bear testimony to a sluggish competitive enough, regionally and globally, to bureaucracy no longer fit for purpose in a fast- generate sufficient growth. Actions which were moving world. The historical advantage of once effective now lack the attractiveness exporting low value added electronics, drawing to stimulate higher private investment on the availability of low wage, unskilled labour and innovative products and processes. has locked Malaysia into a low-level vicious Furthermore, continued reliance on low value circle of competition based on costs alone. It is added export activities inhibits the transition now slowing Malaysia’s progress up the value of the labour force to higher skill levels and chain to more sustainable, higher value, more the associated higher income opportunities. advanced technological levels of industrial This situation is compounded by governance production. conditions that raise obstacles for private sector business development. All of these undermine A disastrous exodus of human capital has Malaysia’s growth potential and render the flowed from the perception that in Malaysia’s economy more susceptible to the volatile global labour markets, rewards have historically not environment. been commensurate with skills, achievements, and merit. Perhaps half a million talented 2.1 Malaysia is open – for better and for Malaysians now live and work outside the worse country — 50% of them educated up to tertiary level, all embodying valuable skills From independence in 1957 until the no longer available to contribute to economic Asian financial crisis, Malaysia’s economic development in the country. Since 2000, the development was impressive by any measure. number of expatriates working in Malaysia has Its GDP growth rate ‘hit’ the 10% mark on four declined 9% a year. In contrast, four-fifths of occasions: 1973, 1977, 1989 and 1997 (Figure the current Malaysian workforce have received 4). High growth in those years reflected a variety only up to SPM-level education. Even with the of factors, in particular a close partnership Government pouring relatively high spending between the government and the private sector into public education, the quality of graduates through initiatives such as ‘Malaysia Inc’ and — measured by international test scores in privatisation. science and mathematics — has simply not kept pace. Openness to the world economy was a major contributing factor in Malaysia’s phenomenal Malaysia has reached a defining moment in economic development. As a result of targeted its development path. It risks being left behind liberalisation and industrialisation measures, or worse still, suffering a reversal in living Malaysia benefited tremendously from standards, unless it implements far reaching increased manufactured exports and improved and comprehensive reforms. Economic consumer welfare. However, being an open policies to date are no longer keeping Malaysia and small economy has also made Malaysia

JD132294 Chap 2.indd 42 3/22/10 8:58:51 AM JD132294 Chap 2.indd 43 developments. global with sync in move and of, abreast keep must Malaysia that sign a also but openness increased Malaysia’s to testimony a – before one the than spike recessionary severe more a into Malaysia plunged has event Each 2008. in began that crisis financial and global latest 2000-2002, the in crash dotcom the crisis, financial Asian 1997-1998 the States, United the in recession 1980-1982 the 1970s, the crisis of energy the include These 4. Figure reflected in as shocks, external to susceptible 6RXUFH0 *'3 \R\ Source: MOF, EPU,KRIS *'350E &RP 2) 0DOD\VLDQJURZ (FRQRP PR GLWLHVRI Q LF5 H HSRUWV( [SRU WV Figure 4 'DZ 38 Q5DL WKF\FOH 0DOD\ G – Malaysia’s historicalgrowthtrends VLDQ3 V ODQV.5,6 ,Q 3 &RP YHVWPHQW OD ] D$FFRUG PR UHFRYH 0DQXIDFW GLW\ 3ULYDWLVDWLR DQG3URSHUW effects onnationalemploymentandincome. negative with ground lose to likely are exports abroad, those with pace keep can Malaysia in costs Similarly,production subsidies. unless impacts These cannot continue to be absorbed by prices. government domestic on impact immediate direct have could food, or fuel like any increase in international commodity prices, but lower-level, present equally damaging consequences. For example, also can shocks, external to vulnerability increased to addition in economy, Malaysian the of ‘openness’ The U\ ! ³0HJD3URMHFWV XULQJH[SRUWOH 6 DYLQJ 50SHJJLQJ 5HFRYH ([SRUW Q \ &U OHG U\ LVLV V, ´ G : FULVL UHFRYH U\ IUR V P QYHVWPHQW 6DYLQJV 'RW&RP EHWZ 'RXEOLQJRISXEOLFGHEW RI )LVFDOGHILFLWDYJ * '3 HHQ &RPP *'350E EXVW RI 5LQJJLWGHSHJ RG ([SRU LWLHV WV Q 3/22/10 8:59:12 AM 43 Where are we? CHAPTER 2 2.2 The economic engine is slowing crisis indicates that neighbouring economies will soon be as large as, if not larger than ours The Asian financial crisis of 1997-1998 was – further diminishing our economic leadership. a watershed in Malaysia’s growth. Since the There are of course, a number of factors crisis, Malaysia’s position as economic leader contributing to the sluggish economic growth. in the region has steadily eroded. Prior to the The NEAC has identified and analysed the crisis, Malaysia’s growth rates averaged 9% most critical: from 1990 to 1997 – second only to China, and • Absence of private investment ahead of Singapore, Vietnam and Korea. Since Difficulties of doing business then, growth rates have fallen to an average • of 5.5% from 2000 to 2008. Vietnam and India • Low value added industries now have registered higher average growth • Low-skilled jobs and low wages rates than Malaysia (Figure 5). • Stagnating productivity growth

The crisis also caused significant outflows of • Insufficient innovation and creativity foreign portfolio investment (FPI) and foreign • Lack of appropriately skilled human capital direct investment (FDI) as well as a fall in overall investment which has not recovered. Each of these factors is described and Malaysia’s economic performance since the discussed below.

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JD132294 Chap 2.indd 44 3/22/10 8:59:12 AM JD132294 Chap 2.indd 45 h lw ee o piae netet in investment factors. several private to due likely of is years ecent level low The in private investmentsincethecrisis. recoveries strong experienced both have 7). Singapore and Thailand, on the other hand, in decline private investment, a which has by stagnated (Figure mostly driven was in Malaysia investment aggregate in contraction This continuing todecline(Figure6). aggregate investment levels in percent of GDP since recovery,no seen has Malaysia crisis, the with levels investment in recovery notable seen have Indonesia as such countries While trends. investment aggregate in change major a seen has Malaysia crisis, Asian the Since 2.2.1 seat back a taken have investors Private Figure 6 Source: World Bank - InvestmentaspercentofGDP, average 0DOD\VLD &KLQD 7KDLODQG

ecig lot 8 o GP n 08 While 2008. in GDP of surpluses, 18% almost reaching account has current years, Malaysia persistent of recent seen payments of In balance in accounts. the developments external by the evidenced further is investment domestic private of absence The well. as investment on impact an had has skills of potential returns on investment. The persistent shortage the and investing, of cost the both and private cumbersome affectedhave procedures bureaucratic lengthy addition, discouraged In has investment. presence and GLC government heavy industries, some In investment abroad. capital account outflow for financing Malaysian net been increasing an of been has accumulation there has assets, foreign the surplus by off-set account largely current this 9LHWQDP ,QGRQHVLD3

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3/22/10 8:59:15 AM 45 Where are we? CHAPTER 2 Figure 7 – Private and public investment as share of GDP (1989-2008; %)

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JD132294 Chap 2.indd 46 3/22/10 8:59:17 AM JD132294 Chap 2.indd 47 of firms. Several measures of doing business, doing of measures Several firms. of exit and entry to related aspects in especially countries, in competing than difficult more is Malaysia in 183 business doing of overall, countries out 23rd ranked Malaysia Although 2.2.2 services the into went FDI of portion large a areas. and sophisticated innovative technologically in especially investment, of sources domestic toaugment FDI of inflows the of advantage taking not simply is Malaysia phenomenon unusual an into translated is This investment. not aggregate of levels higher has rebound this well, comparatively inflows recovered have FDI Malaysia that into shows 8 Figure Although too difficult still is Malaysia in business Doing Source: World Bank Figure 8-

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raise ourincomelevels. to order in services and products added value high in investment private domestic boost will that conditions conducive create to have We lack. investors domestic that networking and capital innovation of degree high a require but outlays physical for need little involve which of both sectors, trade distributive and services sector. However, the bulk of it was in the financial diin a ey og ako o css in cases of backlog long very In a addition, competition. hampering and businesses existing favouring of effect unintended the has economies regional such as Singapore and Thailand (Table 1). This and developed globally behind countries ranking Malaysia registering show business, a property and dealing with construction permits, starting as such ,QGRQHVLD3KLOLSSLQH V 3/22/10 8:59:17 AM 47 Where are we? CHAPTER 2 Malaysian courts appears to weigh negatively investment destination. Institutional structures, on investors’ perception as this slows down processes and policies also contribute to resolution of commercial disputes. the difficulty of doing business in Malaysia. Furthermore, entrepreneurs have identified Malaysia’s place within the Global issues such as inconsistent government Competitiveness Index has dropped to 24th in policies, corruption, tax regime, labour policy the 2010 report from 21st previously, indicating and inflation as the main impediments for that the country is becoming less attractive as an establishing businesses in Malaysia.

Table 1 - Doing Business 2010 report (Global ranking)

Ease of Starting a Dealing with Trading Enforcing Doing Business construction Registering across contracts Business permits property borders

Singapore 1 4 2 16 1 13

New Zealand 2 1 5 3 26 10

Hong Kong 3 18 1 75 2 3

US 4 8 25 12 18 8

UK 5 16 16 23 16 23

Thailand 12 55 13 6 12 24

Japan 15 91 45 54 17 20

S. Korea 19 53 23 71 8 5

Malaysia 23 88 109 86 35 59

Source: World Bank

2.2.3 Our exports are still strong but not such as petroleum and palm oil. Figure 9 shows generating enough added value that more than 40% of Malaysia’s exports are accounted for by E&E products. Exports is, and has been for some time, a key focus for Malaysia. The economy is highly The E&E sector is a good illustration of the dependent on external markets, with an export- difficulty we face in moving up the value chain. to-GDP ratio of 1.2 and a trade-to-GDP ratio Historically, Malaysia’s E&E sector benefited of 2.2 in 2008. Malaysia’s export structure has from the large inflow of foreign investment, focussed mainly on electrical and electronics mostly from multi-national corporations. While (E&E) products and on primary commodities a handful of MNCs have upgraded their

JD132294 Chap 2.indd 48 3/22/10 8:59:18 AM JD132294 Chap 2.indd 49 h rsl o ti efc i ta Malaysia that is effect this of result The oeta o yedn getr eun through returns greater yielding of potential the with – goods progressive and innovative of producer a as Malaysia distinguish to yet investors have industrialisation, of decades three innovation. low After to led has talent attract to added to the final product has been value low. the Inability goods, in export of manufacturing content the import large the given However, base. production cost-competitive a became Profit channels. marketing and recognition from name brand independent own prevented their developing are relationships OEM into manufacturing “locked” become that Firms suppliers. equipment (OEM) original namely a huge community of component manufacturers, created has cluster E&E Penang’s a result, As operations. assembly on only focus continue to majority large a development, and research in investing by Penang in operations 6RXUFH%DQN1HJDUD Figure 9 Source: BNM 2I – Export-orientedindustriesasshareofmanufacturingsector(2008;%) IHVWDWHSURFHVVLQJ ([SRUWRWKHUV (OHFWURQLFV &KHPLFDOV 3HWUROHXP (OHFWULFDOV 7 5XEEHU H[WLOHV : RRG using foreigninnovationandtechnology. ownership foreign under firms by part large in produced be to and contents import high have to continue exports E&E result, a products. As make a breakthrough to new higher value added muster the capital needed to invest in R&D and to companies Malaysian for difficult it makes turn in This sales. name brand own from than sales OEM in lower substantially are margins otnos noain o eie hg value added productsandprocesses. high deliver to innovation continuous requires activities assembly E&E generic dependence on Malaysia’s global in Reducing volatility markets. exports, to insuch country the afall exposing in was reflected growth quickly global in decline recent sector, E&E where the is of fortunes Malaysia the to in sensitive growth GDP leadership. Nevertheless, market and demand enhanced ( ( 1DWXUDOUHVRXUFHEDVHG 3/22/10 8:59:20 AM 49 Where are we? CHAPTER 2 2.2.4 Low-skill jobs equal low wages of the biggest declines in use of high-skilled labour. Experience in more developed regional Skilled jobs are most often synonymous with economies shows that the proliferation of skilled higher wages. In Malaysia, not enough high- workers occurs when workers compete to wage jobs have been created. In fact the upgrade themselves in search of higher wages share of skilled labour has declined across and when firms see an increased use of skilled industries. As discussed above, this reflects workers as necessary to raise their profitability. the dominance in Malaysia of low value added The two factors are largely absent in Malaysia goods, which require low-skilled labour. The use because in many instances, employers do of low-skilled labour has increased between not pay for skills, relying instead on tried and 2002 and 2007 across industries (Figure 10). tested means such as a readily available pool The E&E sector, which is the major contributor of unskilled foreign workers and underpriced to Malaysia’s growth, has experienced some resources to generate profits.

Figure 10 - Use of high-skilled labour across industries (2002 and 2007; %)

:RRG )RRG ( ( &KHPLFDO 7H[WLOH %XVLQHVV 7HOHFRP ,7 6RXUFH(Source:38 EPU,:RUOG%DQN World Bank

Immigration policies favour low skilled and cost and unskilled foreign labour, which has cheap labour. Between 1990 and 2005, foreign sustained the profitability of low value added labour contributed more than a third of the businesses in the short term and provides no increase in total labour supply, and over 98% incentive to move up the value chain. It has were low-skilled contract migrant workers. also largely contributed to a dampening effect Easy access has led to over-reliance on low- on wages. As a result of these trends, only

JD132294 Chap 2.indd 50 3/22/10 8:59:26 AM JD132294 Chap 2.indd 51 Source: EPU,World Bank people exceed greatly Korea, education post-secondary with in example for high, is usually countries advanced for education tertiary with force labour of share The education. to linked also is force labour the of level skill The highly skilled workers, compared to significantly Malaysia’sof 25% of composed is force labour 6RXUFH( Figure 12- 0DOD\VLD RISRSXODWLRQZLWKILQLVKHGSRVWVHFRQGDU\HGXFDWLRQ RISRSXODWLRQZLWKVRPHSRVWVHFRQGDU\HGXFDWLRQ SUHGLFWHG*'3 UHDOSHUFDSLWD*'3 Source: EPU,World Bank 38 :R 0DOD\VLD UOG%DQN Figure 11 Historical trendsofGDP and educationlevelsofpopulation(USD,%) \HDU - Highly-skilledandlow-skilledlabour(2007;%) 6LQJ DSRU H

7DLZ Korea (Figure11). and Taiwan Singapore, in proportions higher n oe o pol wt a lat oe post- some secondary educationhasbeenphenomenal. least at with people of Korea in increase of rate the unimpressive, been Malaysia has in trend upward the while notably, those registered by Malaysia (Figure 12). More DQ .RUHD RISRSXODWLRQZLWKILQLVKHGSRVWVHFRQGDU\HGXFDWLRQ RISRSXODWLRQZLWKVRPHSRVWVHFRQGDU\HGXFDWLRQ SUHGLFWHG*'3 UHDOSHUFDSLWD*'3 .RUH D \HDU /RZVNLOOHG +LJKO\VNLOOH G

3/22/10 8:59:30 AM 51 Where are we? CHAPTER 2 2.2.5 Productivity is growing, but far too per worker during the 1987-1997 period but slowly its share fell to just over a third from 1998 to 2006. On the other hand, the weak productivity Before the Asian financial crisis, Malaysia was growth highlights the stark reality that Malaysia leading the pack within the region in terms of still lacks the sort of creativity and innovation labour productivity growth. But it has since that result in technological and technical lost the pole position (Table 2). This has to progress as well as more efficient practices and be interpreted carefully. On the one hand, the systems – as shown in stagnant contribution by dismal productivity growth has much to do total factor productivity and education to output with slowing investment post-crisis – capital growth (Table 3). contributed to over 60% of growth in output

Table 2 – Labour productivity growth of Table 3 – Sources of growth for Malaysia’s selected Asian countries, annual average labour productivity, annual average change change (1987-2007; %) (1987-2007; %) 1987-1997 1998-2007 Pre-Crisis Post Crisis Labour 5.5 2.9 (1987-1997) (1998-2007) productivity China 4.5 9.2 Contribution of: India 3.5 4.4 Asian NIEs 4.8 3.4 Capital 3.4 1.0 Malaysia 5.5 2.9 Education 0.3 0.3 Thailand 5.2 3.1 Land 0.0 -0.1 Indonesia 3.1 3.0 Total factor 1.7 1.6 Singapora 4.5 2.4 productivity Philippines -0.7 2.3 Source: EPU, World Bank Source: EPU, World Bank

2.2.6 Efforts to innovate and create have for higher value added products and processes, been insufficient and the capacity for their commercialisation are essential to global competitiveness. A The weak track record of domestic innovation World Bank survey of manufacturing indicates in Malaysia is reflected by the comparatively that Malaysian firms are doing less to develop low number of researchers (Figure 13). At innovative processes than those of similar the same time, the number of scientific and countries. Surveys conducted in 2002 and technical articles published in internationally 2007 indicate that Malaysian firms prefer recognised journals by Malaysians is also to undertake less sophisticated activities, well below comparable countries (Figure 14). such as upgrading existing product lines or The lack of researchers and R&D results in a machinery and equipment. Activities that give lack of innovation in the industrial and export rise to greater innovation and require the filing sectors, sectors in which an unrelenting search of patents are undertaken less frequently.

JD132294 Chap 2.indd 52 3/22/10 8:59:30 AM JD132294 Chap 2.indd 53 anan hi laesi psto i the in position to leadership investors their and maintain entrepreneurs pushes it Innovation is a process that is self-sustaining – 2007, to 2002 From activities. sophisticated less on focussed still are innovative, most supposedly the firms, manufacturing E&E Even 6RXUFH:',.5,6 6RXUFH:',.5,6 Source: WDI,KRIS *1,SHUFDSLWD 86' Source: WDI,KRIS *1,SHUFDSLWD 86' Figure 13 0D 0D 6ORYHQLD OD Figure 14 OD &] \ 6LQJDSRUH 1RU \ VLD VLD 1RRIUHVHDUFKHUVLQ 'HQP HFK5HSXEOLF ZD -Numberofresearchers(2006) 1RRIVFLHQWLILF WHF \ $XVWUDOLD DU ,WDO 6Z N \ -R&Darticles(2006) HGHQ 6SDLQ

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3/22/10 8:59:42 AM 53 Where are we? CHAPTER 2 2.2.7 We are not developing talent and Industry players often lament the absence of the what we do have is leaving right skills in the market, suggesting mismatch between the skills provided by the education The human capital situation in Malaysia is not system and those demanded by firms. The improving. Instead, we are losing the skilled Department of Statistics reports that in 2007, talent needed to drive future growth. Of great 80% of Malaysia’s workforce received education concern is increasing evidence that many only up to Sijil Pelajaran Malaysia (SPM). Data talented Malaysians are leaving the country to from the Ministry of Higher Education show seek better opportunities elsewhere – some that about a quarter of graduates from local 350,000 Malaysian adults are working abroad, public universities remained unemployed six over half of which had tertiary education, months upon completion of study in 2008. Even according to an estimate by the Ministry of for those who secured jobs, almost one third Human Resources (MOHR) in 2008. Just as were in jobs at a lower skill level. Moreover, serious is the fact that the number of expatriates according to MOHR, between 2001 and 2005, working in the country has been steadily the government expended RM415 million on declining (Figure 15). retraining some 40,000 graduates to improve their employability.

Figure 15 - Number of expatriates in Malaysia (2000-2008; no. of workers)

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JD132294 Chap 2.indd 54 3/22/10 8:59:42 AM JD132294 Chap 2.indd 55 okr, olwd y opans about the English language. complaints in proficiency and by creativity inadequate followed workers, (IT) skills Malaysian of skills professional / technical and technology information recent about concerned first increasingly become most have firms The that suggests Bank World the by assessment climate. onMalaysia’s investment to studies faced according obstacles firms by top the among high ranks consistently shortage Skill Malaysia. in higher much is workers semi-skilled and unskilled of share the Taiwan, and Korea such Singapore, region as the in economies advanced of value number a with comparison higher In activities. added into Malaysia push to needed talent dynamic the of shortage terms. a is result concrete The in little they very but achieved past have the in introduced been have Va iu porme t atat kle talent skilled attract to programmes rious 6RXUFH:RUOG%DQN.5,6 Source: World Bank,KRIS *R YH Figure 16 UQPHQWH[SHQGLWXU RI7 RWDO &] 6ORYDN -Publicexpenditureoneducation(2008) 0D HFK5HSXEOL OD H \ LD VLD 6.RUHD F 6SDL *UHHFH *1,SHUFDSLWD 86' Q

,WDO +RQJ.RQJ \ objective of producing the best talent to meet to talent best the producing of objective national the stymied have goals socio-political with saddled policies Education inadequate. be to continues Mathematics (TIMSS), Study Science International and in Trends the to according produced, being students of quality region and developed countries worldwide – the the in both – countries other to compared But 16). (Figure countries has other many to relative government The ploughed needed. substantial investment into education skills the through outlays several reform fiscal efforts, is high not effectively despite delivering education the system, that fact the by compounded further is Malaysians talented of exodus The n sine tem cnius o e lower be than in the Arts. More disconcertingly, to the trend continues streams science and technical the in graduates of proportion The the country’s needs. 6Z -DSD HGHQ Q 8. 86 'HQP $ DU N 1RU ZD \ 3/22/10 8:59:43 AM 55 Where are we? CHAPTER 2 appears to have worsened in recent years right talent needed for future growth. However, (Figure 17), with Arts students accounting for they also signal problems on the demand well over half of graduates. At the same time, side. If employers truly value technical and technical and vocational schools are producing science-oriented skills, it should translate into declining numbers of graduates (Figure 18). higher wages for such skills, which will attract Both instances clearly suggest that on the more students into the technical and science supply side, Malaysia is not producing the streams.

Figure 17 - First degrees awarded in Malaysia (2002-2007; no. of graduates)

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Figure 18 – Number of graduates from vocational and technical schools (1999-2009)

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JD132294 Chap 2.indd 56 3/22/10 8:59:43 AM JD132294 Chap 2.indd 57 1 the poor. and rich the between gap growing a tothe indicates also data recent malaise, economic contributing general challenges the addresses significant discussion above the While 2.3 improve as graduate employability. well as graduates and demand industry between mismatch the correct to help will universities and employers sector private skills by investors. Better collaboration between in wage jobs way and meeting the long demand for mid-level a improving the go potential for employment will in and higher schools, technical vocational in especially SPM, following education post-secondary in enrolment Larger s o , h salr h dseso - r h getr h wat equality. wealth the greater the or - dispersion the smaller the 0, to is The Gini coefficient is a measure of statistical dispersion of income or wealth. The closer the Gini coefficient Gini the closer The wealth. or income of dispersion statistical of measure a is coefficient Gini The Table 4- widening h gp ewe rc ad or is poor and rich between gap The

Source: EPU Indians Chinese Bumiputera Rural Urban Other Incidence ofpovertybyethnicityandstrata,PeninsularMalaysia(1970-2007;%) Malaysia Ethnic Strate 1970a 39.2 26.0 64.8 49.3 58.6 24.6 44.8 1987 24.8 20.3 26.6 19.4 8.5 9.6 7.1 (with the overall Gini coefficient improving from improvements inthelastdecade. no disparity with high groupremains The urban the 5). among (Table groups certain for decade past the over increased have to seem disparity the 2007), in 0.441 to 1997 in 0.459 improved as measured by the Gini coefficient Gini the by measured as disparity improved income overall While Malaysia. for challenge real a remains however, Inequality, to decline to3.6%in2007. continued poverty of incidence the crisis, post-Asian growth slower Despite poverty reduction. in progress recorded groups ethnic All 4). (Table 1987 by 20% almost to 1970 in absolute poverty has been cut from about 50% of incidence The reduction. regard poverty overall to with headway impressive made has and the New Economic Policy (NEP), Malaysia Against the backdrop of strong economic growth 1997 13.0 2.5 2.1 1.3 1.1 9.0 6.1 2007 7.1 2.0 9.8 2.5 0.6 5.1 3.6 1 3/22/10 8:59:43 AM 57 Where are we? CHAPTER 2 Table 5 - Gini coefficient by ethnicity and strata, Peninsular Malaysia (1970-2007 ; %)

1970a 1987 1997 2007

Malaysia 0.513 0.456 0.459 0.441

Ethnic

Bumiputera 0.466 0.447 0.448 0.430

Chinese 0.466 0.428 0.416 0.432

Indians 0.472 0.402 0.409 0.414

Other 0.667 0.663 0.555 0.546

Strate

Urban n.a. 0.449 0.427 0.427

Rural n.a. 0.427 0.424 0.388

Source: EPU

Moreover, the results of household income since 1990 (Figure 19). The bottom 40% of surveys over the years suggest that income households have experienced the slowest growth has been strong only for the top 20% growth of average income, earning an average of Malaysian income earners, particularly of RM1,222 in 2008.

Figure 19 - National household income (Average by segment, 1980-2008; RM)

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JD132294 Chap 2.indd 58 3/22/10 8:59:44 AM JD132294 Chap 2.indd 59 2 investment. attract to advantage cost low or resources natural their of use good made they when status income middle to transition the make to country income low a for easier much is it where stayed country, like many others, Malaysia has largely income middle upper an becoming since But the region. in infrastructures developed best the of one of building strong the supported and investment foreign rate proactive savings A high growth. government, country’s the soon were fuelling goods manufactured West. of the Exports and Japan manufacturing, from assistance into primary with diversified successfully the and on country sector dependence the from 1970s, shifted to the ladder 1992. In by status the income middle upper climbed attain 1957, briskly in country Malaysia income low a as Starting 2.4 contribute totheeconomy. to potential their developing and realising fully from Malaysians of numbers large inhibiting again the mobility, social In hampers this progress. run, of long fruits the sharing from Malaysians of portion large a prevents wealth areas. This less-than-satisfactory distribution of very low income levels, particularly those in rural have to continue households of 40% reduced, a though Even (GNI) percapitaintherange of USD3,856toUSD11,905. Income National Gross with those as countries income middle upper classifies Bank World the data, 2008 on Based trap… Malaysia is stuck in a middle income slt pvry a been has poverty bsolute 2 Hsoial, t a been has it Historically, .

people, goods,servicesandcapital. bene and competition policy; effective an of enactment laws; of standardisation and market harmonisation through EU single a into integration as qualification, such membership reforms EU pursuing by by mandated the made countries, was European transition Eastern the For income high the category. into back that them propelled programme transformation far-sighted but painful a on embarked Subsequently,they conglomerates) could no large longer sustain growth. family-controlled connected (politically nldn Kra Pln, lvka ad the and Czech Republic. Slovakia, Poland, Korea, including income’‘high status, the to transition the make (Figure 20). Several countries have trajectory been able to boundary income’ ‘high the below far remains income it trend, upward gradual a exhibit to continues Malaysia’s Although income trap’. phenomenon that has been termed ‘the middle a – category income middle the of out break to strategic and reform plans, many countries niches have been unable new Without fleeting emerge. a is advantage moment that ends cost when other low-cost centres low the But cnmc tutr dmntd by dominated its structure that economic recognised Korea a Japan, and high-tech China rising a between Sandwiched crisis. financial Asian the of aftermath the in regressed but 1992 after trap income middle In Asia, Korea broke out of the fits from free movement of movement free from fits chaebols

3/22/10 8:59:44 AM 59 Where are we? CHAPTER 2 Figure 20 - GNI Per Capita (1990 - 2008; USD thousand) *1,3HU&DSLWD 86'WKRXVDQG 86'WKRXVDQG .RUHD &]HFK5HS 6ORYDNLD 3RODQG 3RODQG +LJK,QFRPH %RXQGDU\ &KLOH $UJHQWLQD 0DOD\VLD 7KDLODQG ,QGRQHVLD

Source: Nationmaster, UN, World Bank

2.5 …and these deficiencies are very well. High dismissal costs as required preventing us from getting out under the labour laws make investors unwilling to go into new areas of business which may In the current evolving situation, almost all involve shedding of labour. In response, some economies of East Asia are poised to recover investors have found it more profitable to take sharply. But Malaysia – already caught in the on foreign unskilled labour where labour laws middle income trap, and facing all the challenges are not as strictly enforced. This, in turn, holds described above – runs the imminent risk of a down wage levels for all workers. Unless such downward spiral and faces the painful possibility market rigidities are corrected, Malaysia will not of stagnation. be able to attract investment in new sources On the basis of recent trends and the fact that of growth such as medical tourism, ICT, and our economy was already one of the hardest Islamic products and services. hit by the recent global financial crisis, Malaysia is set to fall behind others in the region, given Malaysia suffers from an exodus of talent. Not the weaknesses that we have accumulated only is our education system failing to deliver over the years. the required talent, we have not been able to retain local talent of all races nor attract Labour market distortions impede productivity. foreign ones due to poor prospects and a lack The labour market in Malaysia does not function of high skilled jobs. Lack of talent will hamper

JD132294 Chap 2.indd 60 3/22/10 8:59:48 AM JD132294 Chap 2.indd 61 netn i pout ad evcs ht will that services and products not in is investing sector private The distortions. policy and pricing by possible made operations, cost low- from profits short-term with satisfied and on focussed be to appears sector private the goals. short-term on focus sector Low-cost business models encourage a private petroleum by proceeds –isnotsustainable. funded mostly – subsidies on outlay government large the time, same the At wastage. and consumption excessive to leads mispricing The prices. market reflect not Malaysia does in services and goods essential of subsidies misallocations. and resource in result systems pricing Controlled growth rates. stronger by evidenced as economy their into vigour renewed inject actions reform their as us outpace soon will Indonesia context, this In business. doing of cost the reduce to reforms comprehensive implementing while effectively more corruption combating are region the in Countries earnestly. addressed be to needs which corruption, pervasive engendered This has procurement. government opaque and also has doing business due to rent-seeking, patronage implementation increasingly and inadvertently raised the cost its of However, imbalances. economic inter-ethnic addressed The NEP has reduced poverty and substantially problems. created also issues but implementation worked policies economic Ethnic-based manufacturing. and commodities in advantage traditional its of Malaysia will not be able to prevent talent, the erosion expatriate and local of mass critical a Without oil. palm and E&E as such strength, Malaysia’s of areas the in innovation and R&D In Malaysia, In h pricing The e ut c nw eoe u position our before now deteriorates anyfurther. act must We high wage jobshere. create and money their put to reasons compelling investors give to barriers costly all remove must Malaysia like economies small turning costs, lower to markets scale large to eye their increasingly are investors global As and expa establish to seeking investors for costs time and lengthy procedures, increases the financial and requirements regulatory excessive with coupled This, scenario). silo (the with other each coordination little with isolation in work that agencies government about complained well off.well approach targeted more a for time is It but it has benefited a wider group, including the groups vulnerable the support to meant were and price-controlled subsidies items more making costly. rising, The subsidies constantly are Our oil resources are depleting. view ofbusinessprospects. term longer a take will sector private the that so corrected be must deficiencies policy such environment, global competitive increasingly an in survive to order in agile more become to the value chain. innovating products and processes to move up in interest of the lack and R&D by in investment little reflected is This growth. future drive icuae investment discourages Ineffective and siloed government bureaucracy more ofthesubsidisedgoods. are of most benefit to the well-off, who consume often which subsidies based broad than rather nd theirbusinesses. To encourage the private sector Ivsos ae often have Investors . Globally, prices 3/22/10 8:59:49 AM 61 Where are we? CHAPTER 2 JD132294 Chap 2.indd 62 3/22/10 8:59:49 AM CHAPTER 3

What’s happening around us?

