cities, people & the economy a study on positioning penang
Homi Kharas, Albert Zeufack & Hamdan Majeed
A collaborative research between Published by: Khazanah Nasional Berhad Level 33, Tower 2, Petronas Twin Towers Kuala Lumpur City Centre 50088 Kuala Lumpur, Malaysia
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ISBN 978-983-44193-3-2
Kharas, Homi., 1954- Cities, people & the economy a study on positioning Penang / Homi Kharas, Albert Zeufack & Hamdan Majeed ISBN 978-983-44193-3-2 1. Economic development projects - Pulau Pinang. 2. Pulau Pinang - Economic policy. 3. Pulau Pinang - Economic conditions. 4. Pulau Pinang - Social conditions I. Zeufack, Albert. II. Hamdan Majeed. I Title. 338.9595113 First published: September 2010
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Foreword / v 4 Penang’s space / page 49 – Penang as a hub 1 Rising in rhythm: Penang’s cities, – Penang as a secondary city people and economy / page 1 in Malaysia – Cycles of development – Improving George Town’s liveability – Restoring lustre to the “Pearl of the Orient” – George Town as a World – Growing, retaining and attracting talent Heritage Site – Reinventing economic opportunity – Looking forward 5 Penang’s people / page 65 – Providing better livelihoods 2 New opportunities and pitfalls in the – Growing, attracting and global economy / page 9 retaining talent – Global recession of 2009 – A location of choice – Emergence of East Asia, China and – Continued excellence in education regional economics – Leveraging the diaspora – Avoiding the middle-income trap – Doing different things and doing things 6 Levers of change / page 77 differently: Strategic planning in Penang – Strategic development thrusts – The Northern Corridor Economic Region – Lighting the fuse: Policy and institutional reform 3 Penang’s economy / page 21 – Catalytic grants and investments – Macroeconomic overview for change – Penang facing serious structural constraints – Monitoring, data and key – Moving up the value chain performance indicators • Agriculture – New mindsets • Manufacturing & services – Supporting Penang to – Specialisation and economies of scale: support Malaysia Six focus areas to drive growth References & annexes / page 91
Foreword
This book is an output of the “Positioning Penang” each other in Penang. The urban cycle is just study, a collaborative research project between starting to enter a recovery phase, follow- Khazanah Nasional Berhad and The World Bank, ing the World Heritage designation of George identifi ed by the Economic Planning Unit (EPU) Town. The people cycle is still in a recession, as one of the inputs to the 10th Malaysia Plan. with new graduates choosing to leave the area. This book, which primarily targets policy mak- The economy is caught in a slump, with the ers, draws on a strong body of empirical work boom years a thing of the past. Implementing a conducted in a dozen technical background pa- coherent strategy across these areas — cities, pers contributed by a team of internationally-re- people and the economy — could lead to a sus- nowned researchers and fi eld practitioners of the tainable, inclusive and rapid development that Malaysian economy. These background papers benefi ts not just Penang and its environs in the will be published in a separate volume. Northern Corridor, but the nation as a whole. The premise of this book is that a re- The book suggests some levers of change and gional strategy to develop the “Northern Cor- contributes inputs to the preparation of the ridor” of Malaysia is critical in encouraging the 10th Malaysia fi ve-year plan. emergence of globally-competitive clusters. This book was prepared by Dr Homi Kha- For the Northern Corridor to succeed, Penang, ras (Brookings Institution, The World Bank its largest conurbation, must succeed and vice Consultant), Dr Albert Zeufack (Director of versa. However, it seems to be caught in the Research and Investment Strategy, Khaza- “middle-income trap” and needs to reinvent