JD132294 Chap 3.indd 63 3/22/10 9:03:47 AM JD132294 Chap 3.indd 64 3/22/10 9:03:47 AM JD132294 Chap 3.indd 65 around us? happening What’s Planet, Profits & Productivity and People People and 21). (Figure Productivity must & Profits Malaysia Planet, that five Governance, Leadership, are These trends address. identified global has key NEAC The head-on. opportunities their and threats meet competitive these must upgrade Malaysia and strengths. competitive strategy growth their revisit to countries many global forced the has crisis future, near the in rate slower a Because the advanced countries will grow at landscape. competitive the transformed profoundly around has crisis financial happening global The us. is understand what to appreciate need and we effectively act To Why doweneedtheNEM and what are itsgoals? iue 21 Figure 3ODQHW /HDGHUVKLS h fv dmnin o goa changes global of dimensions five The – 3HRSOH

creatively destroying the old order, opening opening order, old the destroying is creatively Crisis Financial balance Global The power shifted. and have dynamics global The 3.1 oiin n h wrd stage. world the on position prominent the more a in play to set voices are and G-20, their strengthen to continue will richer, and faster grow will Indonesia, as such and economies emerging India other and Russia, China) (Brazil, “BRIC” as such engines, growth world new The over. is G-7 the by dominance economic overwhelming of era new. in the pre-crisis The up opportunities *RYHUQDQFH n Mlyi ms b one be must Malaysia emerging and are leaders global New 3URILWV 3URGXFWLYLW\ 3/22/10 9:03:51 AM 65 What’s happening around us? CHAPTER 3 The emergence of a multi-polar power time zone advantage and high Asian savings. structure in a globally-connected world means Resource-rich countries in the Gulf are moving that power and wealth will concentrate in downstream to take advantage of their oil those centres that have geography, timing and gas endowments. Brazil is building on and governance on their side. Leadership its lead in ethanol bio-fuel technology in will accrue to those countries with the cooperation with oil giants. Advanced countries scale, the people and the entrepreneurship like the UK, US, Germany and France all to seize the moment and the emerging have serious growth and innovation plans opportunities. As people grow old in the that emphasise heavy investment in industries advanced markets and the young come of of the future, such as low carbon transport age in emerging markets, consumer tastes and energy, biotechnology, bioscience and and needs will change rapidly. The younger advanced engineering and services. China and generations are more aware of the need for India are investing heavily in infrastructure environmental sustainability, greater social and people to consolidate their advantages inclusiveness, and equality of opportunity. in size and scale. The competition will be Technology is opening up new products and fierce and formidable, even in areas where services, lowering costs and speeding up Malaysia has comparative advantages. delivery. Each company and country is now reviewing how to specialise, upgrade quality Malaysia is already a global leader in electronic and become leaders in their fields. and electrical exports and palm oil, as well as being richly endowed in tropical forests, Other than the population giants, most middle marine reefs and talented people. Given our income countries realise that they cannot natural heritage, we can be a world leader compete in all fields against all comers. To in selected areas of biotechnology. We break out of the ‘middle income trap’, they must take advantage of geography, timing, must be niche-focussed, agile and build on and people, by expanding trade and further their competitive strengths. In this milieu, strengthening our ties with regional global Malaysia must make the best of what it has. growth engines, while consolidating our Leadership is about making tough choices ties with the advanced and other emerging against tough competition. markets.

Many countries are adopting niche strategies Malaysia can be one of the first non-oil-based that build on their strengths, including Organisation of Islamic Counties members geographic location and people skills. to reach advanced country status ahead of Resource-scarce countries like Korea are both Lebanon and Turkey. Malaysia can be moving up the technology path. Taiwan the world’s leading green economy in tropical focusses on strengthening innovative SMEs forest and marine biodiversity conservation. that capture commercial value in larger Building upon its strategic geographic location markets. Hong Kong and Singapore are in the fastest growing region in the world upgrading financial skills to exploit the Asian and a strong base of foreign investment, 66

JD132294 Chap 3.indd 66 3/22/10 9:03:51 AM JD132294 Chap 3.indd 67 and public governance must adapt to to adapt must governance public and responsive, socially innovative and resilient. Corporate governance efficient, more pressure be the to has too so packages, rescue crisis the through increased has enterprises As state ownership and control of banks and review. and surveillance 360º with bottom-up more become have structures economic and social governance, top-down transparent a manner. and of Instead accountable traditional in delivery and financial implementation, enforcement and strengthen to economic overhaul architecture major political, a the in of resulting countries, advanced the in governance of failures global financial crisis has revealed significant public the The fairness. and inclusiveness transparency, and accountability, of standards private high society to from sector civil – levels strengthening enterprise, all about at all governance is Leadership 3.2 sector. tourism the just beyond extending far brand Asia’ Truly ‘Malaysia, the champions, global and regional companies globally, multi-national we can create domestic, with and domestically, sector private the and government partnership the between active Through areas. wealthy growth/ high and markets, emerging rich resource- world, Muslim the between strategic link a be and fields, selected in global leader a become can Malaysia short, In partnerships race. global the right in succeed to the forge can Malaysia re – e hud too should we – order Others are getting their houses in houses their getting are Others work together to address common systemic systemic common address to together work cannot that silos national and weaknesses institutional of structural and overlaps gaps, the demonstrated amply has crisis financial current The network. and the of parts between different competition cooperation, also principally but actions, coordination, relies collective on economies network Modern governance in highly inter-connected excellence performance. of and standards meet, global only exceed not but must one best-in-class, be to due To globalisation. and technology environment competition, changing rapidly the n n n n n n must attain: Malaysia to seek that attributes governance the following demonstrate countries Advanced market 6). (Table free and democracy of representative principles the accept who nations behind norms OECD well but the Asia East above South is within Malaysia indicators, governance Bank World on Based standards. levels, global global match must standards at governance our compete to Malaysia For risks.

externally and citizens the to stakeholders accountable and Effectively connected both internally and and internally both connected Effectively Inclusive Responsive Agile focussed Strategically scrutiny, and review to open Transparent, 3/22/10 9:03:51 AM 67 What’s happening around us? CHAPTER 3 Table 6 - Governance indicators (2008; Percentile rank)

Voice and Political Government Regulatory Rule of law Control of accountability stability effectiveness Quality corruption

Malaysia 31.7 50.2 83.9 60.4 64.6 62.8

SE Asia 30.0 19.5 35.6 29.2 36.6 34.0

OECD 90.6 81.9 88.7 91.2 90.2 90.2

US 86.1 68.4 92.9 93.2 91.9 91.8

Eastern 63.3 56.1 61.3 69.2 58.5 59.1 Europe

Source: World Bank

Socially-accountable growth is about In the economics field, modern public sector partnerships not only between the state and governance aims at the efficient delivery of the private sector, but also with civil society. social services with the minimal levels of We must break down the silos and barriers corruption and bureaucracy. Putting ‘people of trust and communication at all levels in first and performance now’, the objective order to foster quality growth and raise the of Pemandu, is aimed at reducing the standard of living in a sustainable manner costs of doing business, being sensitive for all citizens. This means that academia, to social needs, and fostering innovation, business, the civil service, and civil society entrepreneurship, growth and competitiveness must work together in partnership for the for all citizens. greater good of the nation as a whole. Leading economies are innovating new For the private sector to thrive in open processes of communications, partnership competitive markets, the public sector mechanisms, government procurement must concentrate on its strengths and core programmes and changing incentives in order competence. Modern advanced economies to improve the way the private and public have public sectors that provide and maintain sector (as well as different branches of the excellent social infrastructure, sound public government) interact. There is now increasing security, effective protection of property rights, awareness that transformation to an advanced fair and efficient enforcement of laws and that economy status is a process, where the address public issues of inclusiveness, social goals are identified and incentives aligned. equity and environmental sustainability. Institutional innovations and removal of barriers

JD132294 Chap 3.indd 68 3/22/10 9:03:51 AM JD132294 Chap 3.indd 69 and biodiversity is central to strengthening strengthening to central resources is natural biodiversity and Malaysia’s on Building nature. of for calling stewardship and in lifestyle is changes profound that citizens global of attitude and set mind in shift fundamental a already is There environment. natural precious our of properly by protection and attained ecosystem a healthy be nurturing only can growth Sustainable unrest. and conflicts social to contributed has resources energy and water of non-renewable management of Improper resources. natural depletion rapid the as supply, well as spikes price resource commodity in resulting on pressures excessive to contributing factors major are waste and consumption excess that consensus global isdebate. There policy economic and social international to pivotal become has change, recent climate of impact the environmental In especially of deterioration, awareness debate. global change years, climate and environmental global the of frontier the is at Malaysia landmass, our of 60% covering mega-biologically diverse countries 17 in the world, with rainforests top the of one As 3.3 efficiency social competitiveness. and to barriers discarding removing whilst and systems, and new adopt processes partnerships and adapt to flexibly work public-private must changing the are rapidly, environments and systems As implementation. effective to crucial are

Malaysia should lead the global global the lead should Malaysia re revolution green our future exports and income. income. and exports on future impact our economic significant have could that sanctions global also environmental but damage, irreparable both face could Malaysia mismanaged, If living. sustainable on deterioration environmental of impact the offset help and emission carbon world’s the these preserved, to reduce capacity the have resources natural and managed Properly the and strategy. in mitigation emission role carbon global forests significant a rain plays reefs marine natural world. the the also but important Preserving Malaysia, is for only heritage not natural such precious a Having advantages. comparative our and services that play to our competitive competitive our to play that services and industries green value high in player niche strategic a become and technology green in Ma leads. these exploit to development and research of clusters create to need We is and well positioned to adapt anticipate, deliver and lead. can Malaysia which to goods, in manufactured and shifts commodities large for demand in result will environmentalconsiderations on focus global The 22). (Figure neighbours our than higher notably are emissions CO2 careful Malaysia’s as need enforcement, will and consideration, planning and 2020 implementation/ economy by the for emissions CO2 challenge is a This major to 2005). (compared in 40% a deliver reduction made to already commitments significant Malaysia Copenhagen, In laysia should embrace a leadership role role leadership a embrace should laysia

3/22/10 9:03:51 AM 69 What’s happening around us? CHAPTER 3 Figure 22 - Carbon dioxide emissions per capita (2003; tonnes per person)

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advantages. The commercialisation of our 3.4 Global business is bipolar – the natural biodiversity into high-value products large are getting bigger and smarter and services will be a major national while the small are more nimble challenge. But it is also an excellent avenue and faster for partnership between the private and the The creative destruction of the current public sectors. global financial crisis will unleash a new wave of businesses that will be smarter, The major benefit of our green, high income, bigger and faster than the old industries and inclusive strategy is that future generations that they replace. At the same time, there of Malaysians (and world citizens) will continue will be symbiotic relationships between to enjoy the clean air and water, and natural the multinational giants and the nimble, environment that they deserve and work so creative and specialist SMEs that are the hard to preserve and enhance. Malaysians backbone of any economy. The big must go can feel proud that we are setting the global to survive, whilst the small can also pace in treasuring our heritage and have global reach through the Internet and delicate ecology for the mutual benefit of plugging into regional production networks all mankind. and supply chains.

JD132294 Chap 3.indd 70 3/22/10 9:03:56 AM JD132294 Chap 3.indd 71 investment in skills. Even as larger firms firms larger as continual Even skills. requiring in jobs, investment high-quality of SMEs, with continual creation and expansion and giants global the between relationships the through shared be widely only can Growth skills. entrepreneurial new of in of creation the and infrastructure, investment and levels people development, higher and research requiring from services, come and products will brands, new up opening Profits creatively transform business. chains global highly supply through inter-connected delivered services added value and miniaturisation computerisation, as Traditional manufacturing will be commoditised ore Forbes Source: 6RXUFH)RUEHV iue 23 Figure :H 3DFLILF5,0 0L 1$P 6$P ((XURSH GGOH(DVW VW 6$VLD HUQ(8 $I HULFD HULFD ULFD Cmais n obs 00 y ein 20; o o companies) of no. (2005; region by 2000 Forbes in Companies - +RQJ.RQ 3KLOLSSLQHV 6LQJDSRUH ,QGRQHVLD 0D 7K be found in Japan, with relatively few in in few relatively with (Fi Malaysia Japan, can in Rim found Pacific be the in of located majority companies the while Europe, Western Currently, America and North in located chains. are them of supply many excellent with economies open and primarily advanced based stable, in are globally compete that firms Large firms. large for and talent of the sources providers still employment are important SMEs most creativity. and growth their support to SMEs of masses critical and clusters need They isolation. in exist cannot for firmsLarge knowledge. go specialist and niche firms smaller reach, and scale for go 6.RUHD 7D OD -DSD DLODQG &KLQ LZDQ \ VLD Q D J ue 23). gure 3/22/10 9:03:56 AM 71 What’s happening around us? CHAPTER 3 The lessons that can be drawn from how 3.5 Growing our most important asset these successful firms operate include: – people

n Branding, networks, distribution, and supply At the heart of the global trends of leadership, chains drive profits governance, and business is the quality of n Speed to market is critical people. Globalisation has created a fierce n Technology and innovation drive productivity competition for talent, forcing companies and profits and governments to recognise that people n Trend towards high value services are the most valuable assets. In order to compete, advanced nations have realised that n Economic imbalances are a risk to financial stability their labour forces must be flexible, adaptive and competitive on the global, regional and n Risks are unpredictable but can be national levels. Creative destruction occurs in managed not just companies and industries, but also human skills. Societies and governments In order to address, and keep pace with these must facilitate orderly transition or face global trends, Malaysia should undertake a disruption and chaos. variety of initiatives, for example: n Building on our strengths in E&E, In many countries the dynamics of commodities and services - to find high- demographics are driving change nationally value niches in the regional and global and across borders through migration. supply chain Ageing societies and booming economies n Positioning the services sector to meet need movement of humans as well as the emerging demand for high-value capital to sustain growth. Immigration has services traditionally played important roles in North n Reducing the costs of business entry and America, the EU and Australia in rejuvenating operations, including reducing regulatory their knowledge, skills and technology barriers and costs base. n Focusing entrepreneurial skills by incorporating entrepreneurial curriculum in Globalisation has enhanced the relentless vocational and university training, including competition for talent by making human capital on-the-job training programmes almost totally mobile. The best people want to settle and work in desirable locations and n Fostering the growth of private equity, healthy environments. The new generation of venture funds and capital market professionals and middle managers welcome instruments to improve the capacity of diversity, exhibit greater tolerance, and place SMEs to take commercial risks emphasis on a better quality of life. People n Creating domestic, regional and global also hunger for greater inclusiveness and champions that can grasp the opportunities equality. They want better education for their in the Asian region and compete on world children and a place to grow their talents. standards To attract and retain the talent needed to

JD132294 Chap 3.indd 72 3/22/10 9:03:56 AM JD132294 Chap 3.indd 73 oenet ed t b mr inclusive, more that, be achieve to individual to needs government order each In for family. each life and happy secure, a provide and living good a earn to opportunity equal of land a as others by and people its by seen be must nation advanced leading A the of out break global trap. income to middle the needed are attract that but skills country, the talent within and must skills valuable Malaysia the retain only scale, not global and a on regional compete To Malaysia. of for variety a implications have source, any any from in talent country trend best The the away handled. attract incentives to properly and be to values The needs of society. clash of that being potential risks well the security jeopardise national to and attention personal further considerable to devote countries leading collapse, deterioration in the fabric of society. Advanced to known supporting been their have services social and whole leave, skills staff best the When out competitiveness. and efficiency hollowing business of and services skills, and and of production deterioration of people circle vicious a best to leading the of security outward to migration poor lead as environments working states, and failed many for problems created has talent of mobility The appreciates creativity. an human and but nurtures pay, that high just environment living not and with working conditions, improve to striving are and knowledge-based innovative economy, companies a and countries of growth sustain

by virtue of modern social networking networking social attuned more ways some in modern is technologies, of virtue by which generation, younger the for important particularly is This aspirations. and better agenda a have people understanding and ownership the of the national that ensure will leadership and people the between dialogue comprehensive open, more a Conversely, tolerant opinion. is of differences that of manner a in feedback wide and consultation continual from derived often are Advanced solutions best the that aspirations. recognise nations and needs their respond to and understand with best to people consultation the on-going an establishing within which to attain greater quality of life life of quality achievements. greater atmosphere attain to the which within enrich new will these The of professionals ethic work opportunities. and and perspectives businesses new build and come to foreigners attract highly-skilled also will Malaysia in work to and live Malaysians encourage that life and of quality incentives strive same all the that must We appreciate to whole. a as nation the of advantage comparative the Malaysia enhance and gaps trap, the fill to needed income skills the attract must middle the of get to and out order status In economy advanced sufficient. achieve not is it but for growth, condition necessary a is skills domestic retaining and talent upgrading Nurturing, Malaysia. global for for opportunities and threats both presents competition fierce The country. own its within groups age to trends in other countries than it is to other 3/22/10 9:03:56 AM 73 What’s happening around us? CHAPTER 3 JD132294 Chap 3.indd 74 3/22/10 9:03:56 AM CHAPTER 4

Which advantages do we have?

JD132294 Chap 4.indd 75 3/20/10 6:47:27 PM JD132294 Chap 4.indd 76 3/20/10 6:47:27 PM JD132294 Chap 4.indd 77 income category in the early 1990s. 1990s. was approach early economic the in successful The category middle upper the income into eradicated moved largely and poverty Malaysia nation, a As we have? advantages do Which embedded in the New Economic Policy Policy Economic New the in embedded 4.1 forward. purposeful move to take actions policy we as draw to which on advantages unique and a strengths of have number also we changes, global challenges rapid amid daunting faces Malaysia While Why doweneedtheNEM and what are itsgoals? infrastructure e r nt or n hv good have and poor not are We 6RXUFH81 ore UN Source: ,QFLGHQFHRI 3R YH UW\ iue 24 Figure

- niec o pvry 17-07 %) (1970-2007; poverty of Incidence was reduced from above 40% in 1970 to to 1970 in 40% above from reduced economic was with race poverty absolute of incidence of The function. identification the correct to society of restructuring the and race of irrespective poverty of eradication the on focus two-pronged a had which (NEP) has narrowed. narrowed. has bumiputera the between disparity income Over the years, 30 last Sarawak. and Sabah average in including in reduction, poverty in progress increases and incomes recorded ethnic groups All 24). in (Figure growth period slower post-2000 the despite — 2007 in 3.6% ,QFLGHQFHRISRYHUW\ *LQLFRHIILFLHQW and non- bumiputera *LQLFRHIILFLHQW communities communities 3/20/10 6:47:27 PM 77 Which advantages do we have? CHAPTER 4 Substantial investment has resulted in goods and people (Table 7). In addition, the building of a world-class infrastructure electricity consumption in Malaysia is high in Malaysia. This has contributed to the and our water and sanitation facilities have leadership that Malaysia enjoys in E&E reached a large percentage of households. manufacturing, major natural resource exports Our communication facilities are modern with and passenger aviation. In today’s globalised many more people using the internet. market, our developed infrastructure will facilitate the attraction of new innovative 4.2 We have established a world-class firms that require efficient production chain manufacturing base networking and sophisticated inventory management. Manufacturing has been the fastest growing sector of the economy over the past Our strength in infrastructure is reflected in generation (Figure 25). Rapid growth in an extensive network of roads offering rapid manufacturing first took off in the 1980s connection to air and seaports for moving and accounted for more than 30% of output

Table 7 – Selected infrastructure indicators

2004-2005 Malaysia China India Indonesia Thailand Brazil Mexico Turkey Electric power 3166 1585 457 478 1856 1955 1838 1782 consumption (kwh per capita) Roads, paved 81.31 82.5 47.4 58 (2002) - - 49.54 41.59 (% of total (2004) (2002) (2002) roads) Container port 12 89 4.9 5.5 5.1 5.6 2 3 traffic (mn TEU) Telephone 172 269 45 58 110 230 189 263 mainlines (per (2004) 1,000 people) Internet users 435 85 55 73 110 195 181 222 (per 1,000 people) Improved water 99 77 86 77 99 90 97 96 source (% of population with access) Improved sanitation facilities (% of 94 44 33 55 99 75 79 88 population with access)

Source: Centennial Group

JD132294 Chap 4.indd 78 3/20/10 6:47:27 PM JD132294 Chap 4.indd 79 e l a c s - e g r a l r o f t n e m e r i u q e applications. r l a b o l g of the within operate part to networks chain supply be to have may industries industries. Such value technology higher cutting-edge and added, innovative is more It to leap technological next products. the make to poised electronic now industrial consumer and of exporter major a become has Malaysia services. and logistics supply, in sectors other of growth the spawned E&E sector The firms. inward multinational large by investment attracting by on sector focussed E&E the primarily was 1970. in 15% Manufacturing than less from 2000s the by 6RXUFH%DQN1HJDUD ore BNM Source: 6H 0D $J UY UL QX FX LF ID iue 25 Figure HV OW FW XU XU H LQ ) J RU HV WU \ Sco cnrbto t GP (%) GDP to contribution Sector - )L VK LQ J

seek currency stability through diversity, niche and diversity, resources, natural through to access stability currency seek from FDI/FPI countries these as East Asia and India China, attract to help endowments its and location geographic Malaysia’s 2009. in billion USD10 was Bilateral trade with India is 2007. close to exceeding China over increase 15% and a billion, USD53.5 Malaysia between trade bilateral 2008, In 26). (Figure region growth high a in located strategically is Malaysia 4.3 akt ta rifre iaea ties. bilateral reinforce that markets

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J 3/20/10 6:47:27 PM 79 Which advantages do we have? CHAPTER 4 Figure 26 - Real GDP growth (2008; %)

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The country’s strategic location, coupled with to leverage the best of each group’s innate its well-developed infrastructure, will serve skills and traits for the good of the society as to attract investment to build transportation a whole. Diversity of culture also stimulates and logistics hubs. Our infrastructure is imagination, creativity, and innovation. currently augmented with modern industrial Malaysia’s rich and unique cultural heritage, parks and development corridors, which are and even colonial history are assets for forging meant to favour innovative and high value relationships in many countries, especially in added businesses. the high growth economies of China, India, the Middle East and Indonesia. Furthermore, 4.4 Malaysia is a model of cultural, Malaysia’s diverse language networks help ethnic and biological diversity to support the development of tourism and industry links in those same markets. Malaysia is a culturally rich society with an array of diverse ethnic groups spread across Malaysia is one of the 17 most important the Peninsula, Sabah, and Sarawak. This mega-biodiversity countries in the world diversity provides Malaysia with substantial (Figure 27), with 16 million hectares of advantages. Diversity of culture, ethnicity, tropical forest area, covering 60% of our languages, and religions enables a society land area. Over 90% of the forests remain 80

JD132294 Chap 4.indd 80 3/20/10 6:47:27 PM JD132294 Chap 4.indd 81 1,000 different species of fish exist today. today. exist fish of species different 1,000 and coral of species our 400 where reefs, marine conserve to Areas Protected Marine of ore UNEP Source: km 14,167 about established has Malaysia and terrestrial marine areas are protected in Malaysia. of 16% of total A life. marine and with coral reefs teeming (the best known being world, Sipadan) the in coastline longest 29th of km, the 4,675 has a coastline total Malaysia endangered. or vulnerable are 550 which of species, tree over Park native 2,650 has Malaysia Kinabalu Park. National sites: Mulu and Heritage World these of are Two parks. area national forest designated total is of 73% and state-owned, eadvre countries Mega-diverse iue 27 Figure Cutis ih eadvre at’ species earth’s mega-diverse with Countries – 2

od xml wud e eeal energy renewable be would example good A services. and industries high tech high value, diverse, new, sustainable build to and base a as creative ways in endowment used be resource can natural Malaysia’s essential, is growth economic for industries from reliance on heavy resource consumptive away shift a Although products. nutritional and applications pharmaceutical recreation, to generate economic benefits from tourism, harnessed be can biodiversity rich Malaysia’s are they threat. as under increasingly important more becoming are reefs coral these of protection the Therefore, technologies. technologies. industries such as photovoltaic and biomass 3/20/10 6:47:28 PM 81 Which advantages do we have? CHAPTER 4 JD132294 Chap 4.indd 82 3/20/10 6:47:28 PM CHAPTER 5

Where do we want to be?

JD132294 Chap 5.indd 83 3/20/10 6:52:42 PM JD132294 Chap 5.indd 84 3/20/10 6:52:42 PM JD132294 Chap 5.indd 85 want tobe? Where dowe ed o rsre oil harmony. social preserve to need the ignore and forces completely market to we things leave can Nor which sustainable. not resources, is natural from wealth pump-priming of with short-cut the take cannot we the goals, those of achieve to striving expense In others. the at achieved be should goal one No of Malaysians. lives ordinary of the millions improving for critical are goals the for quality life of high a into translate will together which sustainability, and inclusiveness with nation advanced income high a become will The main goals of the NEM are that Malaysia 5.1 be. us to want get we to where to new necessary is a growth that to clear approach is It environment. global changing the amidst acute more made being our are which undermine advantages, unique to and strengths starting are Malaysia’s handicaps that conclusion the draw observers would informed other most and, believe, NEAC we the far, thus analysis the From Why doweneedtheNEM and what are itsgoals?

h Nw cnmc oe – A – Model Economic New The economy income high inclusive, sustainable, rakyat Fgr 2) Al three All 28). (Figure Good healthcare and social support will be be will support social and healthcare governance. Good good ensure to place in be driven. In addition, effective institutions must more developed, specialised and technology- the be must structure about The economic level. income solely not is nation advanced can An 2020. by nation Malaysia advanced an into before transform economy overcome the be of must shortcomings many The iue 8 – 28 Figure WKHZHDOWKRIWKH IXOO\EHQHILWIURP FRPPXQLWLHVWR (QDEOHVDOO ,QFOXVLYHQHVV FRXQWU\ 7DUJHWV86 Goals of the New Economic Economic New the of Goals +LJK,Q 4XDOLW\RI/LIH Model SHUFDSLWD E\ 5DN\ FR DW

PH 6XVWDLQDELOLW\ 0HHWVSUHVHQW FRPSURPLVLQJ QHHGVZLWKRXW JHQHUDWLRQV IXWXUH 3/20/10 6:52:42 PM 85 Where do we want to be? CHAPTER 5 measurable through a higher life expectancy robust pace (Table 8). Investment will be and a superior standard of living. The benefits the main driver of economic growth through of these improvements will be accessible to 2020. The contribution from private investment all communities and income groups. After must return rapidly to a significant level last achieving advanced nation status, maintaining seen in 1997, reaching almost a fifth of that position will require continuous efforts GDP by 2020 compared with about a tenth well beyond 2020. in 2010. Similarly, private consumption will rise and increase its share of GDP while 5.1.1 Breaking through to high income public consumption will slow down. status Despite the anticipated boost to domestic Currently, Malaysia’s estimated per capita aggregate demand, external demand will GNP of USD7,558 puts it in the upper middle still provide the stronger boost to growth. income group. Growth in recent years has The growth engine will still come from the fallen to a pace of about 4.5% to 5%, which growth in exports. The openness of Malaysia lags behind the growth of neighbouring will increase further with a higher total trade countries and will keep Malaysia trapped to GDP ratio by 2020. in a zone far below its potential. The supply side highlights the shape and We can and must do better. Doing better structural trends of the economy (Table 9). will require taking difficult reform actions As income rises the share of agriculture to to propel the economy to higher growth. GDP will continue to slide. There will be Sustained and full implementation of reform industrial deepening but manufacturing’s measures proposed by the NEAC will drive share of GDP is anticipated to fall slightly Malaysia’s transformation into a high income to 24.9% by 2015 and marginally further economy by 2020. The NEAC foresees that to 24.2% in 2020. On the other hand, bold reform measures will unlock investment, service’s share of GDP will increase from drive labour productivity and boost efficiency, almost 59% in 2010 to slightly above 67% lifting real growth rate to an average of 6.5% by 2020. per annum over the 2011-2020 period. Per capita GNP will rise to about USD17,700 Sizable financial and human resources will by 2020 (Table 8). This scenario assumes be required to achieve the growth targets of that globally there will not be another major the NEM. Both DDI and FDI will continue to economic crisis to derail the Malaysian be vital for financing growth. Maintaining the economy from this growth path. right environment and incentives will also be necessary. Competition for FDI is expected to If the GDP growth target is to be achieved, continue and many of the proposed changes aggregate demand will have to grow at a will have to be implemented.

JD132294 Chap 5.indd 86 3/20/10 6:52:42 PM JD132294 Chap 5.indd 87 *t urn mre prices market current **At estimates EPU on Based * Notes: EPU & BNM MOF, Sources:

Capital Formation Exports ofGoods Imports ofGoods capita(USD)** Consumption Gross Fixed expenditure & Services & Services GNP (USD million)**

GNP per Private Private Public Public implicit price deflator forecasted numbers for 2010-2020 derived from IMF-IFS CD-ROM. For 2011-2020, 2011-2020, For RM3.2/USD. CD-ROM. is rate IMF-IFS exchange from currency average derived & 1.3% year is 2010-2020 rate for growth Baseline population numbers average 2010. in forecasted RM3.4/USD deflator GNPis & price GDP rate the on implicit based computed exchange are prices Current currency numbers. revised & latest EPU 1.5% on based is 2010 is 2010 in rate growth Population GNP GDP al 8 – 8 Table RM million(in2000constantprices

149,607 655,869 516,144 724,480 538,069 612,025 502,100 665,993 546,375 152,594 125,187 358,529 294,134 445,638 365,598 82,902 68,012 69,692 57,175 71,464 87,110 rs dmsi pout y xedtr ctgr, 2010-2020 category, expenditure by product domestic Gross 2010* 7,558 & currentpricesinitalics) 1,136,091 1,006,653 1,086,489 219,354 723,869 977,577 727,510 749,148 808,562 142,713 106,207 257,307 191,487 547,494 407,444 659,572 490,851 114,594 112,078 85,280 83,408 11,929 2015 1,050,975 1,800,684 1,028,558 1,488,636 1,013,691 1,715,793 1,168,375 1,757,522 1,196,790 180,485 420,810 286,552 148,022 100,796 902,953 614,868 715,665 155,763 106,067 265,048 311,686 17,725 2020

101.5 101.5 2010 10.6 23.3 23.3 13.3 13.3 54.7 54.7 67.9 67.9 93.3 93.3 12.6 12.6 10.6

% ofGDP

103.0 103.0 111.1 111.1 2015 14.6 26.3 26.3 56.0 56.0 67.5 67.5 14.6 11.5 11.5 11.7 11.7

115.3 115.3 118.1 118.1 2020 17.8 28.3 28.3 60.7 60.7 70.6 70.6 10.5 10.5 17.8 9.9 9.9

2011-15 13.2 13.8 10.8 15.4 11.2 Average annual growth rate(%) 8.9 3.9 3.1 8.8 6.7 7.8 6.1 6.6 7.0 6.3 6.2 8.3 8.2 7.0 4.6

2016-20 10.1 13.2 10.3 10.5 11.3 11.2 9.2 7.3 8.8 6.9 9.3 8.2 6.3 4.5 8.4 5.7 3.9 8.6 9.8 7.8 3/20/10 6:52:42 PM 87 Where do we want to be? CHAPTER 5 Table 9 – Gross domestic product by industry origin, 2010-2020

Average annual RM million (in 2000 prices) % of GDP Sectors growth rate (%) 2010* 2015 2020 2010 2015 2020 2011-15 2016-20

Agriculture, forestry 40,172 46,706 53,153 7.5 6.4 5.2 3.1 2.6 & fishing

Mining and 41,867 44,309 46,615 7.8 6.1 4.6 1.1 1.0 quarrying

Manufacturing 138,852 181,465 245,140 25.8 24.9 24.2 5.5 6.2

Construction 16,963 20,559 24,019 3.2 2.8 2.4 3.9 3.2

Services 317,010 453,831 682,401 58.9 62.4 67.3 7.4 8.5

GDP at 2000 538,069 727,510 682,401 100.0 100.0 100.0 6.1 6.9 constant prices

Sources: MOF, BNM & EPU * Based on EPU estimates

The fiscal deficit of the Federal Government, (NFPEs), even taking into account the at about 7.4% of GDP in 2009, has reached impact of fiscal stimulus measures in the a peak and is expected to decline to 5.6% of wake of the recent global financial crisis. GDP in 2010. Market sentiments will further This level of debt is much lower than many improve if the fiscal deficit is brought down other countries. The external debt service even lower. The NEM calls for a further ratio from 2005-2009 averaged about 4.9%, reduction of the fiscal deficit with the easing reflecting the fact that Malaysia has relied and exit from fiscal stimulus, to a near-balance far more on domestic sources for financing by 2020. Further control of public expenditure, its growth than on external funding. diversifying the sources of revenue, and a much more efficient utilisation of financial The NEM envisages a continuation of a resources will be required if the economy prudent debt management policy. As public is to achieve a near-balance budget over investment is reduced over time, the fall the next 10 years. in the need for external financing from the public sector will be replaced by an increase As at end-June 2009, the national debt stood in external financing from the private sector. at about 34% of GDP or RM 233.9 billion, Overall, in the 2011-2020 period, the NEAC which includes debt from the private sector envisages a slight dip in the total national and the Non-Financial Public Enterprises debt to just under 30% of GDP by 2020.

JD132294 Chap 5.indd 88 3/20/10 6:52:42 PM JD132294 Chap 5.indd 89 fet f esset nqaiy n economic on inequality persistent of effect is the also but and level the with only not growth concerned pro-poor is growth Inclusive continue to address these inequalities. inequalities. NEM these the address to that continue imperative it ethnic makes between groups inequalities of The persistence dissension. and separateness to growing contributed has resources of distribution ethnicity-based on focus excessive the But ethnicity. of salience the erode cannot by itself growth economic that clearly growth shown of has years 50 than more The us. with feature and this ethnic diversity will always be is still its population outstanding the Malaysian violent conflicts. The multi-racial composition of to prone more are societies divided Ethnically growth inclusive through Unity alleviation. poverty and growth a b smaie as summarised be can which a approach new incorporates NEM The not does worsen. inequality that ensure inclusive will an society While impossible, country. is the equality of perfect wealth the in share will and to contribute to communities Inclusiveness all enable Sarawak. and Sabah of locations remote in rural those especially and areas, urban the in groups from marginalised benefit Not to within resentment breeds progress economic belonging. opportunities of the sense prerequisite having a a is It fostering NEM. for the of part a key and goal second the is Inclusiveness 5. 1.2 l l a r o f s t i f e n e b Malaysians g n i t a r e n e G nlsv growth inclusive . n ti wl b i ln wt te NEM. the with line in be will this and addressed be must and ethnicity beyond go that identities of plurality a is There ethnicity. be used should in a much wider sense and to of Malaysia, transcend united a notion or The 1Malaysia, dangerous. be and can rest misleading the a overriding of notion identity The singular identities. of plurality a by disagreements are characterised Individuals and dissensions. sharp be can there groups and numerous location other ways. Even within ethnic regional age, occupation, class, by also but ethnicity by only not divided be can a community that remember to important is It of opportunity is biased towards equality equality towards biased is opportunity of of equality of terms income, wealth or liberty. in approached be fair can and Equality equality. with equity concern the of is opportunities notion the Underlying performance. her or his by denotes the level Merit and a quality of individual as signalled merit. for of allow contribution greater must opportunities. opportunities to Equalising access of gaining recognition for among greater merit much require, things, will other process rewards fair and A merit. recognises that system a by with complemented be to ahead need will liberalisation pushing and competition More groups. different of interests legitimate between the special position of balance a strike that measures effective of key A design the is growth Constitution. inclusive of challenge the in safeguarded is defining the of features of the NEM. one is inequality Reducing

Equality before the law bumiputera Equality and 3/20/10 6:52:42 PM 89 Where do we want to be? CHAPTER 5 of the means rather than the ends since to enhance economic growth and also, on equal opportunities can produce unequal balance, to be positive for distribution. The outcomes. A wider notion would be therefore distributive outcome arising from greater to focus on fostering equal capabilities. competition depends on the the nature of Opportunities and capabilities are intertwined industrial structure. Manufacturing industries and mutually reinforcing. The shift towards which utilise newer technologies and more equitable and fair opportunities is hence highly skilled labour will make higher broadly consistent with the shift towards profits and pay higher wages. Equitable fair processes. Hence the market-friendly wealth distribution and social justice should affirmative action programmes in line with emphasise equal opportunity. Fair access to the principle of inclusiveness will: education, health and other services should be prioritised rather than excessive focus n Target the assistance to the bottom 40% of households – of which 77.2% on outcomes as in the past. are bumiputera and many are located in Sabah and Sarawak NEM strategic thrusts for inclusive growth

n Ensure equitable and fair opportunities The NEM strategic thrusts for inclusive growth through transparent processes embrace the following measures: n Allow access to resources on the basis of n Enhance growth for expanding economic needs and merit to enable improvement opportunities in capacity, incomes and well-being n Pursue equitable and fair opportunities n Have sound institutional frameworks and fairness in processes for better monitoring and effective implementation n Accelerate liberalisation for growth n Focus on the bottom 40% of households Forces of change make reforms and small businesses imperative n Emphasise opportunities for inclusiveness Forces of change make it necessary to n Augment regional growth and continually reform our approaches to inclusiveness better attain our objective of inclusiveness. The forces of change come from: (a) n Stress knowledge creation and the globalisation and openness; (b) competition knowledge economy and competitiveness; and (c) new ideas on wealth distribution and social justice. Enhance growth for expanding economic opportunities. Economic growth will continue The continuing integration of the Malaysian to be necessary to expand economic economy in the global economy is anticipated opportunities. Inclusiveness is predicated on

JD132294 Chap 5.indd 90 3/20/10 6:52:43 PM JD132294 Chap 5.indd 91 and liberalisation. Procedural fairness will will model. new the in fairness incorporated be Procedural liberalisation. competition and greater growth towards to move the and environment changing the consistent with broadly be would outcome than rather opportunities towards The shift income. of distribution fairer instruments a promote the would of that implementation the on burden a heavier place income of distribution equitable, or fair, a achieving for instruments means or the instruments. the Processes and thethan emphasis processes. greater the given were on Ends or less much outcomes, and on targets, emphasis model heavy distribution placed and growth earlier The outcomes. on than opportunities rather processes on and emphasis greater far put opportunities processes fair in fairness and and equitable Pursue hence and income income. of in inequality increasing widening a distribution to the in contributed have they that shows example, for US, the in been implemented have that measures policy the growth and of nature lesser The a Europe. to in and US extent the in rising been has inequality narrow.to continue would inequalityIncome income economy, income of high status a the attained no having is that, there the certainty that clearly especially shows UK, years, and US recent in countries guaranteed. The experience of the developed income of not be as seen should outcome this inequality, narrowing a to with expected associated is be growth economic because NEM although the of part a be will growth strategy pro-poor A economy. expanding an . The NEM will will NEM The . competitors. The outcome from liberalisation liberalisation from outcome The competitors. come from Malaysian competitors and foreign will pressure efficient competitive The more productive. and are who entrants new to out will lose or are uncompetitive, are unprepared, which interests Existing factors. result opposing of the be will inequality on liberalisation of impact overall The competition. in increase they that can be better prepared to so meet the expected liberalisation for plan the on Malaysian alerted and clarified. aware be to need be will interests to ten have next will the over years undertaken be to is that growth inclusive sustain to liberalisation Accelerate 0 o te itiuin f income. of distribution the of bottom 40% the in are that also and line poverty the will below fall that income households low those include The race’. of irrespective new This groups. approach can be termed as ‘inclusive income growth low the in those focus on be should measures the redistributive the of progresses economy income and high a grows towards economy the businesses. As small and households low income the to ethnicity from approach the households of businesses small 40% and bottom the on Focus liberalisation widen. from could income inequality then more higher benefit the If interests liberalisation. from benefits the of more garner can corporations, whether on dependent the top higher income households or the top be also profits. will i.e. it And income non-wage and income wage for benefits relative the on depend will . The range and pace of liberalisation . The NEM will shift shift will NEM The . 3/20/10 6:52:43 PM 91 Where do we want to be? CHAPTER 5 Emphasise opportunities for inclusiveness. pockets of poverty in specific isolated areas Affirmative action programmes have worked in the low income regions will mean that well to lift large segments of the population the special needs of these groups will differ out of poverty, giving them greater opportunity and the design of poverty projects will also to participate in the economy and have need to be different. successfully reduced inequalities to a significant extent. The past practices have Stress knowledge creation and the knowledge adopted a pervasive approach of using quotas economy. In a high income economy the as a key instrument. Ethnic-based quotas demand for knowledge workers will increase. have been imposed extensively throughout Educational reforms will be a vital need for the economy. These practices have also inclusive growth. Human capital policies given rise to unhealthy and pervasive rent must be given top priority, as they will seeking and patronage activities which has be crucial in making more rapid inroads over-shadowed and irreparably harmed the towards reducing income inequality. Labour meritorious performance of key affirmative market imperfections, including wage and action programmes. All stakeholders are employment discrimination, will have to demanding that these practices be revamped be rectified. Fragmented and segmented and changed to make them more effective, labour markets must be made more equitable and inclusive. integrated.

The NEM will shift the emphasis to market- 5.1.3 An economically and environmentally friendly affirmative action programmes enduring solution supporting social and economic activities aimed at broadening inclusiveness efforts. The sustainability component of the NEM This approach will focus more on building is meant to ensure that all of the proposed capacity and capability rather than the measures defined under the new model imposition of conditions to meet specific must be sustainable in both economic quotas or targets. and environmental terms. Malaysia’s dependence on natural resource Augment regional growth and inclusiveness. consumption as the primary engine of The NEM will give greater emphasis on growth is clearly not sustainable on regional and sub-regional corridor development either dimension. This is not to suggest through clustering, especially in Sabah and that exploitation of natural resources Sarawak, to reduce inequality between the should not be a key component of national states and regions. For areas with high production. But it does mean that incidence of poverty and a high concentration under the new model, investment of low income households, the policy priority and policy decisions should only be should aim at building the capacity and made after full consideration of their long- opportunities for residents to participate in term impact on the society, the economy as corridor development. The persistence of a whole, and of course the environment. 92

JD132294 Chap 5.indd 92 3/20/10 6:52:43 PM JD132294 Chap 5.indd 93 on fiscal transparency will allow proper proper allow public of will dissemination and assessment transparency fiscal on practices best international of adoption The government. the by solely borne not stakeholders, other and contractors with shared equitably and better be If must burden the arise, do costs overruns. additional costs preventing on emphasis greater be must there particular, In bear. to have may government that risks contingency viability, residual the social and impact, and environmental economic covering long-term issues wider address will process procurement efficient more A transparency. and government efficiency to improve system procurement the of overhaul complete a will be reform of reduce area major drastically One wastage. and outlays from greater value unlock to programmes expenditure government all of restructuring bold a Fiscal reforms under the NEM will emphasise customer-focussed. more it making and services public of efficiency the increasing to service, civil is key and retraining, the up-skilling staff including of reform Ongoing NEM. the of component key a is and fiscal sustainability long-term of component important an and financial stability. Public sector reform is balance discipline macroeconomic safeguarding fiscal on for focus a be must government. There responsible and responsive a shaping of aim ultimate the with sector public One of the SRIs will focus on the strengthening improved management financial public through sustainability Promoting Although there has been a veneer of of veneer policies a past environment, been the for has concern there Although environment. the neglected grossly has The traditional approach to economic growth priority top as sustainability Environmental underpin to management sustainability. debt public of effects the consideration into take which framework budgeting of medium-term finance context a the in public undertaken be that operations The recommends sustainability. NEAC and solvency finance to the management of water, and oil and and oil and resources. water, gas of management the to relevant will be particularly This new approach resources. non-renewable and environment natural the of preservation and stewardship effective by generations future compromising withoutpopulation the of needs ongoing the The NEM seeks sustainable growth that meets concerns. environmental to address measures of environment design the appropriate on the and growth of of impact consideration the proper allow will concept GDP’ ‘Green the of development recent society to costs does arising the from environmental degradation. The account growth into take not economic of measurement GDP conventional and The growth. placed environment economic the be of must protection both on emphasis the In equal later. and future, environment first, the growth with dealing delivering on focussed

3/20/10 6:52:43 PM 93 Where do we want to be? CHAPTER 5 One of the key messages of the NEM One example of the NEM approach applicable framework is to leverage on our core to agriculture is to leverage off Malaysia’s strengths, one of which is our rich heritage successful development of its palm oil industry of natural resources. The largest contribution into the most efficient edible oil producer in to Malaysia’s GDP is the services sector, of the world. The commercial production of palm which the largest component is tourism. The oil has created an important source of income tourism sector relies heavily on our natural and export for Malaysia. it lifted over a million resources such as tropical rainforests and people out of poverty by raising their incomes marine life as key attractions. About 5% of through FELDA schemes and if properly the labour force earns their income from managed, can contribute to environmental domestic and international tourism. In addition, sustainability. The Roundtable on Sustainable 12% of the population derive their income Palm Oil (RSPO) has developed Principles and livelihood from agriculture, forestry and and Criteria with which members have to fisheries which together generate 7.5% of comply if the palm oil they produce is to GDP. be claimed as sustainable.

The Malaysian government has made The NEM approach implies increasing higher significant commitments to manage climate value- added and revenue per hectare of change, pledging a RM1.5 billion fund in usable land, rather than pure output per the national budget for 2010 to promote tonne, without damaging our environment. In green technology and announcing several other words, we should maximise the quality incentives to encourage the construction of of our income from our environment, rather green buildings. Malaysia also made strong than focusing on quantity as at present. A commitments to emissions reduction during the case study on the palm oil industry example 2009 Copenhagen climate change talks. is included as Appendix 1.

The NEM considers that sustainable agriculture 5.2 The ultimate beneficiaries: rakyat should be fostered through the development and businesses of productive, competitive and efficient agriculture, forestry and fishery techniques, The NEAC anticipates a series of benefits that while at the same time protecting and improving would accrue to all Malaysians if the NEM the natural environment and conditions of policy measures are consistently and fully the local communities. The sustainability implemented. We must recognise however, principles call for the production of crops that the various benefits will be realised over with high yield and income, ensuring minimal a period of time. In the meantime, some effects on soil fertility, water and air quality, segments of the population may perceive and biodiversity. They also call for optimising greater negative impact than benefit, or that the use of renewable resources and enabling they are receiving less benefits than others. local communities to protect and enhance The government must be able to convey the their well-being and neighbourhoods. ultimate equity of the benefits over time, urge

JD132294 Chap 5.indd 94 3/20/10 6:52:43 PM JD132294 Chap 5.indd 95 the various communities in the transition transition the in cushion communities to fund various the transformation a and net safety enhanced an place in put will ETP The good. common long-term the of a create vision and process, the to commitment a take place if the goals of the NEM are to to are NEM the of achiev be goals the if place must take appreciate changes and better adjustments to orderly that need will public The realised. fully are benefits the before period ed. 3/20/10 6:52:43 PM 95 Where do we want to be? CHAPTER 5 5.2.1 Benefits for the rakyat

Expected benefits for the rakyat from the NEM are as follows:

Table 10 – Benefits for the rakyat

In a high income economy, All rakyat will feel included as a result A sustainable approach will the rakyat can expect: of: provide the rakyat with: • More choices and higher • Living and working in safe • Confidence in the purchasing power. surroundings. Individuals will live, government. Fiscal An upward spiral of work, study and play in localities free discipline will keep the consumption and high from the fear of crime, the indignity economy well-balanced. income career choices. of discrimination and the anxiety of Improvements in • Better quality of life. Not need. bureaucratic processes only higher incomes, but • Equal and easy access to information. will ensure timely, fair, quality healthcare and Families will be endowed with the and respectful service social support, accessible opportunity and capability to pursue delivery. to all rakyat and income their aspirations in connected, • Improved environment. groups. sophisticated, modern cities, townships Future generations will • Opportunities for upward and villages. All communities will be be assured of continued mobility. Readily available able to contribute to and share in the access to clean air, water, skills development wealth of the country. healthy recreational living programmes. Access to • Every individual counts. The conditions and well- resources, jobs, contracts affirmative action approach will preserved biodiversity. and licenses based on shift from ethnicity to low income • Sustained growth. merit and effort. households and individuals on the Development will • Reward for innovation basis of needs and merit. Mutual prioritise of sustained and creativity. A more respect and dignity accorded. economic growth, developed, specialised, • Every part of the nation matters. fiscal management, innovative, technology- Regional and sub-regional social needs, and the driven and knowledge- development will be given more environment. based economic structure. emphasis, especially in Sabah and Sarawak, to reduce regional disparities. Everyone will be consulted and their voices heard.

JD132294 Chap 5.indd 96 3/20/10 6:52:43 PM JD132294 Chap 5.indd 97 ecosystem and a more efficient market to facilitate investment and operations. operations. and investment facilitate to market efficient more a and effective more ecosystem a environment, the in equity greater from result will businesses for Benefits 5.2.2 • • • • includes: which investorswillthrive An equitableenvironmentin • the In ahighincomeeconomy, rakyat nelcul Property. be protected. will assets Intellectual Intellectual choose. they partners with work and Freedom. businesses their own fully free to be will Entrepreneurs Ownership credible legalsystem. and fair a of assurance the with affairs their manage will Law. of Rule business owners. of the responsibilities and rights of recognition due be Rights. Business mobile talent. foreign capital and globally savings, high of back the private investment rates on the of economy. robustness in the confidence Greater eeis o businesses for Benefits canexpect: utie high Sustained Businesses hr will There al 1 – 11 Table • of: All • • • operations willinclude: An effectiveecosystemforbusiness • • • rakyat rus priual toe with those disabilities. particularly vulnerable support groups, will net safety social and needs-based coherent Acomprehensive behind. left is be one to No inequality. narrows and poverty eradicates further it as poor forgotten. pro- be will period be growth prolonged not will poor The n ntokn wl cet benefits create will networking and Dynamic Clusters. regulatory undue burden willberemoved. and licensing Efficiency. Licensing faster. Services. Public disputes willbeswift. Courts. Efficient SME funding. to access of timeliness and Funding. talent theycanafford. open and efficient access to the best Human Capital. from scale. willfeelincludedasaresult

eeis o businesses for Benefits nrae flexibility Increased Employers will enjoy Resolution of legal of Resolution prvl wl be will Approvals Industry clustering Unnecessary A • provide the A sustainableapproachwill • • • • through: growth opportunities provide investmentand An efficientmarketwill aiie aig for future generations. savings maximise to utilised will prudently be non-renewable resources natural and resource management. Continued of acompetitionlaw. enforcement proper and be will created by the enactment field playing competition. Fair in liberalisedsectors. thrive will Entrepreneurs be Barrier will eliminated. price controls and exceptions, subsidies minimal Fair Market Pricing. of governmenttenders. fairness and openness the in confidence be will Transparency. rakyat Renewable with: There A level A Free. With 3/20/10 6:52:43 PM 97 Where do we want to be? CHAPTER 5 An equitable environment in An effective ecosystem for business An efficient market will which investors will thrive operations will include: provide investment and includes: growth opportunities through:

• SME Recognition. • Transformation Fund. Entrepreneurs • P u b l i c - P r i v a t e Regulations for SMEs will be will have access to special assistance Partnership. There will appropriate and proportionate during the economic transition be more opportunities to the risks faced by small period. for the private sector businesses. • Regional Integration. Businesses will to collaborate with the • Market Transparency. benefit from an integrated regional public sector and GLCs Business operations will be market and government support to free from rent-seeking, quotas become regional champions. and preferential treatment.