nah Nasional) and Mr Hamdan Abdul Majeed itself. Penang cannot rely for much longer on (Senior Vice President and Head of the Khaza- cheap labour, subsidised infrastructure and nah Koridor Utara Offi ce), under the overall guid- its ability to provide suitable land for low-tech ance of Dr Nungsari Ahmad Radhi, Executive manufacturing. It must focus on developing Director, Khazanah Research and Investment industries which provide economies of scale, Strategy. Background reports were authored by where on-the-job learning provides the base Tan Sri Andrew Sheng, Dato’ Dr Kim Tan, Dato’ for continuous improvement in productivity. Dr Leong Yueh Kwong, Dr Rajah Rasiah, Dr This requires a new growth strategy that po- Shahid Yusuf, Dr Kaoru Nabeshima, Dr Julian sitions Penang to take advantage of the new Velez, Dr Shahridan Faiez, Dr Hiau Kee, Mr K global trends. If the Northern Corridor can es- Gopalan, Mr Charles Landry, Mr Laurence Loh, cape the middle-income country (MIC) trap, Mr John Lamb, Mr Yoon Chon Leong and Dr then, so can Malaysia. Ooi Giok Ling (in memoriam). Additional input The book proposes a multidimensional and support were received from Azlina Jaffar, growth strategy which embraces three ele- Intan Nadia Jalil, Devendran Nadaraja, Yusmi- ments: cities, people and the economy. At nov Ahmad, Aziz Kevin Lee, Lim Su San, Dr Neil present, these elements are out of phase with Khor, Christopher Choong and Nur Amalina. >>> The team is grateful to numerous eminent per- had); Dr Danny Quah (Professor, London School sons for reviewing earlier drafts of this book and of Economics & Political Science and NEAC providing insightful comments. These include member); and Dato’ Dr Tan Tat Wai (Group but are not limited to Datuk Dr Hamzah Kas- Managing Director of Southern Steel Berhad). sim (CEO of Innovation Associates and National The preparation of the book benefi ted Economic Advisory Council [NEAC] member); greatly from the assistance and cooperation pro- Dato’ Latifah Merican (Advisor, Chairman’s Of- vided by numerous people in Kuala Lumpur and fi ce, The Securities Commission); Encik Johan in Penang. In particular, the team would like to Mahmood Merican (Principal Private Secretary thank the colleagues in the Department of Sta- to the Minister in the Prime Minister’s Depart- tistics (DOS) and the Economic Planning Unit ment); Mr Vikram Nehru (Sector Director and (EPU), especially Dato’ Noriyah Ahmad (Direc- Chief Economist for East Asia and Pacifi c, The tor General of the EPU). World Bank); Dato’ Redza Rafi q (CEO of North- Views expressed in this book do not neces- ern Corridor Implementation Authority); Mr sarily represent The World Bank’s or Khazanah’s Philip Schellekens (Senior Country Economist and should solely be attributed to the authors. for Malaysia, The World Bank); Tan Sri Andrew Sheng (Board Member, Khazanah Nasional and NEAC member); Dato’ Dr R Thillainathan (Inde- Homi Kharas, Albert Zeufack pendent Non-Executive Director, Genting Ber- and Hamdan Majeed RISING IN RHYTHM: PENANG’S CITIES, PEOPLE & ECONOMY - CYCLES OF DEVELOPMENT - RESTORING LUSTRE TO THE “PEARL OF THE ORIENT” - RETAINING AND ATTRACTING TALENT - REINVENTING ECONOMIC OPPORTUNITY - LOOKING FORWARD
RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY 1 The three key foundations of growth in Penang — its cities, people and economy — are not developing in tandem. Their cycles of development must be synchronised to turn Penang into a globally-networked economy and a secondary city leveraging on its unique endowments and niche capabilities. As a middle-income region with a strong track record of economic success, Penang must now set a new multidimensional agenda to be the most vibrant economic hub for the Northern Corridor of Peninsular Malaysia. It must accentuate the links, within and without, and coordinate the development of its cities, people and economy, so as to develop abreast of an Asia that is expected to drive global economic growth in the 21st century.