5.3 Getting help to those who need it quality education referred to in the previous the most section would target the bottom 40% to improve their capability. The NEAC also wants specific measures to deal with inequality by targeting the 40% of While all Malaysians will feel the impact from households in both urban and rural areas disruption and dislocation caused by the NEM that have a monthly income of less than transformation process, the NEAC recognises RM1,500. For everyone to enjoy the benefits that the bottom 40% will be least prepared of a high income economy, the gap between to manage the changes. For this reason, it the bottom 40% and others must be narrowed is crucial that a coherent safety net be put within a reasonable timeframe. in place swiftly to help the households to better cope with the inevitable distress. The NEM provides for mechanisms to strengthen the capability of the bottom 5.4 Core characteristics of the NEM 40% so that they can take advantage of opportunities to secure better jobs, raise To be market-led implies that investment and their productivity and grow their income. production should be private sector driven. The This group should also have opportunities government should facilitate businesses by to use their entrepreneurial instincts to start simplifying processes, increasing transparency up and grow their businesses, which will and improving delivery of services. It significantly improve their livelihood, life should also ensure that essential regulatory chances and prospects. The social safety requirements are market focussed and net, better health services and access to supportive. Also, the private sector must

JD132294 Chap 5.indd 98 3/20/10 6:52:43 PM JD132294 Chap 5.indd 99 oetc akt n te oeta fr a for potential the and small market Malaysia’s domestic With Asia. East cover expanded be to and continue should ASEAN growth of the economy. within More integration long-term the drive is to continue to expected region, Asian the within especially flows, capital and trade through Integration workers. skilled particularly labour, and capital to of access movement the market as well as services and goods open be should There arenas. other and political cultural, research, the in broader also but including services, financial services, and trade in integration Regional integration Regional taking risk avoided. excessive is that ensuring while foment integrity to and governance regulations business good and rules should up government draw with the Working sector, private society. the of participation segments all economic by facilitate in be to should place nets safety health and social Comprehensive processes. and functions of decentralisation appropriate through operate for to ecosystems opportunities economic empowered ample locally be should There outcomes. to performance-based accountable held and flexible dynamic, are institutions Malaysia is of face the in failures. market from stability disruption restore to retain role should a government The legislation. competition effective by possible environment made competitive a by underpinned opportunities, business to all access fair have well-governed would involve not only not involve would when government government when and the available funding options. These will will These options. opportunities funding available the growth and of advantage take to and spirit to environment entrepreneurial engender framework a The provide to government strive will entrepreneurs. NEM supports integrated an mechanism where and freely attract and develop global entrepreneurs, rights (IPR) and other rights should be be should rights other protected. and (IPR) rights property intellectual all, Above managed. be also toneed which failure of incidences many be would there undertakings, lucrative commercial into converted be may knowledge and ideas innovative While status. economy of the economy as it moves to a high income forces driving the be will processes Creative from centres. innovation global technology and home-grown demand, state-of-the-art market excite utilising will services and products New areas. social, process or institutional technical, the in whether the economy, of sectors all in present is innovation be to recognised are We services. and support products innovative of capital commercialisation for venture R&D of encouraging availability and the facilitating include h cuty is country The a from region. growth high emanating the opportunities into tap to abundant country chains the allow supply will and which networks integration regional greater into can through scale developed SMEs, be from contribution larger entrepreneurial innovative when it can can it when when when 3/20/10 6:52:43 PM 99 Where do we want to be? CHAPTER 5 5.5 The NEM – A new way of ‘doing but built upon. The NEM advocates a new business’ in Malaysia and bold approach to unleash the growth potential from these strengths. This new Many analysts are promoting a vision of approach is best illustrated by a contrast Malaysia leapfrogging to a knowledge to some elements of the old approach economy. While it is true that advanced (Table 12). countries achieve growth through knowledge- intensive activities, reflected in high rates These elements of the new approach, of innovation, it is not easy to develop a as described below, are inter-related and knowledge-driven economy. Some crucial linked. One cannot build technological preconditions for a knowledge economy capabilities without a system that recognises are: and retains talent. The human capital base must be world-class, implying that talent n Excellence in institutions of higher from the rest of the world, in the form of education people and institutions, must be seamlessly n Deep capital markets that encourage integrated into Malaysia. The expansion of risk-taking and allow for successes and the professional and creative class requires failures in commercialising ideas minimum threshold levels of economies of n Certainty in regulation and stable scale. Skilled human capital from abroad macroeconomic conditions to permit increases domestic productivity, it does not investors to confidently develop long- substitute for local talent. term perspectives 5.5.1 Greater reliance on productivity to In Malaysia, these pre-conditions are not yet drive growth adequately developed – and thus building these conditions is the focus of the NEM. The old approach of growth through capital While knowledge will doubtlessly play an accumulation and sectoral transformation increasing role in economic growth, it is has become inadequate. Up to now, growth still too weak to play a dominant role in the has come from large-scale physical capital near future. Therefore, the NEAC feels that investment, sustained human capital investment an unrealistic emphasis on the knowledge and the exports of manufactures, natural economy, which leads to a premature resource based goods and petroleum products. departure from traditional manufacturing At the same time, total factor productivity or resource-based activities, would be a growth was achieved by a shift of workers costly mistake. from low-productivity sectors, like agriculture, to higher productivity manufacturing and some The reality is that Malaysia’s strengths and service jobs. Merely increasing investment unique advantages should not be ignored levels and the quantities of low skilled labour

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JD132294 Chap 5.indd 100 3/20/10 6:52:43 PM JD132294 Chap 5.indd 101 7 6 5 4 3 2 1 al 1 – 12 Table the formofincentivesandfinancingto Balanced regionalgrowth investment inproductionandphysical Europe andJapan)markets infrastructure incombinationwithlow firms production chaintosupplyconsumer investment (includingthroughGLCs) goods andcomponentstotraditional economic activitiesacrossstatesto spread benefitsfromdevelopment Export dependenceonG-3(US, the economy skilled labourforlowvalueadded Dominant stateparticipationin Centralised strategicplanning capital accumulation workers Favour specificindustriesand Restrictions onforeignskilled Guidance andapprovalfromthe federal authoritiesforeconomic in selectedeconomicsectors would displacelocalworkers Growth primarilythrough . Grantpreferentialtreatmentin

prah o cnmc eeomn: h od ess NEM versus old the development: economic to Approach selected entities . Fearthatforeigntalent Old Approach decisions markets exports . Largedirectpublic . Focuson . Disperse . Partof . Growth throughproductivity Cluster- andcorridor-basedeconomic of privateinvestmentandtalent,forhigh enable enterpreneurstodevelophigher to reviveprivateinvestmentandmarket industries andfirms to supportinnovationandrisk-taking innovative processesandcutting-edge innovative, highvalueaddedeconomy technology, supportedbyhealthylevel better provisionofsupportingservices activities competition acrossandwithinsectors Private sector-ledgrowth Asian andMiddleEastorientation professionals activities foreconomiesofscaleand local andforeign,neededtospuran Localised autonomyindecision- value addedproductsandservices Develop andintegrateactivelyinto authorities todevelopandsupport making. Favour technologicallycapable growth initiatives,andencourage regional productionandfinancial value addedgoodsandservices networks toleverageonflowsof competition betweenlocalities investment, tradeandideas Retain andattractskilled .

Concentration ofeconomic New Approach Empower stateandlocal dynamism . Embracetalent,both . Grantincentives . Promote . Focuson .

3/20/10 6:52:43 PM 101 Where do we want to be? CHAPTER 5 will no longer suffice to drive growth to a 5.5.3 Greater local autonomy – with higher level or moving up the value chain. accountability Future growth must come from higher factor productivity, nurtured by more innovative Malaysia’s regions and localities differ processes as well as supported by a considerably in terms of resource endowments, healthy dose of private investment and competitive experiences and location talent. advantages. Their strategic policy choices and expenditure needs vary widely. There is less 5.5.2 Shifting from state-led to private- to be gained in focusing purely on national led investment and production strategic choices or plans compared to the better pay-off from developing regional or Traditionally, Malaysia’s growth has been locality based approaches which support key largely driven by public investment and the growth centres, thus building the necessary initiatives of GLCs. While this approach may concentration for scale economies. Corridor have served the country well in the past, it is authorities may be an avenue that can unlikely to provide the dynamism needed to be used more effectively to reflect these spur the country to developed country status. differential local conditions. In this process, That will come from new ventures, fresh competition between localities can be one of products and emerging niche markets. What the strongest drivers of service delivery and is striking is that productivity in Malaysia’s growth as it is in many other countries. services sectors – the largest segment of the economy and the segment where the direct Similar approaches – involving a fundamental and indirect role of government is greatest culture change – are also needed to give – is not growing, even as it expands in the public institutions more autonomy but rest of the world. with performance-based accountability. The bureaucracy and key agencies have Competition can provide a remedy. Competition traditionally operated with top down and through firm entry and exit is perhaps the centralised approval processes – leftover most important area for the manufacturing from the colonial legacy. This inhibits sector to move up the value chain, while initiative, slows down response capacity competition through delicensing, import and ultimately works against changes in liberalisation, more open and equitable entry strategic approaches. Timely decision-making access and a balanced approach to regulation processes that support rather than constrain is needed for the services sector. There is informed decisions must emerge in the also concern that the size of GLCs and their future. This would emphasise delegation mere presence may inhibit expansion of of authority wherever possible and a new firms. With the right policy framework, ‘whole-of-government’ approach to provide a strong competition authority can perhaps integrated services (APEX programmes reduce these concerns. for universities are already showing the

102

JD132294 Chap 5.indd 102 3/20/10 6:52:43 PM JD132294 Chap 5.indd 103 about 40%in1985to10%bythelate1990s. for the capital region, which is the highest internationally, and that for the lowest region – the southwest – dropped from achieved through ‘balanced been growth’ within have the same time not frame. Acould Worldthat Bank study shows incomes that the gap and between per capita GDPstandards living regional in convergence remarkable a – disparities spatial in decline marked a other to led into ultimately location region in shifts These capital settings. low-cost the attractive offered which from regions activities economic of spillover from benefited also labour But Figure). 1 (Box rate particular to Seoul and its surrounding areas in the capital region. The trend was reflected in Korea’s rapid urbanisation in attracted was mobility.labour labour Skilled greater into quality,translated labour which their a in improvement strong saw population rural well-off less the services, social good to access equal With off. paid approach this time, Over services toall,whichmeantprovidingextraresourcesservehard-to-reachorhigh-costareas. social of level same the provide to was objective The protection. social and education health, in expenditure social to dynamic centres and rural areas across provinces. More importantly, the government adopted more the between a – technology communication ‘spatially and transport through blind’mainly – connectivity improve to approach continued also capital the in industries of concentration region, allowing to for agglomeration where led firms benefited fromThis economies of scaleSeoul. and network on effects. The government centres the which target region to capital was the approach in Korea’s density years, of 50 building than less in economy income high a into income low a from Evolving living basic making order of in alternative regions the standards moreuniformacrossspacewillbenefitthelaggingregionsmore. lagging that suggests or experience areas Korean rural the to However, Often, resources growth’. of ‘balanced dimensions. achieve allocation or locational to the to priority regional give to significant need by the feel characterised governments are disparities income economies, many In Box 1:Clusteringisgoodforreducingspatialdisparities–theKoreanexperience Box 1Figure: &KLQD 7KDLODQG Asia’s urbanpopulationas aportionofthetotal(%) 3KLOLSSLQHV ,QGRQHVLD 0DOD\VLD 9 LHWQDP .RUHD 6RXWK 3/20/10 6:52:44 PM 103 Where do we want to be? CHAPTER 5 benefits of such an approach). Information of industries and firms. With the increasing and accountability measures, including complexities associated with specialisation benchmarking data and scorecards for and change in high income economies, such cities, can be a powerful tool to encourage approaches are unlikely to succeed. The a race-to-the-top. focus for the government in the future should be on developing a supportive environment 5.5.4 Greater economies of scale from for innovation and risk-taking and providing clustering firms the opportunities to develop higher valued products for new markets. In the past, the approach was to give undue weight to political dynamics by spreading The range of factors that would support a economic development geographically. more innovative environment include attracting While this was done with the intention to global entrepreneurs, simplifying investment achieve balanced growth between regions, procedures, providing integrated government it is outdated and does not generate the support, and fostering more competitive economies of scale that dynamic investors opportunities. But it also involves a range are looking for. Malaysia should draw of more strategic and complex interventions lessons from the Korean experience with to price and manage natural resources regard to this (Box 1). Accordingly, the more sustainably; encourage clustering of NEM approach is to form clusters of firms firms and globally connected networks of that find opportunities in collaborating and competing with each other within the same specialised talent into a vibrant economic location. Agglomeration of firms in such ecosystem; eliminate distortionary labour clusters makes them less prone to move to market practices; and foster vibrant venture new locations abroad. As an added bonus, capital markets. clustering of innovative firms comes with networks for talented people to exchange But the NEAC accepts that governments will and share ideas that may turn into major continue to intervene to attract investment hits. For this to happen, a range of actions in key sectors. Such intervention, however, are needed as discussed below but it will is best left to experts and professionals also require a more deliberate approach to who are well-versed in the specific industry concentrate activities in key growth centres or dynamics and trends. In addition, the costs of corridors to achieve economies of scale. government support should be appropriately quantified. The NEM would favour investment 5.5.5 Attracting technologically capable in high value added products and services, firms building upon the comparative advantages that Malaysia already enjoys in certain Past approaches to promoting growth have sectors. Several downstream agricultural relied on identifying specific winners in the form activities show such potential. Our rich

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JD132294 Chap 5.indd 104 3/20/10 6:52:44 PM JD132294 Chap 5.indd 105 of investment, trade and ideas within Asia Asia accelerate. within to poised is ideas and trade flow the investment, that of fact the despite benefit full its social to exploited being not close are ties network and having in advantages Malaysia’s natural But expertise. education higher Already, Indian into networks. tapping from is benefiting Malaysia regional advantages developing in first-mover considerable are economies There countries. these both with Chinese links despite and Indian the into emerging tapping it is nor countries, other to compared networks financial and production Asian East the into its country integrated on well the as not is However, building ties. by Islamic East natural Middle the links its with strengthen to started has Malaysia 5.5.6 Syariah-compliant products. other into expand and finance Islamic also in can leadership its Malaysia reinforce businesses. MNCs other for and centres R&D and headquarters regional hosting for and in sector logistics investment the attracting for opens region possibilities up the and in location infrastructure geographical well-developed and our combination of The industries. pharmaceutical petrochemical technology, green tourism, in more offer can resources natural

ide atr dynamism Eastern Middle Tapping the emerging Asian and and Asian emerging the Tapping working in Malaysia has been going down, down, going been has Malaysia in working the foreigners skilled of of number The and expertise. areas specific in level mass critical a aggregate for need the at talent looks at currently Malaysia in agency one No Malaysia. in working from foreigners restrictive restrict with which associations along professional of practices of expertise recruitment foreign discourage which policies Constraints talent. include cumbersome foreign immigration and incentive of inflows and talent of indigenous retention the encourages than rather discourages system current The 5.5.7 global markets. in markets. compete global to of required level proficiency high English the students Malaysian give to programmes systematic and sustained rural in areas. instruction of quality the enhancing and to education vocational universities strengthening public to autonomy greater providing from widely range Priorities world. competitive and globalised more a in needs Malaysia that talent dynamic the the producing in generally, failing as seen widely More is system education talent. expatriate presence the of with linked that closely are ideas of showing diffusion the and evidence investment trade, despite up, not

Embracing skilled talent talent skilled Embracing Above all, Malaysia must revert to to revert must Malaysia all, Above 3/20/10 6:52:44 PM 105 Where do we want to be? CHAPTER 5 JD132294 Chap 5.indd 106 3/20/10 6:52:44 PM CHAPTER 6

How do we get there?

JD132294 Chap 6.indd 107 3/20/10 6:56:08 PM JD132294 Chap 6.indd 108 3/20/10 6:56:08 PM JD132294 Chap 6.indd 109 there? How doweget and economic stability. stability. economic and societyenvironment, of dimensions multiple acrosssustainable is that and performance, inclusively of income, sharing the benefits from improved high economic delivering advance capable of is to that one into needs transform and economy The Malaysian transformation. urgent needs Malaysia Figure 29 FKDQJH 3UHSDUH5DN\DWIRU ZLOODQGOHDGHUVKLS WKURXJKSROLWLFDO YHVWHGLQWHUHVWV %UHDNORJMDPRI (QDEOLQJ – The NewEconomicModel: EnablersandStrategicReformInitiatives &RKHUHQW³ELJSXVK´WRERRVWWUDQVIRUPDWLRQDQGJURZWK $FWLRQV (QVXULQJ6XVWDLQDELOLW\RI*URZW (QKDQFLQJWKH6RXUFHVRI*URZW %XLOGLQJWKHNQRZOHGJHEDVH 7 6WUHQJWKHQLQJRIWKH3XEOLF &UHDWLQJD&RPSHWLWLYH'RPHVWLF 'HYHORSLQJ4XDOLW\: 5HHQHUJLVLQJWKH3ULYDWH6HFWR LQIUDVWUXFWXUH $IILUPDWLYH 6HFWRU (FRQRP\ )RUHLJQ/DERXU DQG5HGXFLQJ'HSHQGHQF\RQ UDQVSDUHQWDQG0DUNHWIULHQGO\ 6WUDWHJLF5HIRUP,QLWLDWLYHV $FWLRQ RUNIRUFH )HHGEDFN5HYLHZ rely on our wealth from natural resources to to resources natural from wealth our on rely longer no can We strengths. and capabilities its its through economies other maintaining against position and of goals these capable so achieving fundamentally transform becomes it must that economy Malaysia’s inability to generate sustained economic economic sustained growth. generate to inability mask U K K

our economy’s weaknesses and our our and weaknesses economy’s our ,QFOXVLYHQHVV 5HYLVH 4XDOLW\RI/LIH 2XWFRPHV ,Q +LJK 5DN\ FR PH DW 6XVWDLQDELOLW \ 3/20/10 6:56:09 PM 109 How do we get there? CHAPTER 6 The NEM will power this profound More importantly, experience has shown that transformation. Malaysia is in a vicious partial implementation of reform programmes circle of underperformance. Breaking that usually leaves a country in a more vulnerable circle calls for a big push, not incremental and unstable situation than if the programme change. were not implemented at all. Given where Malaysia finds itself at this juncture, failure For the NEM to succeed, political leadership to act or to fully implement the needed must unite to break the logjam of vested reforms is not an option. interests; it must overcome the scepticism and convince the rakyat that Malaysia is For this reason, the NEAC has dwelt long indeed embarking on a path that will improve and hard on the processes that would be their lives and those of generations to come needed to make the NEM an effective (Figure 29). mechanism for turning Malaysia into an advanced nation. The NEM defines the The heart of the NEAC’s work will centre eight SRIs to be undertaken by the ETP. on the design and implementation of policy Implementing these initiatives, coupled with measures and requirements to deliver the close monitoring and feedback to review objectives of the NEM. International as well and adjust policy actions, will deliver the as Malaysia’s own experience demonstrate desired objectives. that while it is relatively straightforward to identify Strategic Reform Initiatives and 6.1 Core enablers for the NEM develop their associated objectives, such ambitious programmes usually fail because The most important enablers of the NEM are their implementation efforts cannot be political will and leadership needed to break sustained. the log-jam of resistance and preparing the rakyat to support deep seated changes in Three factors may explain such failures. The policy directions. With these enablers in place, first is insufficient buy-in by stakeholders a ‘big push’ in policy actions and initiatives affected by the required reform measures is needed to kick start the transformation because they were not engaged at the process. The push must create enough policy formation stage. Secondly, reform momentum to overcome resistance. Once programmes have often met with strong reforms are started, continuous feedback resistance from powerful and vested interests, is necessary to fine-tune policies and stay which subsequently forced their derailment. on course. Lastly, the implementing authorities failed to stay the course, either due to a lack of political will or inherent administrative weaknesses.

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JD132294 Chap 6.indd 110 3/20/10 6:56:09 PM JD132294 Chap 6.indd 111 n n n n example: for decisions, tough thesethe of some making in involved trade-offs about clear be must leadership in political put meaningfully Themeasures. bold of mass critical to a place tough order in extremely make decisions must it that is aware government the process, this start vision. to But this for society of segments all from supportof wave unstoppable an create to is aim The society. of segments different affect negatively may actions where of indications including detail, in out laid be to NEM the of and NEM the the path requires of This process. transformation agenda and vision the explanation of coherent a on emphasis an be there that requires and leadership will Political 6.1.1

perception of less job security will irk irk will security unions job the less but of skills; perception reflect better will levels wage while entry businesses for costs reduces exit and firing and hiring Flexible local jobs some costing exit, will cannot that those while automation value embrace or chain the up move to firms encourages labour foreign on dependence Reduced repercussions political but to lead economy may competitive a create and equal and confidence market inspire will fair opportunity promote that Practices business doing of prices costs consumer and raise initially may but efficiency and economic improve will goods services for prices market Restoring

will Unwavering leadership and political and political leadership Unwavering coming period and not just focus on the the on focus just not and period coming the the over them appreciate to accrue would that benefits to made be individuals must firms and consultations, and campaigns effective Through board. on everyone bring to NEM the of vision the to communicate clearly important is it reason this For ‘losers’. or at the NEM from the perspective of ‘winners’ look to tempted be will player individual Each consultation. genuine transparently, following and fairly with dealt be must groups interest vested these from resistance The measures. lobby needed to the down attempt water and then may representatives politicians political and their might to groups turn these then Both threatened. feel may firms protected from lifestyle stable a strongly, government react and those for that have might enjoyed secure jobs and grants and qualify subsidies longer no who labour, licence holders, beneficiaries of of beneficiaries holders, licence foreign of labour, employers industries, protected including community to business the from likely come is Resistance course. the stay and action prompt take must government The n n subsidies, and experts at doing business business the of segments doing Some way. old at the experts and subsidies,

effectiveness but may result in diluting diluting power in government federal result may but effectiveness and implementation speedier achieve will Greater decentralisation in decision making market greater openness in the telecommunication into but markets global requires integration further facilitate will connectivity Faster rakyat

3/20/10 6:56:09 PM 111 How do we get there? CHAPTER 6 possible negative effects on their immediate the ETP. The NEAC will be fully involved well-being. In this regard, it is important to in drawing up an execution framework in explain that the NEM will put in a stronger collaboration with the respective implementing and more comprehensive social safety net authorities. to mitigate the negative effects. Political and intellectual leadership must The NEAC assigns a large measure of demonstrate the necessary commitment to importance to the government’s proper the NEM. Public communication must be management of the political situation. Peace compelling and convincing on why change and harmony must be preserved in Malaysia is urgently needed. At the same time, the in the midst of the likely disruptions from NEM must have both rational and emotional the NEM. This might involve not only close resonance with the rakyat, and must clearly consultations within the political partners of articulate their roles in the transformation the government but also conscious efforts to process. forge bipartisan interaction. Special efforts must be devoted to explaining the impact of But even as public communication proceeds, the NEM to the international audience. This the same team tasked with monitoring the will help to portray Malaysia in a favourable implementation of the ETP must put in light abroad and generate a positive perception place a rigorous technical process to gather of the country among potential investors. information for reporting on the progress of the ETP to all stakeholders. Above all, the government must put in place a strong team made up of technical We envision a constant process of feedback experts and other professionals who will be and adaptation to changes in the Malaysian empowered to monitor the implementation economy. We anticipate responses from of the ETP, interact in close consultations the population. At the same time, it will be with the rakyat, and manage the fallout from important to remain steadfast on the goal resistance of vested interests. of transforming Malaysia into an advanced nation. 6.1.2 Getting the rakyat to drive change together Engagement with all stakeholders is important for two reasons: first, to foster buy-in through Garnering the support of stakeholders and clear communication; and second, to see ordinary Malaysians for the NEM is a political refinement and improvement in policy actions. process, one best understood by the political At the same time, the political and intellectual leadership. However, the NEAC envisions leadership must continue to be at the forefront a number of critical steps in this national of this transformation process. engagement to prepare for and to implement

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JD132294 Chap 6.indd 112 3/20/10 6:56:09 PM JD132294 Chap 6.indd 113 rigorous feedback mechanism to assess a assess to lack mechanism often feedback but and rigorous plans strategies have implementation efforts reform Most 6.1.4 NEM. the derail ultimately, to and, fatigue lead implementation eventually may This a of being compromised. of risks benefits the run the mechanism and feedback the monitoring push, of big a task Without buy-in. foster and A big push event will leave a lasting impression and inclusive an manner. sustainable in income high deliver to measures tandem in move policy must SRIs these The supporting SRIs. the of nature cross-cutting the with inconsistent be would Piecemeal and incoherent introduction of policy immediately. commence must period. preparation preparation this However, longer a require because date they later a at introduced be Others may implemented. immediately be achieving could for results. crucial and is impact actions policy of sequencing the Initiatives, Reform Strategic the of nature cross-cutting the to Due SRIs. the supporting measures policy of mass This big push and leadership the With 6.1.3

i push big adjusting as we go go we as adjusting initiatives and measures Measuring our performance and and performance our Measuring policy synchronised of push’ A ‘big of new policies must be announced. announced. be must policies new of would consist of a critical critical a of consist would Some policy actions actions policy Some rakyat on board, a board, on about accountability of the implementing implementing the institution. of accountability about questions to rise gives and turncredibility affects in which complaints. failure, reform is public result The address channels to limited which and with with accountability implementation little diffused uncoordinated, in and resulting hoc ad become may adjustments policy mechanism, formal a feedback Without earlier viable. less rendered actions and policy changed have objectives may the achieving for a circumstances the while implemented, being is Often, strategy or policy measures. adjustment for allow and effectiveness implementation viability depended on viability commodities, subsidised whose firms those be will Losers winners losers. and both producing adjustments sector. major private requires also forward path spectrum the the Nevertheless, the especially society, across of advancement for The NEM paves the way for more opportunities 6.2 times. changing and aligned realities be practical to with need goals these achieving for tools nation and means the sustainable unchanged, remain and inclusive income, high a This of goals the while fine-tuning. that implies view the and as adjustment well for as need public the by acceptability its feedback progress, its rigorous monitor a to mechanism have must ETP the governance, in trend bottom-up growing the and environment ever-changing an Given

Managing adjustments – Aligning old xettos o h nw reality new the to expectations 3/20/10 6:56:09 PM 113 How do we get there? CHAPTER 6 notably energy and those with privileged do not impede requisite reforms. Moreover, access to controlled imports or contracts. by allowing firms and households to seek These firms and individuals will have to higher but often riskier economic returns cope with the new market realities. Many and reducing the need for precautionary companies will either have to restructure savings, such programmes help spur a more or be phased out. Workers in these firms dynamic economy. The general objective is may need to find other positions and in the to build a more competitive but also more process retool their skills to become more compassionate society. With a well structured employable. Moreover rapid growth is often social safety net, economic reforms become spatially unbalanced with some regions politically more acceptable, thus improving benefiting more than others – increasing the chances of effecting real change. pressures for social services to rectify differing regional needs. Building a stronger safety net is urgent

Globalisation also has increased the stakes Malaysia’s social protection system, as for each country to have efficient labour in many Asian countries, is still evolving. markets. Rapid technological progress, trade While it is relatively well-developed, there in goods, mobility of labour, and international are major gaps and inefficiencies. Poverty is sourcing of services have combined to create less widespread but there remain selective, new openings for economic players and a vulnerable groups and pockets of intractable more integrated global market for labour. poverty. Inequality remains a pressing issue. The impact is tempered by differences in Despite substantial subsidies available to skills, technology, and know-how available the population, the disadvantaged are still to workers. Although globalisation widens not getting access. Safeguards are needed the breadth of export markets and improves to protect individuals from catastrophic access to a wider range of cheaper imported outcomes and to soften income shocks for products (thereby boosting productivity and the most vulnerable. Some have suggested average living standards), it can also impose that a formal minimum wage might be helpful adjustment costs on certain groups within to cushion workers against such shocks or countries, primarily by influencing wages downturns. The NEAC strongly believes and job security, and triggering the need this would be a wrong approach and in fact for retraining. could exacerbate the situation by reducing competitiveness and reducing employment To cushion these adjustment costs, some opportunities. phasing of the reforms may be advisable, but experience has shown that reforms which are Existing weaknesses in the social safety net carried out too slowly are often ineffective or need to be addressed. An evaluation of the even reversed. Thus it is far better to have current social safety net raises a number of in place social protection systems which can these issues: cushion adjustment costs but in ways which 114

JD132294 Chap 6.indd 114 3/20/10 6:56:09 PM JD132294 Chap 6.indd 115 n well: functions market labour the if on Pressures the net safety social are reduced solution the of part is efficient more markets labour Making lumpy. to less them benefits make certain restructuring by inequity horizontal reducing and gradually eligibility out by phasing system the in current inequity the vertical avoid to implemented be could measures create Other to benefits. means-test constructed better be consumption could capita household’s per a proxy of targeting, measures improve To beneficiaries. target and costs, administrative their structure, benefit identify criteria, eligibility to objectives, policy programmes assistance social existing all catalog reform to be should government’s effort the in step important An structured. efficiently more be to have will to obstacles overcome subsidy reform, programmes social assistance to generally More n n n

ol survive. could firm no otherwise outstrip productivity, not labour must wages in upward movements time, same the At skills. match their that quickly jobs find to likely are workers market, labour efficient an In consistent. more made be to needs and agencies across differs and programmes of systems The structure consistent and outcomes; and to equitable refined more be achieve should criteria Targeting limited; quite is households poor targeting spending social of portion The foster more inclusive outcomes. This holding holding This outcomes. inclusive more foster s seil rnfrain ud needed? fund transformation special a Is market. labour shifting a in employability enhancing in helpful often are programmes training revamped periods, adjustment During demand. market to linked Training programmes can help but need to be n eonto o te govern the of recognition tangible provide would costs, adjustment of cushioning the support to account” “holding special a like designed fund, a transformation envelope, fiscal tighter a Within levels. sustainable budgetary more to back and scaled are out deficits phased is programme stimulus the as years coming the in tight be costs involved. Malaysia’s fiscal situation will temporary often but additional the cover to A special transformation fund may be needed funding enough. be these not But will mechanisms training. for or contributions insurance such employee – or firm mechanisms with as recovery cost full or partial built-in Some with designed be can programmes. options welfare new revamped for or especially years, initiatives, such as unemployment insurance significant coming be the will in needs related and nets Financing costs for augmented social safety

does a better job than strict reliance on on payments. severance reliance strict than job better a does usually and solution can short-term a provide insurance unemployment effective associated and loss risks. job The international experience is that of minimise costs to the need also markets Labour ment’s intent to to intent ment’s 3/20/10 6:56:09 PM 115 How do we get there? CHAPTER 6 account or fund would initially be the recipient 2. Inspiring the workforce to draw out their of the potentially large savings which would best. Labour markets must work well: jobs arise from cutting back wasteful subsidies, and workers must be matched efficiently such as those for energy and food products, to increase productivity and thus raise and rationalising other public expenditure wages for all. Labour market adjustment programmes. must be smooth: the right workers need quickly to find the right jobs; the 6.3 A close look at the Strategic Reform right jobs must rapidly attract the right Initiatives workers, including those from abroad. Simultaneously, Malaysia’s talent base The NEAC believes that it is critical to must improve. A quality education system seek stakeholder buy-in of the detailed which nurtures skilled, inquisitive, and implementation plans for each of the Strategic innovative workers to continuously drive Reform Initiatives (SRIs). At this time, the productivity forward is the foundation of NEAC only sets forth the broad parameters sustained economic growth. High income under each SRI, which over the coming period emanates from skilled people applying will be further refined following consultations their talents to successfully meet the and engagement with all stakeholders. economic challenges faced by society. Malaysia cannot miss the opportunity to We have identified eight SRIs at the core put its most valuable resource to work. of the ETP. The NEAC fully recognises Therefore, Malaysia must remove barriers that many of the policy measures derived preventing its brightest people from gaining from the SRIs are either being planned or skills, while enticing these gifted people have been initiated by the government. The to remain within its borders. NEAC recommendations aim to add value by augmenting and supplementing ongoing policy 3. Vibrant markets and greater choices. work. These initiatives are as follows: Many distortions would be removed and the economy will experience greater 1. Firing up the private sector. The private competitiveness from the elimination of sector needs to step up and assume subsidies, price controls and a myriad of a heightened profile in the nation’s incentives which have lost their original transformation. Throughout recorded objectives. The ETP will help individuals history, economies have experienced and firms to cushion the impact of such self-sustained, long-term growth primarily a bold measure by putting in place an through the entrepreneurial initiatives of enhanced social safety net and a special the private sector, guided by economic transformation fund. incentives which encourage individuals to take the long view and refrain from 4. A lean and customer-focussed government. short-term opportunism. Public institutions must be re-engineered.

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JD132294 Chap 6.indd 116 3/20/10 6:56:09 PM JD132294 Chap 6.indd 117 5.

occasional abuses by dominant groups encountered. groups are dominant by abuses occasional and when discrimination fairness undue address ensure will to established Commission be Opportunities Equal An applicants. the of merits and needs the consideration into taking together criteria market-based and on market-friendly based be would programmes action Affirmative households. of 40% low income the in are they as long as and equally fairly action groups ethnic all Affirmative consider will programme. the of effectiveness the blemished have rent which the features distorting market remove and to seeking revamped be will stakeholders, main the of views with line in but, in NEM the continue will institutions and programmes action affirmative Existing opportunities. economic fair and equal of fostering the is inclusiveness of revenue. of utilisation better foster to streamlined expenditure and revenue diversified be must base government’s right The the provide incentives. to and transparency greater include to management strengthened be must Fiscal sector. of private operations the the facilitate to approach government’ of ‘whole a using effective, and be must efficient services government of delivery The perform. cannot sector private the that tasks those toundertake seek should instead but private sector the by provided better functions duplicate not must institutions Public Escaping low income low Escaping . A key component component key A . 7. 8. 6.

Malaysia must build on its strategic strategic comparative its the on with together location build must Malaysia place. market global the in succeed to firms the Malaysian for chances improve will d standards n a international and t n practices e best m with e line c in n processes a v d of a adoption The l drive. a entrepreneurial c i g o l o n h c significant e t with growth productivity and innovation continuous requiring process a is sectors services and agricultural industrial, the in transformation Economic balance and financial stability. stability. financial and balance the is overruns, cornerstone to cost maintaining macroeconomic and wastage of reduction necessitates which fiscal discipline, stringent of through finances Sustainability public efficiently. and resources regulatory strategic policies to pricing, manage non-renewable appropriate future of generations must be facilitated by interest applying the safeguarding and Malaysia mitigation. change climate and generation energy alternative eco-tourism, outputs, agricultural downstream as such markets new into expansions promising to energise corridors growth through scale of economies on focus a be must There high effects. establish drive spillover with growth added value which to platforms natural production endowment its from resource arising advantages idn te cnmc we spots sweet economic the Finding tomorrow better a for today Innovating The future is bright. The future is is future The bright. is future The . . Preserving our natural resources . . 3/20/10 6:56:09 PM 117 How do we get there? CHAPTER 6 Active management of policies supporting both domestic and foreign sources, would the SRIs is essential through a continuous experience a revival because investors would feedback mechanism that allows for the be confident that they will benefit from a timely adoption of corrective actions as stable, productive environment supported required. Many additional benefits flow from by efficient public institutions and highly- this confluence of changes. Investment, from capable workers.

6.3.1 SRI 1: Re-energising the private sector to drive growth

Table 13 – Firing up the private sector

Policy Purpose Possible Policy Measures Target high value n Align incentives to foster investment in high value added activities added product which generate spill-over effects and services n Tailor incentives to meet the needs of each firm

n Facilitate FDI and DDI in emerging industries/sectors Remove barriers n Remove distortions in regulation and licensing, including replacement and cost to doing of Approved Permit system with a negative list of imports business n Introduce a ‘Single-Window’ licensing process through e-Government portals to include local and state governments

Create eco- n Reduce direct state participation in the economy system for n Divest GLCs in industries where the private sector is operating entrepreneurship effectively and innovation n Economy-wide broadband roll-out

n Ensure GLCs operate on a strict commercial basis free of government interference Encourage n Implement efficient and transparent process for government efficiency procurement at all levels through healthy n Level the playing field for the private sector through transparent competition standard settings

n Support a stronger competitive environment with competition law

Promote SME n Provide support for SMEs in innovative and technologically advanced growth areas

n Facilitate timely access to funding for business activities Creating regional n Encourage GLC partnerships with private-sector companies champions n Pursue aggressive regional networking – ASEAN, China, India, Middle East

n Improve leverage of FTAs 118

JD132294 Chap 6.indd 118 3/20/10 6:56:09 PM JD132294 Chap 6.indd 119 n n n n the of realities situation: current several address to NEM the serves under proposals the of thrust The environment. business-friendly rules-based stable, providing a with by sector risk private the of will level it the reduce Instead to try business. normal doing for simply incentives provide or takes it risks the all no for sector will private the government compensate longer The growth. areas future identifying of in lead the take to private sector the encourage will government The sector. private the and government the between bold relationship a the is redefine to attempt profile sector private the Raising

outmoded businesses or in the public public the in in sector. or jobs protect businesses to outmoded efforts divert to not society, to value add to potential realise full their to labour encourage to desire A risk. take invest, and innovate to willingness and dynamism losing its be to appears that a sector reinvigorate private to push big a for need A output. added status value low in the concentration of maintain quo to powerful seeking become forces have sector private the in interests vested that recognition A investment. private of levels low very the in reflected is this and Malaysia, in business elevated the doing an for cost in in resulted barriers have economy other and Distortions The old business model used tax incentives incentives tax used model business old The incentives business Rationalising firms. private to prominence greater the giving rebalance sectors, private and (iii) public the of roles and business; costs doing high of the and distortions removing by environment business the improving investment through private the boost to (ii) sector; available private made incentives of array complex the reform (i) to: seek actions These investors. for competitive globally Malaysia make to and sector private raise the of to profile actions the several for calls NEM The for incentives will focus on firms developing developing firms on focus will incentives for where created, be will innovation and A entrepreneurship for imports. ecosystem dynamic of list be negative a will by system replaced (AP) Permit Approved The renewed. not and out phased be will services new the and industry added value low for incentives on more economy. the of focus priorities to and consolidated be rationalised NEM, will the Under incentives these sustainable. not is profitability. of This driver major a as incentives on dependent become have investors Private income. higher now generating are for they insufficient but and ineffective past the strategies in These well worked preferences. other and investment zones special incentives, tax private of use the by foreign and of domestic direction and level the affect to sought proactively Government variety. in grown has time over which investment, private spur to Fiscal and other other and Fiscal priorities priorities 3/20/10 6:56:09 PM 119 How do we get there? CHAPTER 6 high-value activities with spill-over benefits competing with each other within the same to the rest of the economy. They rely on location. Firms in such clusters are less attracting innovative firms that introduce new prone to move to new locations abroad. business products, processes and techniques to Malaysia in a transparent way. Often these The NEM focus will be on new firms, which firms are new start-ups. They require grants will likely be SMEs. Those firms investing and matching funds for specific start-up costs, in innovative and technologically advanced unlike traditional investors who exclusively production and services with spill-over effects sought tax incentives. across economic sectors will be supported by the government. Such new start-ups Creating a conducive environment for private will need help with specific problems, investment especially distortions and restrictions in the licensing and regulatory environment. To The logic of providing good infrastructure ease such problems, the Malaysian Industrial and logistics in industrial zones in order Development Authority (MIDA) should be to attract multinational export activities has empowered to take decisions and coordinate brought many international firms to Malaysia, among the many government departments including major players in the E&E industry. to facilitate start-ups and licensing. It must But this approach is not enough to encourage become a real and effective one-stop agency, such firms to move to higher value added not only one in name and aspiration. activities within Malaysia. At the same time, many firms, especially those engaged in Rebalancing public-private sector role assembly operations, are gradually moving offshore to cheaper regional competitors, Malaysia’s economic development has been as distortions and barriers in Malaysia drive heavily influenced by the government. The up costs. Malaysian industry is otherwise at government, through GLCs, has directly risk of becoming hollowed out. championed growth of some sectors. The sectors in which government companies Many manufacturing firms in Malaysia have dominate have shown the lowest rates of the potential for moving to higher value added growth of productivity in recent years. Public products and services in R&D, design, testing, investment has become larger than private global procurement and other areas. As a investment. The private sector’s role has chief executive of a Malaysia-based foreign receded. This trend must be reversed if the firm has remarked, “We came for low cost private sector is to be the engine of growth labour, we stayed for talent”. Such firms to high income status. should be encouraged to stay and move up the value chain into new activities. The GLCs dominate many sectors in Malaysia. NEM approach is to form clusters of firms The government as both business owner that find opportunities in collaborating and and regulator of industries faces conflicts of

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JD132294 Chap 6.indd 120 3/20/10 6:56:10 PM JD132294 Chap 6.indd 121 e uprie f nuty n cnrbt to contribute and industry of supportive be transparent. Regulatory bodies charged with oversight being must while proportionate and streamlined be must Regulation costs. and time financial additional in removing resulting and barriers flexibility objective greater the allowing with of and requirements regulatory all licensing review will government field playing environment. level business fair a and uphold thereafter to able be established will be to Commission A sector. the private the raise of profile to demonstrate commitment would government’s the change This issues. competition other the on and on GLCs years of treatment ownership, five state of on consultation culmination of the is law. Act step competition This first explicit an the be establishing in will Act Practices be Fair Trade proposed can The legislation. by environment facilitated competitive more A products added services. value and high in investment private attract could which ones the be well could segments market Such strong. are GLCs where private segments market new in investment discourages effect This firms. private over advantage unfair an GLCs give which decisions in result can that interest Competition Competition In addition, addition, In from all quarters, secure in its belief that that belief both in firms its encourage only will in competition secure quarters, all from competition encourage to will it Instead, sector. powers regulatory private the by competition from its GLCs protect use to government seek not without and treatment. preferential government of interference free basis commercial a on operate to required be will GLCs Remaining privatised. be will GLCs is effectively, operating sector private the where sectors In created. be will innovation and entrepreneurship for ecosystem dynamic A h codn ot f h piae sector. private the of out crowding the minimise would economy the in government services. improve added to value new provide and sectors efficiency their private and public the nurturing healthy private sector competition. into regional and global champions. champions. global and regional into be positive for turning Malaysian companies when they venture abroad. This outcome would networking, and could be especially worthwhile symbiotic and economies scale of advantage take could companies domestic and GLCs private co particular, the In sector. with effectively more partner to for room is there aside, Competition

Reduced direct participation of of participation direct Reduced The government will will government The llaboration between between llaboration GLCs GLCs

3/20/10 6:56:10 PM 121 How do we get there? CHAPTER 6 Box 2: Targeted actions needed for micro-enterprises and SMEs

Actions to re-energise the private sector must be accompanied by programmes which are based on needs and merit, and which build up the bottom segments of the domestic private sector. Some common problems faced by these segments, and the possible approaches to tackling the problems, can be found in Appendix 3. Both informal businesses and micro-enterprises are at the bottom of the economic pyramid and likely constitute enterprises, existing and potential, that reside among the bottom 40% of income earners. These segments include the rural population and also those who migrate from the rural to the urban environment seeking to better their lives. It also includes the wide range of women in the rural and urban areas who seek work opportunities. These are motivated individuals who, but for the lack of knowing how, wish to better their lot in life.

While there are some 30 government programmes to help the micro-enterprises and SME segments, the effectiveness of the outreach for the bottom 40% of the economic pyramid is wanting. It requires greater awareness of their needs and facilitation to bring them to the table of opportunities. While not exactly at the bottom of the economic pyramid, SMEs – accounting for 35% of GDP, 57% of total employment, and 20% of exports – should be given more support and assistance as well. Many SME operations remain low-tech and exhibit low growth rates – due to lack of capital, lack of entrepreneurial skills and management capacity, and high illiteracy rates.

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JD132294 Chap 6.indd 122 3/20/10 6:56:10 PM JD132294 Chap 6.indd 123 6.3.2 global talent Retain and Access force existing thelabour Re-skill the talent overtime Increase local Policy Purpose

labour labour SRI 2: Developing a quality workforce and reducing dependency on foreign foreign on dependency reducing and workforce quality a Developing 2: SRI al 14 Table - overseas toreturnhome Malaysians highly-skilled attract to programmes existing Review Allow wagelevelstobereflectiveoftheskilllevel Formalise internationalqualitystandardsandcertificationofskills ‘Continuous Employment Training’ (CET) encouraging in government with partner to Industry Establish alaboursafety-netfordisplacedworkers through continuingeducationandtraining Upgrade skills of the bottom segment of the Malaysian labour force Deliver highqualityeducation,withinreachofalllocalities Enhance Englishlanguageproficiency and industry learning higher of institutes between collaboration R&D Encourage Improve autonomyandaccountabilityofeducationalinstitutions Identify andnurturetalentthroughademand-drivenprocess colleges Increase emphasis on reintroducing technical and vocational training from ‘rote learning’ approach to‘creativeandcriticalthinking’ educational shift – system education the Review ieaie rfsinl evcs hog mta recognition mutual through services arrangements professional Liberalise permit andimmigrationprocedures work simpler through professionals skilled of mass critical up Build enable to coherent practice expatriates and labour foreign of oversight Centralise Offer permanentresidenceforex-Malaysiansandtheirfamilies nprn te okoc t da ot hi best their out draw to workforce the Inspiring

Possible PolicyMeasures

3/20/10 6:56:10 PM 123 How do we get there? CHAPTER 6 Policy Purpose Possible Policy Measures

Remove labour Protect workers, not jobs, through a stronger safety net, while market distortions encouraging labour market flexibility constraining wage Revise legal and institutional framework to facilitate hiring and growth firing

Raise pay through productivity gains, not regulation of wages

Reduce reliance on Enforce equal labour standards for local and foreign labour foreign labour Use a levy system to achieve targets for unskilled foreign labour in line with sectoral needs

Education driven by growth priorities A more flexible and autonomous environment, backed by a strong research culture and Malaysia’s future education system must funding at all levels of education, is conducive be driven by national growth priorities to to innovation and creativity. This environment nurture the talent needed for an advanced must be supported by a sustainable, critical nation, while at the same time, serve as the mass of talent. Many universities in developed platform to imbue national unity. The national economies have engaged entrepreneurs schools should become the schools of choice through setting up incubator laboratories and where students of all races can interact ‘technology transfer’ offices. In this regard, freely. The education system should focus although Malaysia’s allocation for education on achieving international quality standards has been large, its R&D spending is well by adopting best practices. A creative and below that of our neighbouring countries. critical thinking pedagogical approach should Promoting the growth of knowledge and replaced ingrained outmoded practices of rote innovation parks with links to local universities learning processes. Students should have is one way to boost R&D investment. strong language competencies especially in English. The education system should A key indicator of success of the concentrated take into consideration industry needs and efforts to strengthen education will be when produce students with the requisite skills. firms no longer cite shortages of skilled Building the national talent base will need to workers as a key adverse feature of the cover the entire education system – involving investment climate. Today we have the worst primary, secondary, vocational and technical of both worlds, as the education system as well as tertiary education. has been unable to produce the requisite talent and the labour market is ineffective in conveying information on the type, quantity and quality of skills needed for employers.

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JD132294 Chap 6.indd 124 3/20/10 6:56:10 PM JD132294 Chap 6.indd 125 nldn toe rm h gvrmn to government the from those including with incentives be should provided Employees needs. industry meets mix skills the that ensure will government the sector, private the withjointly undertaken programmes training supporting By transformation. of economic course the the displaced in jobs be added value may low from that improvement, those continuous particularly a undergo to to key is workers as base it allows the talent expanding development skills and Training students. inclined non-academically the for cater and to built be technical should schools vocational More industry. of needs the meeting of objective the with marginalised centres, and urban areas rural in especially courses, reskilling and training quality growth. to spur access to improve to imperative is it factor Therefore, key the human on as leveraging capital to barrier major a This is equivalent. attainment educational or of level low level relatively SPM to up only education have workforce Malaysian the of 60% some population Malaysian that the estimated is It country. advanced and income high a as potential full its reach can Malaysia When achieved, is goal this learning. life-long be through must upgraded population working Malaysian the of segment lower the of skills of the particular, In part base. talent integral on national an the take expanding are to jobs workers value of higher reskilling the and training education, of provision the Besides force labour the reskilling and Training

or about 80% of of 80% about or addition, wage increases should be based based In be on should retention. increases staff wage with addition, help wages, would better of which form the recognised in be employers by should acquired skills new the training, more of become completion Upon can productive. workers skilled that so on the standardisation of competency levels the same time all stakeholders should agree procedures. through simpler work permit and immigration professionals skilled of mass critical a of up build- a up be to needs move there chain a value the facilitate To a practice. enable to coherent expatriates and labour foreign over oversight of centralisation talents a require of will management Better Malaysians. ex- including families, their and workers these to residence permanent of offer the is drawn consideration countriesincome high other of lessons from key A talent. attract foreign to and home return to overseas Malaysians skilled high to attract programmes r a by complemented be should effort This expatriate abroad. and locate to talent Malaysian conditions driving the are improve that to together work must sector private and government The talent global attracting and Retaining wages. of regulation the on not employer and employee representatives to to expand the continuing education and between training. representatives employee council and joint facilitate employer a of should establishment government learning). The (life-long continuing training and through education themselves upgrade productivity gains reflecting skill levels, levels, skill reflecting gains productivity eview of existing existing of eview

At At 3/20/10 6:56:10 PM 125 How do we get there? CHAPTER 6 Greater use of foreign talent will increase usually foreign labour. There are also serious demand for Malaysians with similar problems with the mix of skills available. qualifications and send strong signals for In some sectors, workers are performing nationals to upgrade their skills. The end tasks that do not match their training. In result of an aggressive policy to tap global others, many positions remain vacant due and domestic talent coupled with better to lack of qualified candidates. When faced managed inflows of the semi-skilled would with a skill shortage, a firm should be able to either hire expatriates or retrain existing be a virtuous cycle that would maintain workers. However, retraining workers can profits, encourage higher productivity activities be costly. At the same time, Malaysia has and pave the way for more robust future lost its attractiveness to expatriates due increases in wages. to cumbersome immigration policies. Even programmes to encourage skilled Malaysians Another barrier that has to be addressed is to return home have failed to meet their the regulation of professional associations targets. which prohibit domestic employment of foreign professionals. This is a critical issue since Excessive use of foreign labour undermines Malaysia’s policies are unusually restrictive high income objective compared with other East Asian countries. Without substantial inflows of foreign talent, Up to the late 1990s, inflows of foreign firms do not have the incentive to move up workers served the country well in moving the value chain but still have to cope with from low to middle income status. Since then, wage cost pressures. Malaysia’s policies on foreign workers have become incoherent and run counter to the Removing labour market distortions national objective of achieving high income status. Firms’ obsession with the pursuit of The labour market does not perform well short-term profits makes them focus solely on keeping costs down. This obsession makes in Malaysia. There are insufficient high them prefer to tap into the large pool of wage jobs and skilled labour is not well low cost workers available in neighbouring remunerated. Use of low wage foreign labour countries, leading to excessive use of foreign has become excessive, contributing to low labour in Malaysia (Figure 31). wage levels. Rigid labour laws inflate dismissal costs, reducing incentives to invest in new Government policies should work to correct businesses and pay higher wages. the excessive use of foreign labour in ways which would enhance Malaysia’s longer- Due to outdated regulatory burdens on the term growth objectives rather than feed hiring and firing of local workers (Figure into the short-term cost considerations of 30), firms become overstaffed because it is firms. Existing policies, however, are doing costly to shed labour or they seek to avoid the exact opposite. Foreign workers are such burdens by using contractual staff – not subject to the same labour standards

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JD132294 Chap 6.indd 126 3/20/10 6:56:10 PM JD132294 Chap 6.indd 127 turn spawns a range of abusive practices. practices. abusive of range a spawns turn in which agencies, private for profits huge generate now fees Recruitment and rent- seeking. on thrives recruitment that a industry outsourcing created has labour-originating and countries wages in Malaysia differential between large the Moreover, market. labour advantage domestic the unintended in an workers giving foreign – nationals than hire to costly are less they Thus, government. the by cost borne the is but health like services social access to have workers Foreign nationals. as iue 31 Figure 6RXUFH: 6RXUFH:RUO ore Wrd Bank World Source: ore Wrd Bank World Source: RU G%DQN

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eot o frs eriig oeg workers foreign recruiting firms of Reports workers would address equity concerns. In In concerns. equity address would workers migrant for services social fund to the proceeds of utilisation the and levies of system rational A more workers. foreign of treatment poor Malaysia’s about concerns international address also would It nationals. as service granting them access to a comparable social subjecting standards, to labour the same workers foreign mechanism, rationalising levy the with of use begin the should Reforms glaring one is exist not example. do which jobs for KDLODQG 7DLZDQ3 ([SDWV 2& +RQJ.RQJ 6$5 6LQJDSRUH 3/20/10 6:56:10 PM 127 How do we get there? CHAPTER 6 addition, funds could be used to finance disability and old age. A stronger safety programmes that drive innovative practices net would provide support to cushion the among Malaysian firms, thus reinforcing adjustment costs for employees and facilitate pressure to move up the value chain. the restructuring of firms. Current weaknesses include the absence of unemployment Stronger safety net for the unemployed insurance, limitations in the eligibility and needed adequacy of the EPF, as well as the narrow reach of health insurance programmes for Before hiring and firing is made more flexible the poor. While strengthening such services across the board, the safety net for the could be costly, the problem can be eased unemployed must be strengthened. The current through improved targeting and reduced system does not protect workers from the fragmentation of services across multiple risks associated with unemployment, illnesses, agencies and levels of government.

6.3.3 SRI 3: Creating a competitive domestic economy

Table 15 - Vibrant markets and greater choices

Policy Purpose Possible Policy Measures

Improve economic n Strengthen the competitive environment by introducing fair trade efficiency through legislation competition n Improve competition law to safeguard the interest of domestic firms before liberalisation of sectors to foreign firms n Set up an Equal Opportunity Commission to cover discriminatory and unfair practices n Review remaining entry restrictions in products and services sectors n Adoption of international best practices and standards for local industries to become highly competitive

Build n Revamp the seed and venture capital funds to support budding entrepreneurship entrepreneurs n Simplify bankruptcy laws pertaining to companies and individuals to promote vibrant entrepreneurship n Provide financial and technical support for SMEs and micro businesses, to move them up the value chain

Remove market n Phase out price controls and subsidies that distort markets for goods distortions leading and services to misallocation of n Apply government savings to a wider social safety net for the bottom resources 40% of households, prior to subsidy removal n Create a Transformation Fund to assist distressed firms during the reform period

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JD132294 Chap 6.indd 128 3/20/10 6:56:10 PM JD132294 Chap 6.indd 129 subsidies which are numerous, complex complex numerous, are is which sector subsidies government on private reliant the more ever time, becoming same the At consume goods. subsidised who the of more well-off, the of to are benefit often most which subsidies based broad than rather poor the for assistance financial is It off. direct well of approach targeted more a the for time including group, benefited has wider it a but groups vulnerable the more items costly.supportto meant were subsidies The price-controlled and subsidies making rising, constantly are prices Globally, in resulting often waste. and signals, overconsumption price distort reflect not subsidies and controls does Price prices. market Malaysia in not services is and – goods proceeds essential of pricing The sustainable. petroleum mostly by – subsidies funded on large outlay the The deficit. government of fiscal rising part to contribute large a and expenditure for operating government’s account items government. price-controlled various and fuel for the Subsidies to burden considerable representing a – which products of petroleum bulk to the goes – being subsidies are to allocated resources financial Substantial subsidies and price controls can reduce a to reduce better balance Furthermore, fiscal deficits. can restore and time over controls expenditures operating price a and with subsidies controls, Removing incentives. price tax of rationalisation and removal subsidies steady of a recommends NEM The they used if indiscriminately. revenue tax investment, foregone to private contribute encourage to government. the While tax incentives are necessary by measures granted incentives numerous tax the are burden that to production. Adding added value low maintaining in interest vested a have investors foreign and domestic result, a As investment. levels private high of sector and private innovation to the leading to not is sector public the support by Such administer. to expensive and rdcs rvosy controlled. of previously products supply and demand the regularise to signals market of removed, restoration the for be allowing will this distortions With price environment. solution, market new the to adjust to reforms the by displaced firms help can savings This toTransformationa Fund to applied be also groups. vulnerable and scheme targeted at from poor beneficiaries households net safety social a will fund to subsidies used be of removal the from savings 3/20/10 6:56:11 PM 129 How do we get there? CHAPTER 6 6.3.4 SRI 4: Strengthening the public sector

Table 16 - A lean and customer-focussed government

Policy Purpose Possible Policy Measures

Improve decision- n Use “whole-of-government” approach to provide integrated services making processes n Empower state and local entities to perform their tasks locally n Encourage greater local input and authority in economic development to support regional differences and needs n Develop a process for effective implementation, monitoring and evaluation of policy measures n Empower MIDA to become an effective one-stop-agency to facilitate foreign investment n Revamp MPC to be more effective in driving productivity and efficiency improvements

Improve service n Reform the government to be lean, consultative, and delivery- delivery focussed n Upgrade skills of staff to enable them to multitask n Modernise human resource management to match qualifications with jobs

Reduce ‘friction n Have zero tolerance for corruption costs’ n Address underlying weak governance structures n Codify best practices n Implement an open, efficient and transparent process of government procurement at all levels

Provide a safety n Retain a residual role for safety nets to stabilise and correct periods net to facilitate a and instances of market failure smooth transition n Apply government savings to a wider social safety net for the bottom 40% of households prior to subsidy removal n Create a Transformation Fund to assist distressed firms during the reform period

JD132294 Chap 6.indd 130 3/20/10 6:56:11 PM JD132294 Chap 6.indd 131 are still perceived to be bureaucratic, bureaucratic, be based. to agencies operating in silos and very much patronage- perceived Government still produced are results. have general the limited in was measures but all portals, measure e-government of such service establishment One public improve delivery. and integrate to implemented been have measures Various ground. gaining are society and market state, the between partnerships Effective discourse. are used widely to promote internet transparency and the and technology matters. Communication policy public in role influential important and increasingly an Civil playing is management. society effectiveness top-down and traditional of capability society and the business exceed of as complexities decentralised the more and top-down less becoming is worldwide governance National delivery-focussed and more consultative. consultative. more leaner, and become delivery-focussed should government The growth. the generating for for particular services in sector due to its increasing importance implementation, and for needed is this oversight on strengthening policy development In attention immediate eliminated. be regard, to needs functions similar undertaking agencies of duplication The implementation. ETP of for success the critical are agencies key the restructure to initiatives Urgent corruption. combat to efforts greater with and structure governance system the administrative the of revamp a requires institutions public of Re-engineering mrv te eiin aig process making decision the Improve

measures to boost growth and accelerate accelerate and transformation. growth boost to measures policy of push big the create to needed are the public institutions staffed with Quality committed civil implement servants SRIs. the underlying effectively policies to public of institutions ability the upon depends NEM critically the of outcomes the Achieving reduce and rent-seeking. effectiveness their improve to processes and procedures must be simplified Transformation regulations, Cumbersome (GTP). Programme Government the the of with launch started has area this in Work financed the early five-year plans. From the the From plans. five-year early the financed substantially oil and rubber, palm for example, tin, on duties Export development resources. natural from Malaysia’s expenditure has depended greatly on revenue Historically, revenue government Diversifying fiscal greater transparency. 5) and management; improving budget 4) incentives; price tax and subsidies, distortions rationalising 3) collection; revenue strengthening 2) base; revenue be to diversifying need 1) are: that addressed concern The of areas cost-overruns. specific preventing for and reducing waste target should accountability outlays government Better expenditure improved management. as well as revenue sources of diversification are fiscal management of reform in issues central The management finance public Strengthen government government

3/20/10 6:56:11 PM 131 How do we get there? CHAPTER 6 mid-1970s, the contribution from oil and gas NEM advocates a shift away from line item rose and now accounts for about 40% of budgeting to results-based and programme total government revenue. budgeting. In addition, a medium-term budget framework should be introduced. This The NEM recommends a number of reforms framework should incorporate the results in the sources and distribution of revenue. from debt management analysis. A wider tax base is an important part of reforms, where the introduction of the Goods The annual budgeting process should also and Services Tax (GST) is a key component. be improved to accelerate programme A more diversified tax base is needed to implementation. Consultations with the compensate for an expected future reduction private sector should be more focussed in the share of revenue from oil and gas. on the implementation of tax measures to Overall, another aim of the fiscal reform is ensure sufficient understanding and more to lower the rates of personal and corporate rapid implementation. taxes, which will incentivise individuals and firms to increase their income and profits. Greater fiscal transparency

Under the fiscal reform, distribution of revenue Public finance management must be made in the forms of loans and grants to states more transparent. The current culture of should be reviewed to align them better confidentiality must be replaced by timely with state requirements. At the same time, dissemination and disclosure of assessments the criteria for revenue sharing with states of fiscal outturn. There should be greater should be standardised. In particular, royalties openness in government expenditure from exploitation of natural resources such programmes. A special focus will be the as oil should be transferred as established re-establishment of an open tender system by clear criteria to the producing states. for all government procurements. This system should be transparent at all stages and the Strengthening revenue collection results of tenders should be made public, taking into account confidentiality. The findings Revenue leakage is a pervasive problem and of external audits of public finances should be has an impact on overall revenue collection. disclosed. Where it is feasible, this solution The current, largely manual approach to should be supplemented by greater use of revenue collection is archaic, difficult to control independent external audits. and open to abuses. The development and implementation of effective technology-based Sanctions for poor budgetary management revenue collection and management system and failure to observe accepted procedures is a high priority of the NEM. on expenditures should be balanced by recognition of prudent fiscal management Improving budget management among agencies. Decentralisation of budgets and its managements with proper accountability The current government budgeting process and transparency will improve efficiency needs to be reviewed and re-designed to meet and responsiveness among government the demands of a high income economy. The agencies.