2 RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY Cycles of development to Universiti Sains Malaysia (USM), one of the largest universities in Malaysia and a multitude Shih Chung Branch School, along Northam of research institutes. Road (Jalan Sultan Ahmad Shah) in George Ironically, it has also experienced marked Town, Penang, was a magnifi cent colonial-era shortages of skilled labour. Brain drain remains building in the heart of town. It is now aban- a signifi cant problem for local business. There doned. Its roof and some internal walls have are limited opportunities for graduates to work collapsed. Vegetation is growing wildly among with cutting-edge technologies in many areas the ruins. Shih Chung is a grim reminder of the of industry, including the hard sciences (for state’s changing fortunes. example, with nanotechnology and grid com- Once the “Pearl of the Orient”, present- puting), services and management. Often, day Penang is home to many dilapidated build- multinational corporations (MNCs) rotate staff ings. But efforts are under way to reverse this to other countries as part of their global talent- cycle. In July 2008, the historic port cities in management programmes, further encourag- the Straits of Malacca — George Town and ing the drain of skilled human resources. Melaka — were listed by the United Nations Educational, Scientifi c and Cultural Organisa- tion (UNESCO) as World Heritage Sites for their living culture, history, architecture and The Bayan Lepas industrial park, the fi rst free multiculturalism. With this, projects to restore trade zone (FTZ) in Malaysia, became a sig- the cities are being actively developed. nifi cant pillar of Penang’s economy after the island lost its “free port” status in 1969. It also became a model for the rest of the country. Manufacturing assembly work for MNCs, es- The Penang Free School, founded in 1816, was pecially in the electrical and electronics indus- the fi rst English school in Southeast Asia. Con- tries, along with tourism, provided a dynamism vent Light Street (founded 1852), the oldest that allowed Penang to grow at rates exceeding girls’ school in Malaysia, and Chung Ling High the national average, and upwards of 7 per cent School (1917), one of the fi rst formal Chinese for the period 1970–2005. The grand building that schools in the region, were also founded in Pen- Manufacturing’s share of state gross do- later housed the Shih ang. The state’s long history of formal learn- mestic product (GDP), grew from 13 per cent Chung Branch School (left) and the state it is ing has continued to this day. It is now home in 1970 to 54 per cent by 2008. But both tra- in today (below) Courtesy of Malcolm Wade
RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY 3 ditional manufacturing and tourism are fac- Box 1), its people and its economy. But recent ing competitive threats. Lower wages and the history shows that they can move with their lower cost of doing business separate rhythms unless they are coordinated. in neighbouring countries are In reality, the cycles of development in Pen- The cycles of eroding Penang’s advantages ang’s physical infrastructure, its human capital development in Penang’s in manufacturing assembly, and its economy are not in tandem with each physical infrastructure, while tourism arrivals have other today. The old city centre has become its human resource base fallen as alternative destina- run-down. Many of the best graduates are and its economy are not tions gain popularity. Foreign leaving the area. That is why, despite some im- in tandem with each tourist arrivals have declined pressive advances, Penang’s economy is falling other today. Despite from a peak of 2.3 million behind some of its rapidly-growing neighbours some impressive visitors in 2000 to perhaps and even other regions within Malaysia. advances, Penang’s 1.8 million in 2008. From The prospects for Penang depend impor- economy is falling behind 2001 to 2005, Penang’s GDP tantly on policies undertaken at the national some of its rapidly- growth averaged just 5.9 per level, and on decisions taken by the federal gov- growing neighbours cent, much less than its his- ernment in terms of projects to be undertaken and even other regions torical average. It needs to in the state. The responsibility for Penang’s fu- within Malaysia. develop new sources of com- ture also rests with the state government. It is parative advantage if it is to the state government that implements many grow rapidly again. federal programmes and it has the closest links with local businesses and the people. The state government, and Penang-based federal govern- ment agencies, can provide crucial inputs into Penang’s fortunes are intimately linked to de- articulating a vision for Penang’s development. velopments in these three areas: its cities, its But, as former Chief Minister Tun Lim Chong Eu people, and its economy. The three can com- has said, “It is indeed the people of Penang who plement each other. have made us what we are today”, 1 and it will Vibrant cities can lower the transaction be the people of Penang who will determine the costs for the fl ow of goods and transfer of ideas, prospects for their state. producing what economists call ”agglomera- Today, in 2010, the world is still recover- tion economies” — higher productivity based ing from a major recession. Penang’s principal on bringing people and fi rms closer together in economic model of export-led manufacturing dense environments. They also serve as a mag- based on cheap labour is under threat from net for talented people. lower-wage competitors in China and Vietnam. People, in turn, provide the life and soul of Some MNCs are relocating their production cities. The wide presence of skilled professionals base elsewhere in the region, unemployment can elevate a production assembly economy to is on the rise, and the state government is in a higher value-added plain. A talented resident opposition to the federal government, making population is a critical requirement for a suc- coordinated policies harder to achieve. cessful knowledge economy — knowledge fl ows But this does not mean that prospects best through face-to-face contact and inte- are dim. At another time, in 1969, Penang also raction, even in an electronically-linked world. faced a global recession, the loss of its free A vibrant economy serves as a magnet port status on which much of its economy de- for talent and provides the rhythm of city life. pended, the exit of a major multinational (the Economic opportunity is the means by which Royal Australian Air Force from its airbase in wages and living standards rise. Butterworth), rising unemployment and a state Penang can regain its dynamism only if it restores and maintains an upswing in the cycle of development in all the three areas: its cities 1 SERI Penang Lecture 2005, “Building on (especially the George Town Conurbation, see Penang’s strengths: Going forward”.
4 RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY Gurun Yan BOX 1: George Town Conurbation
Envisaged in the National Physical Plan (NPP) of Malaysia, Tg Dawai the George Town Conurbation (GTC) consists of the highly- DAERAH urbanised Penang Island, Seberang Prai, Sungai Petani, Kulim KUALA MUDA Sg Petani and the surrounding areas (see map). With a population of 1.6 Kuala Muda million according to the National Census in 2000, it was the KEDAH second-largest metropolitan area in Malaysia after the Kuala Lumpur conurbation (Klang Valley), which had a population of 4.9 million. Johor Bahru had 1.5 million. The population of Kepala Padang the GTC is now estimated at 2 million. Batu Ferringhi Batas Serai Like Johor Bahru and its surrounds, the GTC has been designated a regional growth conurbation while the areas Butterworth linked to Kuala Lumpur is the national growth conurbation. George Town Kulim A conurbation is defi ned as “an urban area that encom- Batu Uban Bukit passes several cities or towns physically agglomerated and Balik Pulau Mertajam DAERAH KULIM DAERAH forming a builtup area through population growth”. Under the SELAMA NPP, for consistency, a conurbation is named after the most Bayan Baru Bayan Lepas DAERAH prominent town within it — and not because it is the state Bukit Tambun BANDAR capital or the state in which it is situated. Its name is also BAHARU not based on locality such as “northern” or “eastern”. That Serdang township will be the reference centre within its conurbation. Nibong Tebal PERAK In this case, George Town represents the most-developed Bandar Baharu area and main growth centre in the GTC. The federal government is currently upgrading the Parit Buntar George Town infrastructure in the GTC. However, these developments lack DAERAH a central strategy and if there is one, it is poorly articulated. Conurbation KERIAN Furthermore, there are risks that, due to lack of coordination, Centre of the infrastructure developed would not synergise to enable conurbation seamlessness of operations. (pusat konurbasi)
government in the Opposition vis-à-vis the na- tunities. Despite the hollowing It is time to articulate tional government. From that forbidding start- out, traffi c congestion is grea- a new development ing point, it enjoyed a period of prosperity and ter than one would expect from strategy that can guide growth for over 30 years based on a strategy of a city of its size. Penang has the Penang to provide export-led, labour-intensive manufacturing. highest per-capita car owner- better wages, jobs and Once more, it is time to articulate a new ship in Malaysia. prospects for the next development strategy that can guide Penang The World Heritage de- generation. This strategy to provide better wages, jobs and prospects signation for George Town pro- is to turn Penang into for the next generation. This strategy is to turn vides an opportunity for a fun- a globally-networked Penang