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JD132294 Chap 6.indd 132 3/20/10 6:56:11 PM JD132294 Chap 6.indd 133 has the elements of a system networked government. delivery service public integrated An process. evaluation major and the monitoring implementation, be effective an to will contributors agencies Government issues. in cross-jurisdictional complex resolving especially coordination agencies, better government among and decision-making the between governmental collaboration will result in faster collaboration different levels of government. Greater inter- enhance place in to put objective, be this should to mechanisms proper regard With needs. differences and regional support to needed are local Greater input and authority effectively. in economic development more resources manage and decide to entities local and state empower to rebalanced be should approach ‘top-down’ is existing The delivery. service approach public integrated more government’ provide to essential of ‘whole The accountable and approach ‘whole-of-government’ A return. in states by be provided must programmes expenditure of results and impact the of Assessment programmes. will expenditure state This of effectiveness and states. efficiency the in to improvements to contribute allocated federal are how into funds inputs provide to be should allowed governments state exercise, In this states. as respective such the in indicators levels poverty varied more of use by the supplemented be should criterion l capita a c per a on s solely based i f Allocation be undertaken. should government to e federal the t funds by a of states t allocation s - the l of a review r A e d e f f o arrangements w e i v e R an annual report, with limited powers to take take to powers limited with report, annual an produce to is task main its that is the but perception role that of part Auditor-General’s performing The is Office debilitating society. on their effects about raise will awareness wastage public and corruption of costs wastage. The quantification of the economic and corruption of eradication to lead would accountable agencies government holds that mechanism effective an that believes NEAC private firms, NGOs as and other civil society groups. such The stakeholders governmental non- include also but agencies, government multiple involve only not design will services and the government, programmes policies, public of delivery and networked a In outcomes. and results between inter-relationships the explain to help will approach This purpose. this for established be should requirements better outcomes. policy The to right processes and overall reporting with need results a governance is intermediate align There for effective. be required to organisational are Distinctive processes mergers. and streamlining on focus must restructuring any Further making. enlargement of agencies decision must be avoided and in efficiency and be effectiveness can improve to empowered agencies further line where areas Malaysia to identify restructured in and reviewed agencies be should central of role The redesigning and structures organisation processes Developing government. the within resources of mismanagement and misappropriation with should be expanded to deal more effectively authority the Auditor-General’s regard, this In significant for prosecution. and enforcement in calls acceleration This actions. remedial 3/20/10 6:56:11 PM 133 How do we get there? CHAPTER 6 6.3.5 SRI 5: Transparent and market-friendly affirmative action

Table 17 - Escaping low income

Policy Purpose Possible Policy Measures

Reduce income n Continue support programmes for disadvantaged groups disparity n Focus on the bottom 40% of households and business owners

n Shift focus towards relative poverty

● Continue growth as a means of poverty reduction

● “Growth Elasticity of Poverty” – inequality can reduce impact of growth on poverty

Create market- n Use transparent procedures and criteria friendly n Use affirmative action as a means to promote building of capacity and affirmative action capability

n Phase out approaches that contributed to rent seeking and patronage

Narrow regional n Leverage scale with effective development of economic clusters as differences a means of reducing regional inequalities, especially in Sabah and Sarawak

n Enhance measures to raise income levels through better access and provision of quality social services in education and health, especially in Sabah and Sarawak

Encourage reward n Encourage greater competition in the economy by removing excessive on the basis of protection and accelerating sectoral liberalisation performance n Redesign affirmative action to take into account merit and needs

n Phase out approaches that contributed to rent seeking and patronage

Promote equal n Emphasise equitable and fair opportunities for employment, health and fair access to and education and access to business opportunities opportunities n Apply government savings to wider social safety net for the bottom 40% of households prior to subsidy removal

n Create a Transformation Fund to assist distressed firms during the reform period

n Set up an Equal Opportunities Commission to deal with possible cases of unfair treatment and discrimination

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JD132294 Chap 6.indd 134 3/20/10 6:56:11 PM JD132294 Chap 6.indd 135 of share capital. Preferential pricing and and distortions. pricing to led have Preferential quotas capital. share of require at least 30% least at require still industries certain in companies limited for the quotas The in exist. still some currently and past economy the imposed throughout been extensively have quotas Ethnic-based of less qualified use recipients and bred the inefficiency. encouraged has quotas ethnic of use Excessive fronts. spurious of up setting qualified of Shortages bumiputera and culture behaviour. entitlement rentier and embedded distributive and a propagated inevitably also at the past affirmative action programmes have achieved that accepted now been is It costs. considerable have successes these progress some been have there Although attitudes. and practices to and approaches has produced some the undesirable outcomes, past But shortcomings serious of has action affirmative addressed. imbalances implementation substantially economic were commendable, inter-ethnic and and exemplary been has poverty of absolute The reduction front. action affirmative the on made been has Progress fair and equitable opportunities and action to Affirmative access fair and opportunities. equitable and performance promote of basis the on reward differences encourage Sarawak, and Sabah in especially regional narrow programmes, disparities, income continue with market friendly affirmative reduce action to are Initiative Reform Strategic this of purposes main The and capital have encouraged the the encouraged have capital and bumiputera ownership ownership be given the opportunities to overcome their their overcome to opportunities the given be the that should disadvantaged economically considers relatively expressly policy action Affirmative inequalities. in persistent of light the desirable be still would action Affirmative economy. rent-seeking the of in growth the with associated closely is corruption and bribery of growth The can business. doing of cost the to and sizably add activities unproductive are in engaged Rent-seekers growth. economic to add or wealth, create really not do Rent-seekers action. affirmative to approach past the of and has been a serious, undesirable outcome distorting market is behaviour Rent-seeking o voae o ngt, h wrig o the of workings the negate, or does violate, it not that ensure would action affirmative action friendly A market market-based. is affirmative market that policy an be be must must it it or that friendly, is growth NEM inclusive the of under part be will that policy action affirmative new the of principle The thought. previously as meaningful as for target 30% a having ownership, equity mere than more means wealth because For example, action. reform affirmative of to to approach forces past imperative the it new make the also with change arisen have that the for strengthening future programmes. Challenges lessons for drawing while abuses adjustments and flaws make and practices, past of effectiveness the account to affirmative into reformed take to and revised be approach must action the But inclusive growth. of part is action Affirmative actionpolicy. affirmative an was (NEP) Policy Economic New The position. disadvantaged bumiputera equity ownership may not benot may ownership equity 3/20/10 6:56:11 PM 135 How do we get there? CHAPTER 6 market. Market friendly affirmative action 40% of households. An affirmative action should not cause, contribute or perpetuate policy based on the low income group i.e. distortions in the economy. The efficient giving preferential treatment to the relatively functioning of the market should not be disadvantaged group would be in the interest hindered by distortions so that scarce of distributive justice. It will treat equally resources are misallocated. those who are in the low income group. Affirmative action will consider all ethnic groups Growth can be maximised if resources are equally as long as they qualify for access used efficiently. Prices play a role as signals to resources under affirmative action. to where and how resources should be utilised to maximise profits. Entry into and Affirmative action should be seen as a means exit from markets should not be constrained. of equalising opportunities but applicable Unsuccessful enterprises must be allowed to the low income group. A market-friendly to fold, if they are no longer competitive or market-based affirmative action will be and the resources are freed for other implemented progressively. Liberalisation and economic activities. Land, labour, capital and the opening up of sectors to market forces entrepreneurship should be allowed to flow will be implemented in stages. Whenever in and out of the economy with minimum and wherever possible, sectors should be restrictions. liberalised as speedily as possible.

Markets, however, can malfunction even Policy measures and instruments without any form of intervention through affirmative action. Monopolies and collusions The section above on inclusiveness has can hinder the efficient functioning of markets. outlined the strategic thrusts of the NEM on Excessive risk taking can lead to crises. wealth distribution and social justice. For this Markets can fail when it is manipulated by SRI, the NEAC has some suggestions on interest groups that seek to maximise their specific measures and instruments. These own interest at the expense of society. In proposals are made on the basis that the such cases of market failure government broad strategic thrusts are acceptable so intervention would be necessary to regulate that the specific measures and instruments and correct the failures of the market. But complement, or supplement, the strategic government intervention itself can also worsen thrusts. In considering policy instruments it market failure and thus has to be kept under should be mentioned that the most contentious vigilant review. Excessive protection, for of the strategic thrusts have to do with the reasons other than affirmative action, can proposal for greater liberalisation, competition, inevitably introduce market distortions. the shift towards the bottom 40% low income group for distributive purposes, as well as The NEM proposes that the revised affirmative emphasis on opportunities. In reviewing the action policy should be based on the bottom

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JD132294 Chap 6.indd 136 3/20/10 6:56:11 PM JD132294 Chap 6.indd 137 Tax exemptions for low income groups will will groups income low for exemptions Tax inequality. in widening a check could regime tax progressive a Maintaining on distribution. impact can expenditure, from revenue apart the side on income policy, Fiscal their inflation. index with to poor able The been not that inequality. have worsen shows can poor evidence inflation the and cross-country groups and income low effects the adverse on more has for Inflation aim growth. sustain to to and economy continue the stabilising should policies rate exchange and fiscal monetary, Overall, profits on impact greater wages. than a have to labour tend less is recessions countries, there developed In hoarding. and are developed nets less safety social downwards, flexible are wages because recession during rise to tends inequality distribution. countries, developed less income In on impact an have do Macro-economic. n n n n n categories: or following the measures into divided be can policy instruments The place. instruments in the are that supplement or replace to introduced be can instruments and measures New they removed. or modified retained, instruments, be can and measures existing

oenet rcrmn ad tenders and procurement Government Subsidies Prices Quotas and programmes action Affirmative Macro-economic ar-cnmc policies Macro-economic applied, their transparency and effectiveness. effectiveness. and been transparency their applied, have quotas how of re-examination a require will quotas of the streamlining in The past. extensively used been have Quotas action Affirmative exports. boost could which rate exchange and employment for a with depreciating be favoured would income sector export the on and orderly dependent an Households rate. exchange stable maintaining policy at aim rate should Exchange groups. income low the to inimical less and consumption on progressive tax a be could level low a at starts increase their income. A value added tax which to ensure that it is broadly consistent with with consistent broadly is it that ensure to re-assessed be The to needs expenditure. regime subsidy operating of fifth a than more for accounted have subsidies that on estimated been products has It consumers. Malaysian petroleum and fuel international for of prices impact been the has suppressing to and goes subsidy the of part large sizable A increasing. is Government Subsidies low 40% group. bottom income the at targeted be should interim the in use continued their out, phased progressively be to are quotas If applicants. the of merit and need the account into taking but quota ethnic the using i.e. considering worth a and workable be quota, may approach hybrid enrolment the for As progressively out. be phased The should outcomes. quotas than remaining of rather shifting opportunities the emphasise to programmes action affirmative recommends NEM The Te usd bl o te Federal the of bill subsidy The . programme s and quotas. and s 3/20/10 6:56:11 PM 137 How do we get there? CHAPTER 6 the financial resources of the government Institutions for equitable and fair and that it is fairly distributed to benefit the opportunities neediest. There are serious leakages in the subsidy schemes and subsidies should be Competition and liberalisation of the economy redirected to ensure that the poor are really under the NEM will reduce the extent of the beneficiaries of the subsidies. Some controls over the functioning of the economy. estimates indicate that more than 70% of the Private enterprise will become less fettered. beneficiary of the subsidies for fuel products Abuses clearly may continue to flourish and has been enjoyed by the higher income must be stemmed. Discrimination in many groups. Subsidies should be reformed to forms will appear and must be explicitly benefit the poor. managed. Checks and balances need to be introduced in anticipation of a possible rise in Government procurement and tenders. abuses and discrimination. The NEM proposes Government procurement and tenders that an institution, or agency, be established are the two broad policy instruments that to counteract and check these unwelcome have and will continue to have distributive tendencies in abuses, discrimination and implications. A review, therefore, is required unfair treatment. An Equal Opportunity to take into account the shift in approach Commission (EEC) is proposed with the with the adoption of the NEM. Supplies responsibility of monitoring and considering and services are the key items and areas cases of discrimination and unfair treatment for government procurement and they in the economy to cover both the public and account for about 17% of the total operating private sectors. The Commission will focus expenditure of the Federal Government. The on the implementation of the measures that key items for supplies and services include have been proposed under the NEM. repair and maintenance, professional and other services, communication and utilities, Inclusive growth will require a new institutional supplies and rentals. The thrust of the regime. The present institutions and tender system should be towards a much approaches were designed more than 30 more open system without direct negotiated years ago to support and administer the tenders. Some schemes for tilting tenders affirmative action programmes but conditions towards the bottom 40% will have to be and ideas have changed. It is timely that a considered. serious review of the key institutions that have been entrusted with affirmative action is undertaken, for the purpose of re-engineering and re-designing these institutions to support inclusive growth under the NEM.

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JD132294 Chap 6.indd 138 3/20/10 6:56:11 PM JD132294 Chap 6.indd 139 6.3.6 institutions stronger enabling Establish innovation environment for Promote an entrepreneurship ecosystem for Create an Policy Purpose SRI 6: Building the knowledge base and infrastructure infrastructure and base knowledge the Building 6: SRI

al 1 - 18 Table n n n n n n n n n n n n n n n n n n

e plce sc a goa poueet hog technology through procurement global as intermediaries such market- policies with led approach innovation technology-driven the Balance the by announced government in2007 Model Innovation National the Operationalise run onacommercialbasise.g.ITRI Taiwan clustermodel excellence of centre and powerhouse research technology a up Set KPIsforuniversitiesbasedoncommercialisation Establish procurementsupportslocalinnovation Ensure public Open accesstofundingcompetitionamongresearchers hi-tech fields and innovative in particularly objectives growth national to R&D Align R&D funding consolidate allpresentgovernment Review and Immediately rolloutnationwidefastbroadbandconnectivity the privatesector and learning higher of institutions the between links R&D Fostering benchmarks Enforce strictadherencetoglobalstandardsand thevalue up move and chain technology embrace to firms Incentivise Ensure protectionofintellectualpropertyrights Improve accesstospecialisedskills Harness Web-based expertise andindustrynetworks promote vibrantentrepreneurship to individuals and companies to pertaining laws bankruptcy Simplify budding support to funds capital entrepreneurs venture and seed the Revamp workers andexitoffirmsaswellhighskilled Easing entry noaig oa fr bte tomorrow better a for today Innovating Possible PolicyMeasures 3/20/10 6:56:11 PM 139 How do we get there? CHAPTER 6 Malaysia has benefited from globalisation, Upgrade institutions of higher learning especially through integration into production processes and networks at the global and To enhance the knowledge base, education regional levels. However, in the current institutions should be allowed to compete for economic environment, firms are continuously the best students, government grants and other refining their strategies and restructuring their academic resources. The present system of supply chains through relocation, outsourcing closely controlled operations by the Ministry and in-sourcing. Against this changing of Education (MOE) and Ministry of Higher landscape, Malaysia can no longer rely on Education (MOHE) should be changed to a global firms which will constantly seek and system with autonomy and accountability. relocate their investment to more attractive The views of the local community should markets. Through entrepreneurship, local be sought and given due consideration to firms will increasingly have to drive industrial improve the quality of schools. upgrading by developing their capabilities and innovation infrastructure. There is nothing Autonomy and accountability are also automatic about this process. Government very important for universities. Public support can facilitate such upgrading. universities should have the authority to decide on matters pertaining to course Moving up the value chain implies a continuous offerings, student enrolment, staff emolument, process of change, innovation and productivity financial management and daily operations. growth. Under the NEM, Malaysia’s economy Similarly, students should be free to pursue will grow by developing new technology, education at a university of their choice. innovating products and processes, and Accountability would focus on compliance designing new management methods. with uniform performance indicators set by the government. Development of curriculum to Infrastructure critical to high value added meet market needs as well as collaboration activities, such as high-speed broadband, with industries in R&D should feature among must be rapidly put in place to facilitate the performance indicators. However, R&D the new production processes that rely on must be aligned to national growth objectives networking to create scale and efficiently particularly in innovative and hi-tech fields. connect supply chains. Access to R&D funding must be open freely to competition and not be monopolised by Still, technology alone is not enough. Other established research providers. Also, priority ‘soft’ innovative capabilities covering the should be given to research with potential social, organisational and cultural aspects are for commercialisation. more difficult to attain but are also critical. Malaysia must respond to market trends and tap into the global pool of knowledge, supported by education and training policies embedded in the other SRIs.

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JD132294 Chap 6.indd 140 3/20/10 6:56:11 PM JD132294 Chap 6.indd 141 6.3.7 markets Create new between products integration Develop greater advantages other comparative first moverand Create valuefrom Policy Purpose

R 7 Ehnig h sucs f growth of sources the Enhancing 7: SRI al 19 Table n n n n n n n n n n n n n

xad evc-retd nutis o einl akt bsd on based markets regional to industries service-oriented Expand saving energy as well as generation energy alternative into Move Improve maritimeandportservices,leveragingon technology trade intra-regional as hub distributional a as share greater Capture services quality ensuring by services tourism seamless Improve Malaysia’s inherent biodiversity products andservices expands taxi servicesandimprovingpersonalsafetyfortravelers) quality poor of revamp the as such (examples chain value the along and ICT infrastructurereadily availableinMalaysia ports roads, on leveraging industry, logistics the prioritise Further a centreofengineeringexcellenceintheE&Ecluster Integrate education services with industrial development, for example finance, pharmaceutical e.g. tenets Islamic with comply that services and products Promote e.g. services and products recyclables mitigating change climate Promote and tourism medical education, ecotourism marketsthroughdomesticandregionalpartnerships the of share greater a Capture fresh fruitbunches Encourage upstream technology innovation to develop higher yielding develop to new marketdemands industries downstream oil-related indigenous technology and innovation or acquire technology to meet palm on Focus niche new intra-regional tradeexpands foster and depth as hub distributional a as share greater build a capture to and industries, to subsectors E&E Identify - idn te cnmc we sos spots sweet economic the Finding Possible PolicyMeasures 3/20/10 6:56:12 PM 141 How do we get there? CHAPTER 6 Policy Purpose Possible Policy Measures Build scale of n Promote corridor-based development around spatially dense poles industries and and adjacent hinterland, especially for electronics production networks for n Encourage competition between localities specialisation n Cluster industries to leverage on integration, scale and connectivity

n Exploit economies of scale through networking of production and supply chains leveraging on location - ‘Speed to market’

n Establish global presence through international acquisitions of companies in the same field to Harness n Adopt an open innovation system to acquire technology and expand innovation networks potential n Support rapid transformation of SMEs with potential for innovation

n Develop industries that support sustainable development such as use of traditional plants and herbs for modern applications Integrate real n Develop the commodities trading platforms and products for domestic sector industries producers to benefit from financial innovation and expansion with financial services n Offer Malaysia as a regional hub for both futures and spot markets for commodities

n Develop Islamic-based financial products to support domestic production and risk management of prices and production

The old emphasis has been for Government schemes (e.g. financial and tax breaks) to to identify the sources of growth, usually promote their growth (e.g. education, tourism through the 5-year Malaysia Plans and the and shipping). Industrial Master Plans which then provide the incentives to drive the growth sectors/ The new emphasis within the framework industries. This was the case in developing to transform the economy would be to the commodities and later the manufacturing strengthen overall competitive capacity of sectors, in particular the electronics sub-sector. the private sector and remove the barriers In the late 1980s and over the following for private sector to drive sectoral growth. two decades, selected services sectors The Government’s role would be facilitative, were identified as having export potential ensuring distortions are not created in order and again, government introduced incentive that private sector can allocate resources

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JD132294 Chap 6.indd 142 3/20/10 6:56:12 PM JD132294 Chap 6.indd 143 n spillover activities: with of areas new into growth effects added value high of developed sources main the as has advantages mover early Malaysia and where advantage, industries comparative with sectors must its Malaysia harness endowment, natural which can lead growth, the NEAC believes that industries and sectors further developing In realise to potential. growth their industries must these that for barriers removed be the and/or place be in must put that support arrangements necessary facilitative the and as well of as sources growth, important make as will that sectors/industries criteria approach identify the to be potential, would growth high with which by sectors/industries mode supports new Government the the of context the In sectors. required specific for when attention industries special value giving high and support to enablers required the place in putting efficiently, more

wants, including healthy fats and oils, oils, and fats healthy including market wants, the what produce to indigenous technology develop technology to a approach is driven alternative other technology. The acquire to driven be will market a approach sector, oil example, palm For the in services. and product in activities downstream resource natural added value high on focus increased an with progress drive to scale of economies leverage to corridors on growth present focus the a requires momentum growth In developing natural resources, the future n n

create low value added products. to driver products. powerful a added be will value Innovation which low and industries create low the technology from medium change a transformation The requires sector. the within to firms segments add value of high develop further concentration and the set of skill advantage taking national to through approaches leveraged be should advantage mover early sector, E&E the In plastics. degradable bio- and benefits) medical and health provide that products (food nutraceuticals organic cosmetics, biomass, from biofuel industries (as in aqua-culture) which can can which in aqua-culture) in (as industries industries Growth agriculture would be integrated agriculture value products. high as new well downstream as into venturing technologies, and processing harvesting planting, innovative into activities agriculture will commercial that expand framework within management risk schemes a insurance for support Governmentwith agriculture commercial developing for potential is There MNCs. large the to supplying structure SMEs support to shift should incentive The products. and new innovation foment will Partnerships productivity. and specialisation facilitate will services Shared intensity. knowledge drive to corridor Penang the in of industries proliferation through global the on enhanced for leveraging be can Potential 4). innovation (Appendix growth to sector this of contribution the deepen 3/20/10 6:56:12 PM 143 How do we get there? CHAPTER 6 create value in rural space and build energy generation as well as promoting new skills and capacity to earn higher climate change mitigating products and incomes among rural populations, and services e.g. recyclables. Our strategic have high potential to service the growing location is conducive for further developing international markets. the distributional hub potential to capture a greater share of expanding intra-regional n In the services sector, we should trade in both goods and services. harness potential for a higher share of the regional market in tourism and Overall, industries and sectors with high education. Manufacturing or commodities growth potential should include those with development should be better integrated the capacity to become champions and turn with education services to support R&D. Malaysia into a regional hub for specific An example is the centre for engineering goods and services. excellence where industrial training in electronics firms combined with research In financial services, Malaysia needs to institutes supported by the electronics optimise its early mover advantage in industry can ensure skills growth that Islamic finance, and exploit the potential is in tandem with industry requirements. to become a dominant global champion by Similarly, in health tourism, medical further expansion of products and services colleges can be integrated with hospitals that comply with Islamic tenets. Better to service demand for medical training coordination among agencies is required for from the region and medical services Malaysia to become a hub for cross-border from within and outside the region. Islamic finance products to support growth sectors within the region. This coordination Developing scale is important to building of policies is also important for implementing competition and growth. Concentration of the ASEAN Capital Market Framework industries within a region/corridor creates scale Agreement, where Malaysia already has the advantages through multiplier growth effects skills and scale. for all kinds of related and support service industries. It is critical that Federal decisions In the commodities field, Malaysia needs to on location place priority on this criterion exploit the potential for widening the trading when approving new investment. In addition, platform in commodities to give better trading industries (such as telecommunication and and hedging options to commodity firms. mobile services) which are able to attract Partnerships with external parties can be foreign interests and operate in regional exploited to build synergies and widen trading markets, should be encouraged to locate opportunities, including commodity derivatives in the corridors. Our endowments support and other hedging options to reduce risks promising expansions into new markets such as well as costs of doing business. as eco-tourism and moving into alternative

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JD132294 Chap 6.indd 144 3/20/10 6:56:12 PM JD132294 Chap 6.indd 145 concentration for scale. Related services services Related scale. for concentration policy shift from 360-degree decentralisation to locationala include ones Major removed. be must that barriers cross-cutting major are growth potential of sectors the and industries, there realise to strategies the implementing In investment. related finance technology green and new evaluate to build capability to right the institutions financial requires firms tech green and technology for funding priority Similarly, growth. economic drive help to and credit sophisticated become to institutions flow financial for cash required is and now Action assessment. project of use through the performance companies’ evaluate guarantees. to capacity build partial must sector to financial The shifting by lending less giving as to as well asset- collateral-based SMEs, emphasis innovative to lending in assessments credit in change a of form the take would industry financial the from Support can provide an avenue for quick resolution resolution quick for avenue an provide can Complaints a and Dispute Settlement up bureau for investors Setting exports. of and prices quality raise will services and products of delivery all for standards against international benchmark to move A required. be will regulations government the in processes rules and transparency and adopting agencies in government efficiency to improve measures primarily on economic considerations. A host of affecting growth and employment being based decisions policy on dependent is issue This disadvantage States will may need to be that addressed. people policy Federal of of Issues skills. and concentration from benefit also go a long way to enhance growth sectors sectors growth industries. enhance and to way long a go will level, sector-specific and general the both at regulations inconsistent of elimination comprehensive and consolidation a their regulations, of all, review Above Malaysia. businesses in up setting in faced problems of 3/20/10 6:56:12 PM 145 How do we get there? CHAPTER 6 6.3.8 SRI 8: Ensuring sustainability of growth