into a globally-networked economy. damental renewal. The issues, economy, but it is not a however, do not have a simple simple “engineering” fi x. “engineering” fi x — remove the Restoring lustre to the congestion, improve the envi- ronment, and reduce the crime. That approach “Pearl of the Orient” would focus efforts on the continual search for Penang has been called the “Pearl of the Ori- property development opportunities to opti- ent”. The image of idyllic beaches, temples and mise the use of space, and to maximise density mosques, coupled with world-class schools and short-term profi ts. The most successful cit- and infrastructure, made the island an at- ies in the world do more than this. They develop tractive destination for major MNCs from the as liveable, multicultural and sustainable envi- 1970s. In those days, many skilled people lived ronments, where quality of life, beauty and aes- in or around George Town, but the city today is thetics spur innovation and creativity. In short, no longer a magnet for the highly-skilled and cities which possess the right physical, cultural, creative. Many of its buildings are empty, with economic and social conditions would become their owners awaiting redevelopment oppor- a magnet for talent, a “sticky place” for skills.
RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY 5 Successfully balancing the ambition to Growing, retaining and become a global leader, move up the value chain and be a destination of choice for the attracting talent young would not be easy. Penang is small and The pattern of migration in Malaysia over the lacks the dominant position, for example, of last two decades has favoured the Klang Valley Kuala Lumpur. But across the world, while and the south relative to Penang. For example, major global cities like London and New York between 1991 and now, the population of the have thrived by becoming town of Klang has almost trebled. It has grown centres of creativity, there to 2.5 times in Ampang Jaya and more than Penang is small and have also been highly suc- doubled in Johor Bahru. lacks the dominant cessful secondary cities. In the similar period as above, the popu- position but the global In Spain, Bilbao, Bar- lation in Penang has only grown by 0.5 times experience is that celona, Seville and Valencia (Intan Nadia, 2009). This is partly refl ective “pocket-sized” places have become important hubs. of the lack of job opportunities, especially as can develop niches that Bologna is the richest city in investment has started to fall relative to other permit them to grow Italy in per-capita terms, and locations, and is partly the result of a perceived rapidly. But they must generates the greatest export decline in the quality of life. avoid the path that revenues per capita, with a In a globalised world, where people have makes them oversized focus on education, research many options as to where to live and work, and suffer the and advanced manufacturing. the links between quality of life and economic diseconomies of poor The global experience is that performance of a location have strengthened. living conditions in many “pocket-sized” places can de- Whereas in the past most skilled people chose major metropolises. velop niches that permit them a company and job, and located to where their to grow rapidly. But they must work took them, in the modern economy, avoid the path that makes skilled people choose the place they wish to them oversized and suffer the live and look for jobs there. Even if a locality diseconomies of poor living conditions in many is effi cient and competitive, it may not attract major metropolises (Landry, 2009). people to live there. As an example, for many Successfully capturing the opportunities years, fi rms in Penang have complained about afforded by place requires Penang to build on a lack of qualifi ed skilled personnel, especially its diversity. It is the differences that make a engineers. The jobs are there, but there are few difference. With these in mind, there are four qualifi ed takers. aims for the future: Instead of productive effi ciency, the main • Make diversity a strength, with opportu- source of competitiveness of a region has be- nities for people from different income come the ability to attract people, especially levels and ethnicity; the young. Places that attract talented youths • Be creative and innovative in ways that end up being the winners in the national and benefi t the local economy, Malaysia and global battle for development. The cohort of the world; 25- to 35-year-olds has energy and ambition • Develop as a transactional hub for prod- and is fl exible and adventurous. ucts and services — a spatially-connect- The young people in Penang surveyed ed economy; and for this study say that they seek a culture of • Encourage ideas, knowledge and creativ- openness, good career opportunities and good ity — an Internet- and people-connected governance. They may migrate overseas for a economy. time to gain experience, but they will return if family, lifestyle and cultural factors become Together, these changes will position Pen- effective pulls. The current global circulation ang as a networked economy: globally, region- of young people allows them to build up over- ally and domestically. seas networks, ideas and linkages. They would