Table 20 - The future is bright. The future is Malaysia

Policy Purpose Possible Policy Measures

Preserve natural n Use appropriate pricing, regulatory and strategic policies to manage resources non-renewable resources sustainably

n Encourage all sectors to embrace ‘green technology’ in production and processes

n Develop a comprehensive energy policy Leverage on n Increase focus on downstream high value added production and comparative services advantages for n Develop a comprehensive energy policy high value added products and services Meet n Reduce carbon footprint in line with government commitment international n Enforce clean air and water standards in utilising natural resource i.e. commitments pollution mitigation

Facilitate n Develop banking capacity to assess credit approvals for green bank lending investment using non-collateral based criteria and financing n Liberalise entry of foreign experts specialising in financial analysis of for ‘green viability of green technology projects investment’ n Support green technology investment with greater emphasis on venture capital funds

Ensure sound n Use appropriate pricing, regulatory and strategic policies to manage public finances non-renewable resources sustainably

n Reduce wastage and avoid cost overrun by better controlling expenditure

n Establish open, efficient and transparent government procurement process

n Adopt international best practices on fiscal transparency

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JD132294 Chap 6.indd 146 3/20/10 6:56:12 PM JD132294 Chap 6.indd 147 the government. of government. size the the reduce continue and services should improve GTP, to the measures under Fiscal including initiated stability. programmes, financial reform balance facilitating macroeconomic and directly maintaining contribute to sound Healthy finances for finances. government public needed is sustainable and discipline Fiscal natural scarce our maximise of as resources. well stewardship as the standards, water and air clean enforce pollution practices, place mitigation in put to needed are efforts greater time, same the At introduced. be to a footprint, carbon Malaysia’s reduce in to for Copenhagen commitment government the policy with line In platform government. the by set be must development economy green A sustainably. resources non-renewable pricing, manage to natural policies strategic and regulatory its appropriate of applying by usage resources careful of overlook all value not is the must government development and important, progress generations. While future of interest the guarding safe- and resources natural our preserving on emphasis strong places NEM The

comprehensive energy policy is is policy energy comprehensive proposals. Given the complexity of these these of complexity the Given proposals. investment such evaluate to officers credit their educate and capacity develop to need institutions financial Malaysian happen, to move that must For credit. collateral-based banks from away investment Malaysian fund area. to this in facilities financial by A green technology platform must be supported to framework sustainability. underpin budgeting medium-term finance a within Public undertaken be management should management transparency. budget fiscal in and practices best international adopt should government The services. services. of environmentally sustainable products and has development for Malaysia centre a be to area. opportunities this in expertise local develop can that experts in bringing for and technology green for support capital venture Ainclude should policy energy comprehensive for developing home grown green technology. Malaysia also has the comparative advantage is expertise developed. local of arrangement mass critical interim a an until be could parties external with collaboration and partnership required, expertise technical the and projects 3/20/10 6:56:12 PM 147 How do we get there? CHAPTER 6 JD132294 Chap 6.indd 148 3/20/10 6:56:12 PM CHAPTER 7

The time for change is now – Malaysia deserves no less

JD132294 Chap 7.indd 149 3/20/10 6:58:26 PM JD132294 Chap 7.indd 150 3/20/10 6:58:27 PM JD132294 Chap 7.indd 151 no less Malaysia deserves change isnow– The timefor started by the ‘1Malaysia’ and ‘Government ‘Government and ‘1Malaysia’ already the by change started for momentum to required the is bolster NEM the of push big The and the economy. in Malaysian unfold monitoring changes as correction constant needed, course be with will together leadership Determination resolute policy. and and perspective in change drastic a task push, big a the for calls of ahead significance the and proposals these of nature Malaysian the cross-cutting The in economy. participants and players sectors, and interests of range profoundly wide a affect will changes These SRIs. eight following changes specific for calls NEM The if way taken. its not lose is action will urgent Malaysia and clear is however, ahead, way The beginning. the to signpost a just journey, the of is end the this not But an economy. to income high Malaysia inclusive drive to required changes key main the and NEM the proposed the of outline elements chapters preceding The Why doweneedtheNEM and what are itsgoals? the NEM can drive our economy forward to to forward economy our drive can NEM the the convince will however, improvements, economic clear and change real Only begun. indeed has change that Malaysians reassure also will push big The initiatives. Programme’ Transformation oenet osdrto ltr hs year. this later consideration government Model for Malaysia the of 2 Part in forth set be proposed will measures the policy the of of details The SRIs. support in key with stakeholders, policy NEAC detail the and for formulate is help to step next The complete. and t But by agencies. ministries NEM government undertaken the appropriate be the of will advisory recommendations implementation and independent an body is NEAC The less. no deserves Malaysia futures. our all for environment a sustainable providing of and Malaysians, all of lives the in improvements delivering of growth, income high sustaining of capable economy an have advanced nation status. Malaysia would then he work of the NEAC is not not is NEAC the of work he report, to be submitted for rakyat that the SRIs in in SRIs the that New Economic Economic New 3/20/10 6:58:27 PM 151 The time for change is now – Malaysia deserves no less CHAPTER 7 JD132294 Chap 7.indd 152 3/20/10 6:58:27 PM APPENDIX 1

Sustainability and the palm oil industry

JD132294 APENDIX 1.indd 153 3/22/10 8:35:51 AM JD132294 APENDIX 1.indd 154 3/22/10 8:35:51 AM JD132294 APENDIX 1.indd 155 industry and thepalmoil Sustainability Appendix 1: expand acreage and production, but from from base. but to low a production, beginning and also acreage is expand Africa Western and plantations palm oil commercial started has America Latin labour. cheap larger and a mass land of advantage the has Malaysia to relative which Indonesia, of emergence the until oil, palm of producer and largest the 1960s, was the in guineensis, Elaeis oil palm, African the of planting commercial scale large- the in ‘first-mover’ the was Malaysia 2005. exports in of 4.3% to 7% of compared share a capturing in 2009, RM38.5bn to 2005 by since grew year a oil 13.8% palm of Exports 2000. from in 2.9% increasing 2008, in GDP real of 3.2% contributed and 2009 in Malaysia in hectares million 4.69 covered oil Palm oil. palm of In 2009, Malaysia produced 17.7 million tonnes sector oil the palm of problems current and history The of goal sustainability NEM. the the achieve of to illustration how an is industry Oil Palm the develop to how on study case following The Why doweneedtheNEM and what are itsgoals? is dramatically upgraded, the palm oil sector sector oil palm the upgraded, sector dramatically is E&E the NEAC unless that show of 2005). estimates in 41.1% (49.6% 2009 for in exports accounting RM227.5bn, amounted to exports E&E 2008. in 9.4% to 2000 in GDP of 12.2% from declined had the rise, the share of electrical & on electronics (E&E) to GDP is activity oil palm While oil palm the of industry importance Relative advantage in the upstream palm oil sector sector oil palm upstream the in advantage competitive Malaysia’s success, its Despite and conditions. climate agronomic ideal stability, political include success to Malaysia’s that contributed Factors s en eroded being is 3. 2. 1.

aor scarcity Labour trend increasing an on are costs input and sector. this enter to reluctant are on foreign workers while local workers n industrialisation and Rising production cost: ad scarcity Land

u to: due : From urbanisation urbanisation From : : Over dependence dependence Over : Land, labour labour Land, 3/22/10 8:35:51 AM 155 Appendix 1: Sustainability and the palm oil industry APPENDIX 1 Figure I: Contribution of the Palm Oil sector to the economy

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will become a larger component than E&E currently have lower yields than commercial rising in nominal terms to 12.2% of GDP estates. The initiatives by the Government by 2020 (7.6% in real terms) (Figure I). and market leaders should aim to help smallholders, chiefly by timely replanting of The palm oil sector fulfills the three goals old, low yielding palms with better yielding of the NEM stock. This, together with better maintenance and upkeep will serve to ensure that the High income: Industry calculations suggest smallholders in this sector generate higher that the sector’s share of real GDP can yields and thus income. This will help achieve grow to 7.6% by 2020 if the value-added the inclusivity goal of the NEM. gains from efficiency and innovation can be realized. This would translate into a Sustainability: Research & Development yearly growth of 13.7% from 2009-2020. (R&D) efforts in the Palm Oil sector will Palm oil exports can also grow by 7% p.a. improve the productivity of the sector, enable to RM84.6 billion by 2020, probably more if better conservation of the environment and new palm oil-based products and services lower the net carbon impact of operations. can be successfully marketed. Better use of land should see high value timber and other crops planted on hilly terrain Inclusivity: This sector employs 590,000 which is not suitable for oil palm, but can direct workers compared to 316,956 in the yield significant value through future sales E&E sector. More than one third of palm of timber from managed forests. Similarly, oil production comes from smallholders, who riverine reserves should be rigorously

156

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3/22/10 8:36:14 AM 157 Appendix 1: Sustainability and the palm oil industry APPENDIX 1 Key Assumptions

1. Smallholders: 20% of 6. R&D Genome1 : RM 20m per 8. Downstream Processing: planted area needs full year . CPO Production scale rehabilitation (RM3k 7. Biomass2: (2020): 24.6m MT per ha); remaining planted . Sample . CPO exports: 13m MT area (RM500 per ha) . Size - 3.1m MT of . All CPO exports are 2. Smallholders: Increase milling capacities processed in Malaysia output from 15MT/ha to . Savings - RM18.5m . Long term CPO price: 25MT/ha . Capital expenditure - RM2,250 per tonne 3. Local Planting: RM14k per RM96m . Downstream margin Ha . Total milling capacities in 5% Malaysia: 92.5m MT

Out of these value added activities, the Palm oil cultivation has been quick wins are: instrumental in the socio-economic development of Malaysia: 1. Realising full potential of small holders and; • Overcoming rural poverty and improving the livelihood 2. Genome qualities of rural areas by 1. Realising full potential of small providing food security and holders employment The establishment of land schemes • Acting as a needed brake on by FELDA and FELCRA has resettled migration from rural to urban landless farmers who mainly grow areas oil palm. The land schemes are • Bringing education and provided with basic amenities healthcare to the rural such as potable water, electricity, economy communications, roads, schools • Modernizing behavior and and healthcare, and offer further culture of rural areas through employment opportunities in these infrastructure such as roads, economic activities. public transport, etc.

1 Assumes that best estate management practices are in place. 2 While it can be shown that using biomass for generating electricity can add value relative to other uses, the additional value from converting biomass to electricity is quite small. In addition, there are unresolved issues relating to the opportunity costs for using biomass for fertilizers as opposed to electricity usage. The removal of biomass for energy generation will result in the depletion of the soil. Currently, the depletion of soil is counteracted by pouring mineral based nitrogenous fertilizers onto the soil. But this produces various nitrous oxides when applied in mineral form, which are highly damaging to the atmosphere, far more than CO2. The best use of biomass from the estate operations is to return it to the estate, preferably composted in the case of EFB, to reduce transport costs from the mill. 158

JD132294 APENDIX 1.indd 158 3/22/10 8:36:14 AM JD132294 APENDIX 1.indd 159 . . . e tonne per RM2,250 at increasing billion RM8 20%, by exports by increased be could 2008 in production CPO 21%, of (OER) rate extraction oil FFB. With of tonnes million 16.9 another generate would schemes schemes), state and government of (inclusive Bunch) per hectare, involving 1.69 area 1.69 smallholder of hectares involving million hectare, per Bunch) Fruit (Fresh FFB tonnes 10 extra An services consultancy through large by smallholders to companies plantation awareness and training The issue can be solved by introducing expertise of lack III) (Figure the and scale less of are productive due to the lack of economies smallholders However, 6P DOOKROGHUVLQFOXGHLQGHSHQGHQWJRYHUQ eca n Rsa ad tt schemes state (Felda, and Risda) schemes and Felcra government independent, include Smallholders * iue III: Figure 07+ mlhle yed v patto companies plantation vs yields Smallholder D

U KD S sae ad smallholders. and estates Government, the from including buy-in stakeholders the all get must and thought strategy well out very a have must it effort, this problem. on embark intractable Government the should Therefore, pretty solution a be workable to a rubber, proved of into case idea the this in turning 1970s, note we the in desirable, that highly is smallholders of results the improving while Nonetheless, value the up chain. smallholders rural will it the as move Model Economic New the of goal inclusivity the to contribute will initiative smallholders. This among and opportunities development income capital human enhance gap, industry close transfer and levels productivity boost to knowledge, technology smallholders to opportunities and provide will management initiative This HU 3O \ DQ HD WD 2( U )HOFUDDQG5LVGD DQGVWDWHVFKHP WLRQ 5 & RP SD QL HV HV 3/22/10 8:36:15 AM 159 Appendix 1: Sustainability and the palm oil industry APPENDIX 1 The potential additional GDP Contribution resistance to pest and disease, resistance alone equals to RM3.5bn. to weather, longer fruit stalk and tolerance to salinity (Figure IV). 1. Genome: Unlocking the future value of Palm Oil through innovation and Trait stacking will exponentially increase the R&D retail value added per hectare and therefore the Genome project will also enable us to A new era of genome engineering and shift towards a sustainable economy largely design has emerged to provide significant based on renewable resources or known as improvements in tools for sequencing and the “bio-based” economy. synthesizing DNA at the molecular level. The traits that are discovered through the Carbon trading potential Genome project on Palm oil have unlocked the potential to increase efficiency and The potential of Palm Oil sector becoming productivity of the Pam Oil industry. The the lead in terms of the sustainability pillar palm oil crop can be altered to produce in the NEM depends also on the fu ture higher oil yield, higher iodine value and of carbon trading – which is uncertain due height reduction in the palm oil tree to to lack of agreement on setting binding make it easier to harvest. Other traits that international targets at the recent Copenhagen can be altered from the Genome project are negotiations.

Figure IV: Trait stacking to increase the retail value added per hectare

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160

JD132294 APENDIX 1.indd 160 3/22/10 8:36:20 AM JD132294 APENDIX 1.indd 161 h cro taig benefits trading carbon The emissions. CO2 of Tonnes 90,340 to 12,040 estimated an produce plantation) with (the replace to change land and forests of down stock Total cutting carbon emissions. from CO2 4,180 emissions of produce tonnes 6,225 operations to total Oil Palm carbon on impacts 3 stocks: have Plantations €10-25 per tonne, earning extra revenue. revenue. extra earning between tonne, palm for per oil trade €10-25 can Malaysian remissions globally, carbon up set are regulation emissions and trading If carbon the abn eeu example: revenue Carbon Th CO2-equivalent @ €15p/tonne cret dangers current e 1. 3. 2. Per hectare Tonnes of

Basis eoa o te rgnl bv and above original the of Removal abn emissions carbon forest) increases (e.g. biomass below-ground peat oxidation, leading to leading oxidation, peat causing drainage ongoing requires reduces Operating plantations on peat peat on plantations Operating carbon store to palm oil Growing abn emissions. carbon abn emissions carbon 129.3 tonnesCO2-eq/haover Average €77.6 p/ha/yr plantation 25 years carbon stock increasing

in siain, aasa hud consider: should Malaysia preliminary estimations, and rough above the on Based plantations. in remissions stock carbon the outweigh clearly We can see that the emissions from peatland adopted. strategies the on depending increases, carbon for Malaysian companies potentially pay hand, penalties, other the On 2. 1. 1,137.5 tonnesCO2p/haover25years

Average 45.5tonnesCO2p/ha*year Average nesfig fot t gt plantation get to efforts Intensifying using the Roundtable on Sustainable Sustainable on Roundtable the using sinks. carbon natural as internationally recognised be to land akt commodity). market a tangible already is carbon (because it end-consumer the means to branded be can abatement carbon a with RSPO CSPO current equating whereas certification), (i.e. improvements process operational to tied currently upstream growers. CSPO premium is from credits carbon buy can members RSPO Downstream with (CSPO). Oil Palm tandem Sustainable Certified in of development (RSPO) Oil Palm Developing an intra-community market market an intra-community Developing emissions €682.5 p/ha/yr peatland = fromdrained 3/22/10 8:36:20 AM 161 Appendix 1: Sustainability and the palm oil industry APPENDIX 1 3. Realizing potential additional value VCU (Voluntary Carbon Unit) on remaining 1.3m ha of peat land by replanting with peat land forests The name of carbon offset credits specifically as peat lands account for about 2.8m verified to the Voluntary Carbon Standard, ha of total land area in Malaysia. one of the leading independent standards Potential emissions avoided as carbon established to demonstrate integrity in project- revenue: based emission reductions in the unregulated voluntary carbon market. This is especially Potential Carbon suitable for an intra-community mechanism Emissions Revenue – e.g. RSPO carbon certification with price Avoided (€ bn per annum) shadowing CER. This can be applied to the For all Malaysian whole nation. 1.94 peat land For cultivated land VERs (Verified Emission Reductions) 0.59 on peat land For palm oil The general name given to carbon offset plantations on peat 0.23 credits in the voluntary carbon market. These land are tradable credits for greenhouse emission reductions generated to meet voluntary Carbon instruments that can be used demand for carbon credits by organisations by Malaysia in its efforts to become and individuals wanting to offset their own sustainable emissions.

REDD (Reduced Emissions from Deforestation CER (Certified Emission Reduction) and Degradation) A credit generated under Kyoto’s Clean An initiative to cut greenhouse gas emissions Development Mechanism (CDM) for the associated with forest clearing by the inclusion reduction of emissions of greenhouse gases of ‘avoided deforestation’ in carbon market equal to one tonne of CO2-equivalent. They mechanisms. More simply, payment in are designed to be used by industrialised return for the active preservation of existing countries to count toward their Kyoto targets forests. REDD+ is the extra consideration but can also be used by EU companies in reducing greenhouse emissions given and governments as offsets against their to sustainable forest management and emissions under the EU Emissions Trading afforestation/reforestation in developing Scheme. countries, beyond deforestation and forest degradation. This would be a viable possibility UN data shows Malaysia’s carbon emissions in being implemented for the states of Sabah in 2006 stood at 187 million tones or 7.2 and Sarawak. tonnes from each Malaysian.

162

JD132294 APENDIX 1.indd 162 3/22/10 8:36:20 AM JD132294 APENDIX 1.indd 163 Although that figure is far less than than less far is third largest emitter with 2.3 billion tonnes or world’s the is which figure Indonesia, neighbouring that Although government data, Malaysia has stated that mu that nations all stated has Malaysia data, government to Indonesian according capita, per 10 tonnes t contr st ibute. 3/22/10 8:36:20 AM 163 Appendix 1: Sustainability and the palm oil industry APPENDIX 1 JD132294 APENDIX 1.indd 164 3/22/10 8:36:20 AM APPENDIX 2

Managing adjustments – Aligning old expectations to the new reality

JD132294 APENDIX 2.indd 165 3/22/10 8:39:11 AM JD132294 APENDIX 2.indd 166 3/22/10 8:39:11 AM JD132294 APENDIX 2.indd 167 reality expectations tothenew Aligning old Managing adjustments– Appendix 2: rapid growth is often spatially unbalanced with unbalanced is spatially often growth rapid Moreover employable. more become to skills their retool process the in and positions other find to need may firms these in phased Workers out. be or restructure to have companies either will many and the with realities cope market to new have will individuals to and firms These access contracts. or imports privileged controlled and energy notably depended on viability commodities, subsidised whose firms those be will Losers winners losers. and both producing adjustments major requires also forward path the Nevertheless, brings. participation active that rewards potential the and markets competitive more for needed skills Malaysians the with of range broader a provide will and competition through greater accountability as well address education tertiary of as quality the to strengthening education Efforts rural in skilled. weaknesses services highly the the for of demand while increasing 40% also bottom the for wages in robust growth of more to use lead should better workers and foreign markets labour flexible More sector. private the especially society of spectrum the across advancement for The NEM paves the way for more opportunities Why doweneedtheNEM and what are itsgoals? for each country to have efficient labour labour efficient have to country each for stakes the increased has also Globalisation needs. regional differing rectify to services social for pressures increasing – others than more benefiting regions some better to have in place social protection protection social place in have far is to it Thus better reversed. often even are or slowly reforms ineffective too out that carried shown are which has advisable, experience be may but reforms the some of costs, phasing adjustment these cushion To moving jobs. of between upheaval need the the from retraining triggering for and wages security, job influencing and by primarily within groups countries, certain on costs adjustment impose also can it standards), living average and productivity boosting (thereby products access to a wider range of cheaper imported improves and markets widens export of breadth the globalisation Although workers. available to know-how in and differences technology, by skills, tempered labour. is for impact market The global a integrated and players more economic for openings new create to combined have services of sourcing international and labour, of mobility goods, in trade progress, technological Rapid markets. 3/22/10 8:39:12 AM 167 Appendix 2: Managing adjustments – Aligning old expectations to the new reality APPENDIX 2 systems which can cushion adjustment costs Malaysian labour laws are skewed towards but in ways which do not impede requisite protecting workers at the expense of reforms. Moreover by allowing firms and employers, who face obstacles in hiring households to seek higher but often riskier and firing. The absence of a formal safety economic returns and reducing the need for net forces the government to put in place precautionary savings, such programmes help regulations to protect workers but in ways spur a more dynamic economy. The general that impede firm-level competitiveness. As objective is to build a more competitive but a consequence even as the country enjoys also more compassionate society. And with low unemployment, the fact is that many a well structured social safety net, economic workers are under-employed which leads reforms become politically more acceptable, to the implicit acceptance of low factor thus improving the chances of effecting real productivity. The government must be prepared change. to tolerate initially a moderate degree of frictional unemployment and coordinate with Building a stronger social safety net is stakeholders to encourage re-skilling and now urgent up-skilling of workers to improve labour productivity. Malaysia’s social protection system as in many Asian countries is still evolving. While Existing weaknesses in the social safety it is relatively well-developed there are net need to be addressed major gaps and inefficiencies. Poverty is less widespread but there remain selective The social safety net in Malaysia comprises a vulnerable groups and pockets of intractable broad array of programmes implemented—at poverty. Inequality remains a pressing issue. least in part—to protect the poor and otherwise Despite substantial subsidies available to vulnerable groups from persistent or transitory the population, the disadvantaged are still poverty. Expenditures on these programmes not getting access relative to other groups. are classified largely under three categories. Safeguards are needed to protect individuals The bulk goes for subsidies for energy and from catastrophic outcomes and soften income food products, with smaller allocations for shocks for the most vulnerable. Some have social assistance and “incentive programmes”. suggested that a formal minimum wage might In total, these amounted to 4.6% of GDP be helpful to cushion workers against such in 2008, and an estimated 3.5% in 2009. shocks or downturns. The NEAC strongly Compared with other middle/high income believes this would be a wrong approach countries, these are large amounts in relation and in fact could exacerbate the situation to GDP and if restructured would allow the by reducing competitiveness and reducing government to use available public resources employment opportunities. more effectively.

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JD132294 APENDIX 2.indd 168 3/22/10 8:39:12 AM JD132294 APENDIX 2.indd 169 that the current poorly targeted system system targeted poorly current the that about creating worry an entitlement culture- forgetting makers policy Some misconceptions. causing about is this and views structure and differing objectives have Housing, and Ministries for Women, Regional Development, and exclusion of such as the agencies, Implementing inclusion. both errors, targeting of probability the increase budgets assistance programme social other of dilution resulting the and of Fragmentation agencies. across lack approaches inconsistent general and mechanisms a is protection social modern about understanding there Currently, top 40%. almost the for quintile and over consumption just aggregate for of 9% accounts quintile bottom where the products, subsidised on expenditure household of distribution the in inequality general the reflects This households. income subsidies accrue disproportionately these to higher- of benefits and the items, energy food on subsidised budgets their of proportion Although all households spend a substantial n n n to need addressed: that be issues safety of number social a raises current net the of evaluation An

ae oe consistent. more made be to needs and agencies across differs and programmes of systems The structure consistent outcomes; and to equitable more refined be achieve should criteria Targeting limited; quite is households poor targeting spending social of portion The eom rnils n options and principles Reform agencies. across net safety social comprehensive suitable on a vision be clear would a what for need a is there Thus capacity. response of the overall effectiveness the enhance or complement might schemes new or services programmes such as unemployment insurance training and pensions as such programmes others related Yet how see not health. do and services education social as core such basic and social between protection differentiate incentives. not do perverse Others producing already is subsidies should be gradual, accompanied accompanied gradual, be should energy in subsidies reduction Consequently, reform. to impediments offsetting serious be can lack effective mechanisms and However, support political objective. of this achieve to ways efficient more are goal policy—there the a of is poor the protecting that To extent the options. various considering currently is Government the and for compelling is products case energy for and economic subsidies price The eliminating energy of subsidies. form food the net coping in risk safety on programmes spent social being of are bulk resources the Currently effective?)”. services social core and efficient markets labour (are and risk prevention in coverage?); widespread assistance mitigation risk (“Are (“ different designed?”); well from coping schemes at risk looked angles: be Malaysia to in system needs protection social The a e nuac shms sufficiently schemes insurance re

3/22/10 8:39:12 AM 169 Appendix 2: Managing adjustments – Aligning old expectations to the new reality APPENDIX 2 by credible assistance for the poorest during And while there is generally free or low cost the transition. health services available, a large portion of total health expenditures are out of the More generally to overcome obstacles to pocket payments putting those who may subsidy reform, social assistance programmes be displaced in the adjustment process will have to be more efficiently structured. An particularly vulnerable. important step in the government’s reform effort should be to catalog all existing social Regarding risk mitigation programmes, assistance programmes to identify their Malaysia needs to protect workers, but policy objectives, eligibility criteria, benefit not jobs. This is where social protection structure, administrative costs, and target systems, such as unemployment insurance beneficiaries. To improve targeting, proxy come in. Currently Malaysia’s labour market measures of a household’s consumption mobility is severely constrained by difficulties per capita could be constructed to create of hiring and firing (e.g. large severance better means-test benefits. Other measures payments as well as barriers to redundancy). could be implemented to avoid the current Reducing these restrictions will improve the vertical inequity in the system by gradually productivity of firms (by allowing them to rather than sharply phasing out eligibility and condition wage increases on productivity reducing horizontal inequity by restructuring improvements). The burden of cushioning certain benefits to make them less lumpy. labour should be shifted more from firms to the state but the private sector also has a The system needs to be better targeted, role to play. Options which are suitable for expanded in some aspects but reduced in low and middle income countries become others. There are errors of exclusion - some obsolete in moving to high income conditions. groups are falling through the net (foreign Here the Government needs to access workers, their children, the urban and rural knowledge on design options and conduct poor) and some problems with the e-Kasih simulation analysis for the determination of approach in terms of targeting. There are parameters and financial implications; and also errors of inclusion largely because of of course explore international experience poor targeting. Moreover, the overall system in general. can be streamlined to improve efficiency and generate savings that would help fund In practice, there is no magic formula expanded programmes. for the appropriate division of adjustment costs (e.g. training, health expenses, A related concern is that the Employment unemployment benefits and pensions) between Provident Fund only covers about half of the government – employers – workers. In the workforce leaving many low income many developed countries, the proportion workers out of the formal pension system. of medical costs borne by employers are

170

JD132294 APENDIX 2.indd 170 3/22/10 8:39:12 AM JD132294 APENDIX 2.indd 171 n n well: functions market labour the if on Pressures the net safety social are reduced solution is the of part efficient more markets labour Making level a field. on playing as competing and actually not borne, are costs such disadvantaged additional are the to firms due international the some in their market, selling services by and goods compete summary, firms In although benefits. consultation medical hospitalisation for and limit upper an to subject expenses medical paid others while the by borne more than half of the fully respondent companies, were expenses Employers medical staff’s the Malaysian that reported (2007) The Federation staff. their to benefits hospitalisation as well as treatment the in private sector provide medical consultation and companies most where Malaysia, as such countries developing of that than lower

does a better job than strict reliance on on payments. severance reliance strict than job better a does usually and solution can short-term a provide insurance unemployment an that effective is experience risks. international associated The and loss job of costs the minimise to need also markets Labour firm no survive. otherwise could productivity outstrip labour not must wages in upward movements time, same the At skills. match their that quickly jobs find to likely are workers market, labour efficient an In

training which is not geared to real market real to geared not providing is which or training re-employment seek swiftly to have drawbacks, programmes such as reducing incentives such that recognised also is it Nonetheless, services. employment improved and systems information market labour better restructured creation; or job for subsidies new targeted positions; for training of consist mainly policies Such inefficiencies. market minimise information asymmetries and labour to important are policies market labour active appropriate identify workers. to As via such interventions government for employers for difficult and often is it jobseekers to own, identify good career opportunities their on Left are seen as providing the needed support. support. needed the providing as seen are payments severance since system insurance unemployment formal no is there future. Currently, the in rise to likely is unemployment restructuring, and competition increased With ago. decade a 5% than less with compared 18% persons about unemployed for total of account to years, recent in 15% of average annual an unemployed increased has graduate Total sharply. has risen unemployed non-graduates of to compared share graduates the Nonetheless, education). secondary and primary with those among (concentrated decade past the over force labour total the of 3-4% about at low relatively a been has rate is implications. unemployment The political turns with down concern special during increasing of possibility unemployment the with Dealing place. in be to need also systems evaluation and monitoring strict Thus needs. 3/22/10 8:39:12 AM 171 Appendix 2: Managing adjustments – Aligning old expectations to the new reality APPENDIX 2 However, such views fail to realise that as part of the solution and if so, a regulatory Malaysia approaches developed country environment that minimises the costs of status, appropriately designed unemployment entry and exit is critical. For example, insurance schemes provide significant current bankruptcy laws are outdated and advantages in terms of pooling risks and do not easily offer entrepreneurs a second providing a channel for shifting some of chance. the burden from firms to shared pooling schemes with government, thus facilitating In sum, Malaysia’s labour market is failing firm level competitiveness, especially for to convey information on the type, quantity SMEs and relatively new companies. It is also and quality of skills needed, making it difficult far easier to link unemployment insurance for the country to produce the right skills schemes (compared to firm specific severance and hampering the countries’ progression to payments) to other social programmes to higher value added industries and services. provide extra assistance for retrenched Indirectly, these policies also put additional workers who also happen to be specially stress on the social safety net system. disadvantaged. Training programmes can help but need To deal with severe unemployment situations, to be linked to market demand options could include for example some form of partial wage loss insurance with benefits During adjustment periods, revamped training kicking in only upon reemployment, thereby programmes are often helpful in enhancing giving people stronger incentives to find a employability in a shifting labour market. new job. Benefits would be determined as Compared with other regional countries, a share of the difference between previous Malaysia ranks high in giving priority to and current wages and paid out only for a training by large companies for specific needs fixed period of time. This would encourage relevant to the job scope and specifications, individuals to get hired quickly – even at especially when there is a technology upgrade a lower wage – rather than holding out for involved. But firms have no incentive to higher salaries. provide their workers with general skills because this increases the likelihood that As discussed earlier, Malaysian firms indicate the worker will leave the firm. This has that difficulty in hiring local and expatriate been found to be a key factor in causing foreign workers and skill shortages are the very low training incidences among small reasons for why they are understaffed. Firms and medium enterprises (SMEs) in the also face considerable uncertainty regarding manufacturing sector. the length of time required to complete bureaucratic procedures (e.g. licenses from Specific to Malaysia, there will continue to land offices and import permits). In some be a need to bring in substantial numbers cases, bankruptcy and new startups are of semi-skilled foreign workers but locals

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JD132294 APENDIX 2.indd 172 3/22/10 8:39:12 AM JD132294 APENDIX 2.indd 173 stimulus programme is phased out and and out the phased as is budgetary deficits as a share of GDP scaled years programme coming the stimulus in tight be will situation fiscal Malaysia’s involved? costs temporary often but additional the cover to needed fund transformation a special is Thus costs. adjustment with deal to activities envisaged of range for wider a enough these be not But will mechanisms or example. funding for insurance schemes for training contributions or firm – employee mechanisms recovery cost full or partial built-in Some with designed be can programmes. options welfare new revamped for or especially years, initiatives, such as unemployment insurance significant coming be the will in needs related and nets fund Financing costs for augmented social safety transformation special needed? a Is more be can they needs. emerging of how supportive for should evaluated services be and manufacturing the in (HRDF), which supports training for companies Fund Development Resource Human the in significant programmes of Ongoing adjustment. economic periods be to during needs emphasised training Hence, chain. industry the value up one moves economy the from as another shift to them help that schemes would training through implications negative the of some from protected be can effectively if for implementation they are are they implementation for if more effectively used be could resources these But programmes. expenditure public other of rationalizing and products food and energyfor those as such subsidies wasteful the back of cutting from savings recipient large the potentially be initially would fund more foster to oraccount holding This outcomes. inclusive intent recognition government’s the tangible of adjustment provide of would cushioning costs the support to more like designed a account” “holding special a fund Within a transformation envelope, levels. fiscal tighter sustainable more to back oversight to ensure that accountability is is accountability realised. efficiencies and that identified ensure to centralised oversight adequate with implementation account for programmes holding specific to a reallocating for as operated be should fund the to intentions, sense Government’s the makes signal fund special a while Thus oversight requests.rent-seeking to prone and monitor and to difficult diffuse, be to mandates likely are expertise which for larger fund a in left than responsibilities specific core with agencies resources by if administered are enhanced is and efficiency implementation that shown has Experience activities. of collection a supporting fund a from general administered being than rather (e.g. programmes programmes) or assistance retraining targeted specific into channeled 3/22/10 8:39:12 AM 173 Appendix 2: Managing adjustments – Aligning old expectations to the new reality APPENDIX 2 JD132294 APENDIX 2.indd 174 3/22/10 8:39:12 AM APPENDIX 3

Targeted actions needed for promoting micro-enterprises and SMEs

JD132294 APENDIX 3.indd 175 3/22/10 8:41:03 AM JD132294 APENDIX 3.indd 176 3/22/10 8:41:03 AM JD132294 APENDIX 3.indd 177 enterprises andSMEs promoting micro- actions neededfor Appendix 3:Targeted seek work opportunities. These are motivated motivated are These who opportunities. work seek areas urban and range rural the wide in the women of better includes also to It lives. seeking to their rural environment the urban from the migrate who and those population also rural the include These earners. segments income among of 40% reside bottom that the potential, enterprises, and constitute existing likely and pyramid economic the of bottom the at are enterprises micro- and businesses informal Both in found be can I. Table problems, approaches the tackling possible to the these and by faced segments, problems merit. and common needs Some on based sector domestic private the of build segments to bottom the up programmes by accompanied be must sector private the to re-energise Actions Why doweneedtheNEM and what are itsgoals?

While there are some 30 government the of effectiveness government the segments, micro-enterprises SME and 30 the help some to are programmes there While life. in lot their better to wish knowing how, of lack the for but who, individuals capacity, and high illiteracy rates. rates. illiteracy high management and and capacity, skills entrepreneurial of lack capital, of lack to due – low rates growth exhibit and low-tech remain more SME operations Many given well. as be assistance and should support – exports of 20% and employment, total of for 57% GDP, of 35% accounting – SMEs the pyramid, of economic bottom the at exactly not While opportunities. facilitation of table the and to them bring needs to greater their requires of and awareness wanting is pyramid outreach for the bottom 40% of the economic 3/22/10 8:41:03 AM 177 Appendix 3: Targeted actions needed for promoting micro-enterprises and SMEs APPENDIX 3 Table I: A closer look at the bottom/ middle segments of the domestic private sector

Segments Current situation Possible approach

Informal • Off the radar screen and not • Engage and provide advice on registered business opportunities • Unaware of aid schemes • Training, education and support • Low business skills network  Rural • Lack capital & financial ability • Access to loans/ grants • Subsistence farmers; Small • Assistance in business holdings development • Migrating to urban poverty • Job training and resettlement  Women • Financially stressed • Microfinancing • Marginalised • Empowerment and mentoring • Lack of child care networks • Unaware of opportunities • Child Care Centres • Exposure and access to information Micro • High illiteracy rate • Facilitation and counseling in • Use rudimentary technology business development • Low skills • Microfinancing • Motivated but unaware of • Education, especially with regard opportunities to management and planning • Bottom 40% income group skills • No business acumen Small • Need for incubation • Provide office space • Lack access to financing • Skills development, including • Lack entrepreneurial skills financial training • Poor management/marketing • Credit guarantee schemes skills • Schemes to help raise • Low networking presence productivity through upgrading • Poor ICT usage • Linkages and exposure to opportunities with local firms and MNCs through effective networking Medium • Need training • Skills training • Need capacity building • Build inter-firm linkages, • Not fully exploiting ICT especially with large firms, to • Poor growth strategies provide opportunities for market • Lack financing and product expansion • Low technology • Encourage adoption of ICT • Low networking applications • Encourage more technology, innovation and R&D 178

JD132294 APENDIX 3.indd 178 3/22/10 8:41:03 AM APPENDIX 4

Leveraging 40 years of manufacturing experience to bridge into high value added niche areas

JD132294 APENDIX 4.indd 179 3/22/10 8:43:05 AM JD132294 APENDIX 4.indd 180 3/22/10 8:43:05 AM JD132294 APENDIX 4.indd 181 added nicheareas into highvalue experience tobridge of manufacturing Leveraging 40years Appendix 4: o upr te rvt sco’ cpct for capacity innovation. sector’s private the support to a is policies there public far-sighted and effort sustained if possible only is this However, status. income high into Malaysia propelling i.e. transition, next the driving in role major a has achieved play should and can performance, world-class Malaysia where industry specifically, E&E the sector, manufacturing of the segments some that believes NEAC The manufacturing the sector intheNEM. of role the on questions large externalities. This situation has prompted trigger can that scale the in and iscoming enough fast change if not clear is it level, firm the the at up ladders value-added and clambering technological and upgrading of encouraging signs recent been have there While of objective the ‘moving uponthevaluechain.’ with odds at the seems and sector time over stalled has performance manufacturing However status. middle-income to transition country’s the in force driving the since the 1970s. The sector was unequivocally story transformation and growth Malaysia’s of The manufacturing sector has been at the center Summary Why doweneedtheNEM and what are itsgoals? promote electronics manufacturing operations manufacturing symbolically electronics promote to 1970 launched in government Electronics Penang Penang The Alam. Matsushita Electric opened operations in Shah goods. consumer final with market domestic the supply to seeking 1965 in capital foreign Japanese by begun was Malaysia of industry E&E The States. United the to components making country, Malaysia the largest the exporter of semi conductor in industry largest and well-organised most the is industry E&E The back firms with a demonstrated innovation ademonstrated potential in their efforts to increase productivity with firms back of holding alleviation are that constraints the structural serious is importance utmost Of and importancetotheMalaysianeconomy The Malaysian E&E industry: A brief history process areabandoned. country’sthe for basis as served specialisation which may happen if industries that could have future will also avoid the risk of ‘premature exit’ the towards geared resolutely while NEM The services inMalaysia. and goods value-added higher produce and

3/22/10 8:43:05 AM 181 Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high APPENDIX 4 value added niche areas which attracted firms such as Japanese owned The E&E industry became Malaysia’s leading Clarion followed by National Semiconductor manufacturing employment and export from the United States. The Malaysian generators by 1980. By 2005, the E&E industry government attracted these firms to tax-free contributed about 64.1% of total exports and export-processing zones in the country to create provided jobs to over 800,000 people in 2005 employment opportunities. Earlier export- (MITI 2006). The contribution of the E&E industry oriented initiatives following the Investment in manufacturing employment and value added Incentives Act (IIA) of 1968 and the launching also rose in the period 1972-1979 and in 1985- of the New Economic Policy in 1971 (Malaysia, 97 before showing a trend fall in 2000-2005 1971) did not prove successful until the Free (Figure I). The E&E value added rose to 30% Trade Zones (FTZ) was enacted in 1971 (see of total manufacturing value added by 1997, as Rasiah et al, 2009)1. shown in the figure below, but declined to 26% in 2005.

Figure I: Share in manufacturing value added of E&E, 1972-2005 (In percent)

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1 Rajah Rasiah, Hamdan Majeed and G.N. Gopalan (2009), Background Report to Positioning Penang; A World Bank- Khazanah National Berhad collaborative study.

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JD132294 APENDIX 4.indd 182 3/22/10 8:43:08 AM JD132294 APENDIX 4.indd 183 The E&E industry growth has staggered since staggered has growth industry E&E The 2 in for hub R&D group’s based the addition, In Malaysia. is Germany in outside headquarters its of capability manufacturing OSRAM industry. Malaysia E&E the in ladder added value- the up are moving MNCs, and upgrading mostly indeed firms, of nucleus a that evidence some is there that is news good The value-added and ladders technological the up of E&Efirmsareupgrading andclambering nucleus a that evidence anecdotal is There to climb upthetechnologicalladder. capacity its on critically depends survival its and saturation of point a reached have to 2009) Zeufack, (see and 2005, growth has been flat over the past seven years (TFP) productivity and factor total 2000 manufacturing between declined productivity Labour burst. bubble dot.com the

Albert Zeufack and G. N. Gopalan (2009), Background Report to Positioning Penang; A World Bank-Khazanah National Berhad collaborativestudy. 2 Te nuty seems industry The . 0DOD\VLDQ3DWHQWVE\5HJLRQRI,QYHFWRU 6HODQJRU 3HQDQJ Figure II 2WKHU aasa a bit p vr h yas an years, the over up built has Malaysia ‘World value-added activities are example, Class’and could serve as a bridge to higher for industry E&E the in manufacturing, of segments Some designing next generationFGPA chips. in involved Centre, R&D offshore largest group’s the is which Altera, company, design ASIC’s hosts also Malaysia revolution. Netbook the of core the is which Chip, Atom innovative the developed and designed which Malaysia in Centres Design IC Global three its of one runs Intel Penang. in located is Asia o RD hc i fly epnil fr the for responsible fully development and manufacturing of all Motorola is which R&D for facility largest Motorola’s is cluster same the in Also Cluster. E&E Penang the in produced is shipment microchips world’s the of percent Today,world. the 50 in companies leading the amongst from companies of suite impressive $OO\HDUV 3/22/10 8:43:09 AM 183 Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high APPENDIX 4 value added niche areas 2-way communication devices, accounting for talent is in Malaysia. A subsequent survey of more than 50 percent of the global market some of the leading electronics companies share. in Penang confirmed this trend. This change in the workforce composition is a reflection It is interesting to note that the E&E industry of the burgeoning change taking place in the has become the first driver of innovation in electronics industry, shifting from high volume Malaysia. However, innovation remains driven manufacturing to more technology content by MNCs. About three quarters of patents related activities. generated in the Penang industrial cluster are owned by foreign MNCs in the electronics A final reason why E&E is key to the transition sector (Figure II). to higher income is that the presence of a strong manufacturing E&E base, while being Along the way, there has been skills’ upgrading a neither necessary nor sufficient condition3, among the nucleus of innovators. Figure III can be helpful to the development of higher below shows skills intensity has increased value services. Services such as Business significantly in the E&E industry in the Penang Processing Outsourcing (BPO), Information Cluster from 13% in 1980 to 45% in 2007. As Technology Outsourcing (ITO), Shared an illustration of this transition, 94 percent of Services and Outsourcing (SSO), warehousing Altera’s current total employees are engineers, tend to be manufacturing-related and thrive and 60 percent of its worldwide engineering well around E&E clusters.

Figure III: Skills intensity manufacturing and electronics, Penang Cluster (1980-2007)

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JD132294 APENDIX 4.indd 184 3/22/10 8:43:11 AM JD132294 APENDIX 4.indd 185 nert te oe technologically-advanced to more efforts the integrate Additional (R&D). development and research and technology on institutions firms other suppliers, between efforts local cooperative of and transfer such “Linkages” technology in as behind far is lagging industry E&E still Malaysian the addition, In few innumber. very are fabrication wafer and design product the high end activities of R&D, chip design and whole industry. The number of firms involved in the catalyze to and externalities large trigger can that scale the in and enough fast coming E&E industry, it is fair to admit that change is not skills upgrading are and starting to take place in the technological that comforting is it While trigger large externalities can that scale the fast in and happening enough not is transition the But n n n n For example:

ASEAN, Indianand Australian markets. its to computers all supplies also It order. daysafter 4 than of less delivery efficient boasts and America North to computers laptop of percent 95 supplies Penang Dell group’s turnover. Malaysia, the of percent 60 than more for accounting in management to chain R&D supply like activities conducts Agilent and designcentreinMalaysia services shared global its have now AMD the group’s globalsharedservices. for responsible assembly now is an but operation as started Malaysia Intel upr srie ad re gnrto as generation order delivery, and services logistics support manufacturing, custom development, and research design, in activity excellent more attract to itself position and could Malaysia growth. geography regional from benefit to infrastructure its leverage should and located strategically is Malaysia a middle incometrap’ exit’, ‘premature avoid common mistake of countries ‘caught in the to need The local economy. can help accelerate knowledge spillovers in the foreign-owned establishments into the economy their specialisationprocess. the from for basis as served prematurely have could that industries exit they or policies mistakes: successful past to long too on cling common they either two make to tend MICs Trapped fact. interesting this to points (2008) report industry. Commission Growth Spence’s E&E Michael the of from risks prematurely the to exiting attention draws NEAC The other and specialized electronicsandservices. nano-electronics performance high agriculture, for sensors industry, and energy devices renewable the for electronics devices devices, medical as such areas and automation, manufacturing management to engineering, bridge into niche precision experience in manufacturing of its years 30 leverage over aggressively should Malaysia sector. manufacturing the in multinationals of strategy Asian +1 China a in pole second the as simply or China in violations rights property multinational companiesbecome more wary of 3/22/10 8:43:11 AM 185 Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high APPENDIX 4 value added niche areas The E&E industry’s upgrading and transition Talent supply mismatch- First, the number hinge on significant structural constraints of unemployed graduates has been increasing steadily while at the same time, firms face more Technological upgrading has many determinants difficulties finding the skills they need. It takes and is unlikely to take place especially when on average 5 weeks to fill a vacancy for a skilled there are severe structural constraints. Chief technician in manufacturing in Malaysia, one of among the constraints facing Malaysia E&E the longest time in Southeast Asia. Therefore, is the compelling evidence of skills deficiency. there is ample evidence that Malaysia is skills- Malaysia underperforms on key skills indicators constrained and the prevalence of graduate compared to countries in the same income unemployment, instead of invalidating this bracket. argument is its manifestation.

Despite spending more on education than Skills constraints have devastating most countries in ASEAN, the quality of skills consequences on firms’ productivity. The World produced by the Malaysian education system Bank estimates that firms in selected industries does not seem to match the demand from the in Malaysia may be losing up to 15% of their labor market. The incidence of vacancies for output to skills constraints. In 2007, around professionals in manufacturing has increased 19% of employers surveyed cited skills mis- from 26 percent in 2002 to 27 percent in match as a major constraint to doing business 2007, much higher than the levels observed in manufacturing. in neighboring countries. Furthermore, it takes longer in Malaysia than in most other countries Paradoxically, inflexible and bureaucratic to fill vacancies for professionals or skilled immigration policies prevent Malaysia from production workers. This skills mis-match has attracting and retaining the needed talent. In two implications. addition, the rate of Malaysian talent attrition

Table I: Malaysia needs affordable and faster Broadband

Singapore Philippines Thailand Vietnam Malaysia Korea Fastest 100Mbps/ 3Mbps/ 8Mbps/ 3Mbps/ 4Mbps/ 100Mbps/ Bandwidth/ $84.68 $62.10 $58.30 $50.55 $76.00 Cost $25.00 Lowest 3Mbps/ 1Mbps/ 1Mbps/ 1.5Mbps/ 400Kbps/ 20Mbps/ Bandwidth/ $19.04 $20.60 $17.28 $14.00 $14.00 Cost $20.00 Cost/Mbps $2.70- $15.50- $5.80- $9.30- $19.00- $0.25- Low/Hi $10.20 $20.70 $17.28 $16.85 $35.00 $1.15 (US$)

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JD132294 APENDIX 4.indd 186 3/22/10 8:43:11 AM JD132294 APENDIX 4.indd 187 exit for new firms are also preventing the preventing also are firms and new entry for exit for both bottlenecks Regulatory bandwidth inKorea. lowest the than expensive more times three than more and slower times five is Malaysia in bandwidth fastest Tablethe the in I, shown As services. value-added high of expansion and upgrading at affordable price is a severe constraint to E&E speed and bandwidth broadband for need the business major addition, In Malaysia. in high remains obstacle a and as electricity ranking telecommunications firms of the proportion that suggest surveys firm from Findings as wellissuesrelated topublicsafety. constraints regulatory and infrastructure these alleviate to taken be to needs action decisive the of activities of the targeted industries. Urgent and track keeps which device monitoring window single no is there and incentives the of avail to firms for cumbersome particularly it make milestones, and requirements different with institutions, of multiplicity The schemes. the incentive and in grants different of including management prevalent also is world. tape the Red in longest the among is property register to time the and competitors main its than Malaysia in business a close or create to longer takes It industry. E&E the in transition euaoy n nrsrcue bottlenecks- infrastructure and Regulatory income high status. to transition Malaysia’s delay is not returning. This dynamics can only further diasporas the and lately increasing been has

ulc oiis o upr te private the support capacityforinnovation sector’s to policies public The need for sustained effort and far-sighted streamlined. further be can regulations business climate, made great strides in improving the investment has Malaysia while Similarly, R&D. on spend they than more and any country neighboring other than more charges, Malaysia security-related in on sales their of 3% around spent firms security, of lack the with cope to In order regions. all in business to obstacle major a as worsened has disorder and theft crime, lseig n lnae bten economic between linkages and facilitate clustering to but activity, economic spread to not important therefore is It innovation. to key are agglomeration from scale of inisolation. Economies capabilities acquire rarely firms Also, capabilities. technological firm-level of development the in roles crucial play training and education Therefore, activities. complex more to simple from moving and manner, capabilities incremental technological in investments an past on building in proceed they completely new into areas of competence. Instead, jumps make they can nor technologies; new handle to needed capabilities the develop 2009). Bank, instantaneously cannot enterprises and Therefore, (World incremental process an cumulative is building capability is it important to doing, realize that firm-level technological so In firm-level capabilities. of promotes technological development the that enables environment and on focus the must fostering Malaysia in Policymakers oil perceptions- Social h preto of perception The 3/22/10 8:43:11 AM 187 Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high APPENDIX 4 value added niche areas agents, both private and public, local and ecosystem which will not only bring in new foreign. For this to happen, the budget and technologies and activities, but help to develop respective development plans need to have a a new breed of technopreneurs. Provided the geographical focus, and systematically avoid right incentives, this new ecosystem would sector silos. flourish through outsourcing opportunities and the use of new products to create the next Specific policy recommendations to generation of applications and devices. The accelerate and scale up the E&E transition presence of a nucleus of innovative firms in to higher value-added Malaysia represents an opportunity which can be tapped in order to proliferate innovation and Specific policies could be implemented to creativity. accelerate and scale-up the move of the E&E industry up the value chain. The capacity and The NEAC has identified four key areas of capability built up over the last 40 years in the intervention: Talent, the R&D Ecosystem, field of electronics manufacturing and related Infrastructure, and Institutions and Incentives. activities need to be nurtured and further developed aggressively. Firms, including These four thrusts must be aligned and MNCs and Malaysian domestic ones, that implemented simultaneously for optimum either are willing to employ or have introduced impact in order to create the right environment new business activities, should be supported. for the transformation into the innovation-led This action would accelerate the growth of an economy.

Pushing Ahead: The 4 Major Thrusts

Talent R&D Ecosystem Infrastructure Institution/ Incentive

Welcome talent Nurture Globally competitive One Stop Centre Attract diaspare technopreenurship ICT infrastructure Re-visit incentive Develop & retain Establish high and Seamicess physical packages talent research centre connectivity Adapting an (CEE) Sustainable and “Asset Light’ R&D grants scheme liveable city approach which connects foreign-local

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JD132294 APENDIX 4.indd 188 3/22/10 8:43:11 AM JD132294 APENDIX 4.indd 189 industry requirement knowledge gap Bridge theskillsand source oftalent Attract diasporas experts withcleardeliverables. professionals anddomain and residence Allow Proposed Solutions flexibility forentry, exit forhighlyskilled tomeet asprincipal • • • • • • Introduce electivesinto Establish a‘finishing Match thecapabilities Establish aNon-Profit Review andshortenthe Introduce afast-track for foreigntalent Permanent Residentstatus process ofdeliveringthe Universities skills businessesand permits forhigh-tech/ procedure forwork niche areas graduate programmesin school’ programme opportunities to therighteconomic with thediasporas organisation tofosterlinks Key MeasuresFor Action hut : Talent 1: Thrust • • • • Enterprise Ireland/ Singapore isamodelto Follow theH1Visa Formalize andstrengthen retain foreigntalent attract talent system intheUSto aimed atemployability current programmes emulate could bemodelsto Singapore International Remarks 3/22/10 8:43:11 AM 189 Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high APPENDIX 4 value added niche areas Thrust 2: R&D Ecosystem

Proposed Solutions Key Measures for Action Remarks

• Promote • Review & adapt • Explore best practices technopreneurship bankruptcy laws to in the developed world and high risk ventures in support high risk ventures similar to Chapter 11 for targeted sectors by lowering in innovation-based innovation ventures cost of entry & exit businesses, allowing more risk-taking and eliminating the stigma of failure in these targeted areas • Explore partnerships with global venture capital firms

• Revise R&D grants/ • Conduct an independent • The focus of the incentives under a single study to streamline R&D awards should be on window grants / incentives predetermined outcome of • Simplify grants system to local companies accelerate disbursement • The awarding of grants • Establish condition-based must be supported by a grants system to encourage clear set of deliverables on foreign-local collaboration the part of the recipient

• Establish high end research • Establish CEE as a pilot • ITRI (Taiwan), Cambridge centre to nurture & retain center in collaboration with Science Park, A*Star talent, attract global talent global research centres (Singapore), R&D labs in • Provide a suitable work like IIT with free access to Bay Area. CEE is a hybrid environment for the foreign talent and flexible learning from these four diasporas mechanism to involve the models diasporas

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JD132294 APENDIX 4.indd 190 3/22/10 8:43:11 AM JD132294 APENDIX 4.indd 191 • • • • • Focus onestablishingPenang Create a Increase bandwidthand liveability as leaderonsustainabilityand urban centre connection’ ‘frequency ofair/port connectivity Improve physical connectivity totechhubs virtual connectivitytoenhance voice connection with highspeeddataand Enhance virtualconnectivity Proposed Solutions viable andvibrant through

• • • • • hut : Infrastructure 3: Thrust Key MeasuresFor Action Redevelop thewaterfront Enhance theGeorge Town Improve securityforboth Establish flightstoregional Establish globally competitive connectivity cities andenhanceport/rail ICT infrastructure like HongKong-Kowloon and ensureseamlessness Conurbation environment the livingandbusiness • • • Upgrade Penang’s logistical Ensure seamless Adopt acitystrategyto E&E sector would bettersupportthe that theexportinfrastructure warehouses andairportso capabilities suchas and physically connectivity bothvirtually for sustainability reinvent Penangasaleader Remarks 3/22/10 8:43:11 AM 191 Appendix 4: Leveraging 40 years of manufacturing experience to bridge into high APPENDIX 4 value added niche areas Thrust 4: Institution and Incentives

Proposed Solutions Key Measures For Action Remarks

• Set up ‘One Stop Agency’ to • Reduce the regulatory • Benchmark against EDB handle all matters relating to burden (Singapore) and IDA the E&E industry • Abolish the system of (Ireland) Approved Permits and replace it with a short negative list • Introduce a ‘single-window’ system to manage all matters

• Re-visit incentive framework • Adopt proactive approach to and packages to strengthen retain and grow companies the competitive position of • Link incentive packages to companies globally impact and outcomes

• Adopt an ‘Asset Light’ • Appoint a trust company to • The unlocking of asset value approach to unlock asset manage the ‘Asset Light’ must be supported by a value approach on a selective clear set of deliverables on basis the part of the recipient

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JD132294 APENDIX 4.indd 192 3/22/10 8:43:11 AM NEAC Advisory Group

Dato’ Latifah Merican Cheong, Securities Commission Dato’ Noriyah Ahmad, Economic Planning Unit Dr. Nungsari Ahmad Radhi, Khazanah Nasional Bhd Prof. Tan Eu Chye, Universiti Malaya

NEAC Secretariat

Prof. Norma Mansor, Secretary

G. Jeevakumar Lee Chee Sung Liew San Yee Mary Artylan Fernandez Nur Farhana Md. Marzuki Tong Yee Siong Yassif Nagim Mustapha

NEAC Chairman’s Office

Ahmad Zuhairi Muzakir Dennis See Roshan Jaffar

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