6 RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY add to the social capital of Penang if they can Penang cannot rely for much longer on be attracted back. cheap labour, subsidised infrastructure and It is not only engineers that Penang needs, the ability to provide suitable but a broad group of creative professionals. For land for manufacturers. It must a city to function well, it needs a diversity of tal- focus on developing industries In a globalised world, ent. So far, there has been a tendency to focus that provide economies of where people have on attracting those with specifi c skills, like en- scale, where on-the-job learn- many options as to gineers or business service professionals. But ing provides the base for con- where to live and work, arts and media practitioners, educationists, tinuous improvement in pro- the links between entertainers, activists and others give a city the ductivity. It cannot do all things quality of life and creative edge that supports innovation. but must be selective in what it economic performance While it is important to attract and re- tries to develop. of a location have tain talent, it is also important to develop it. Penang must position strengthened. Penang Penang has a rich array of higher educational itself to take advantage of: has grown as a institutions, research organisations and think • The emergence of Asia as sweatshop factory for tanks, but these have fallen short of global the economic driver the rest of the world. standards of excellence. Restrictions on the in the world, and of Asian It must do better and import of skilled talent from abroad are rem- consumers as a dynamic become a smartshop for nants of an outmoded idea that skilled jobs new force for growth; sustainable products. must be subjected to control to provide op- • Its strategic location fac- It cannot do all things portunities for locally-trained professionals ing the Indian Ocean and but must be selective in to flourish. the Bay of Bengal; what it tries to develop. These policies have pushed the best local • The need for new tech- talent abroad to fi nd collaborators at the cut- nologies to power a low- ting edge of their fi elds. Penangites are fl ourish- carbon global economy; and ing in Singapore, Britain and the United States • The continued progress of globalisation because those are places where they can inter- and outsourcing that is developing new act with the best in their chosen fi elds. Similar markets, especially in the modern opportunities for them to interact with global service sectors, and innovations peers and mentors are needed at home. in new products and processes.
Reinventing economic Looking forward opportunity Penang today is a middle-income region. As Economic growth in Penang has been driven such, it has various advantages like fi rms with by the dynamism of the manufacturing sector, enhanced capabilities and a well-developed especially in electronics. Manufacturing jobs track record of economic success. But it also account for 37 per cent of all jobs in the area faces the disadvantages of rising labour costs and all groups are well represented in manu- and greater competition from lower-cost facturing. But the fi nancial crisis of 2009 has neighbours such as China, Vietnam and Thai- shown the limits of such a strategy. land. This study explores strategies suitable for While Penang is well-integrated into the middle-income regions. global supply chains, domestic value-added is Moving to a new growth strategy is not limited and the supply chain does not extend easy. A multidimensional approach is needed, enough to local fi rms or into the hinterland. and it must embrace the three elements of Penang has grown as a sweatshop factory for developing cities, people and the economy. At the rest of the world. It must do better and be- present, these elements are out of sync with come a smartshop for sustainable products. each other. The urban cycle is just entering a
RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY 7 recovery phase, following the World Heritage ity of patients in the medical tourism sector in designation. The people cycle is still in reces- Penang. India, China, the Middle East and In- sion, with new graduates choosing to leave. donesia are expected to continue to have dy- The economy is caught in a slump, with the namic economies, and closer integration with boom years a thing of the past. A coherent them can bring about positive development strategy is needed across for all. Upgrading logistics and international these areas. agreements with these neighbours can deepen Moving to a new growth All over the world, cities regional integration ties. strategy is not easy. are trying to embrace the Where Penang has fared poorly is in inte- A multidimensional knowledge economy and grating domestically, in connecting the natural approach is needed, become more creative. Such resources and human capital of its hinterland and it must embrace pronouncements are easily with the global economy. This is an area with the three elements of made, but much harder to untapped potential. Investments here can build developing cities, talent achieve. If a premature move the critical mass and density needed for the and the economy. takes place, with everything economy to benefi t from scale. The premise of oriented towards a new this book is that a regional strategy to develop For the Northern knowledge economy, there the Northern Corridor of Malaysia is critical in Corridor to succeed, is a high risk of failure. Along encouraging the emergence of globally-com- Penang must succeed with this, the current core petitive clusters. and vice versa. strengths of the economy For the Northern Corridor to succeed, If the Northern Corridor (basic manufacturing) may Penang must succeed and vice versa. Penang can escape from the be eroded at an accelerated is the heart of the Northern Corridor and the middle-income trap, pace — with nothing sub- Northern Corridor can provide the scale re- then so can Malaysia. stantial to replace them. But quired for Penang to grow. Successful develop- Conversely, if the if no move in this direction ment in this locality can reduce the economic Northern Corridor is taken, it is inevitable that distance of many Malaysian citizens to global stagnates, the likelihood Penang will decline, at least markets, and can reduce divisions by offering of Malaysia escaping in relative terms. opportunities for all groups to participate in the middle-income trap Penang has excelled over economic growth. declines considerably. the past 40 years in orienting The way forward can feature sustainable, itself externally and linking with inclusive and rapid development that benefi ts the global economy. Its exports not just Penang and its environs in the Northern go to all corners of the world. It has attracted for- Corridor of Peninsular Malaysia, but also the na- eign direct investments (FDI) from major MNCs, tion as a whole. If the Northern Corridor can es- especially in the electronics sector. cape from the middle-income trap, then so can Penang has also started to develop closer Malaysia. Conversely, if the Northern Corridor links with its neighbours and to integrate within stagnates, the likelihood of Malaysia escaping the region. Already, Indonesians are the major- the middle-income trap declines considerably.
8 RISING IN RHYTHM: PENANG’S CITIES, PEOPLE AND ECONOMY NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY - GLOBAL RECESSION OF 2009 - EMERGENCE OF EAST ASIA, CHINA AND REGIONAL ECONOMICS - AVOIDING THE MIDDLE-INCOME TRAP - DOING DIFFERENT THINGS AND DOING THINGS DIFFERENTLY: STRATEGIC PLANNING IN PENANG - THE NORTHERN CORRIDOR ECONOMIC REGION
NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY 9 The global economic recession of 2008–09 has brought into sharper focus the need to review and readjust policies to promote foreign investment. Penang is well-placed to take advantage of the shift in global consumer demand to China, India, the Middle East and Far East. However, it must avoid the “middle-income trap”. A victim of its own success, its competitiveness in traditional areas is falling as wages rise. At the same time, it has not developed an environment where innovation can fl ourish to yield higher profi ts and wages. Faced with this, the government has embarked on a new policy of developing regional economic corridors — the Northern Corridor Economic Region in Penang’s case — that can benefi t from the labour, land and natural resources of the hinterland, combined with the manufacturing expertise and global connections found in exporting centres.
10 NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY Global recession also declined. East Asian exporters, includ- ing Malaysia, were also hard hit as importers of 2009 worked off excess inventories. There is no denying that the world has gone There is a growing consensus that the through a global recession of historic dimen- world is recovering from the recession and the sions in 2009. The International Monetary decline in global output has levelled off in the Fund (IMF) projected that the dollar value of second half of 2009. Much remains to be done, global output could drop by 6 per cent in 2009. and the recovery is still unsustainable as it relies This drop was largely the result of a major fi - on massive public sector defi cits which, at some nancial crisis that has seen the bankruptcy or point, must be curtailed. Nevertheless, history merger of many of the largest and oldest fi nan- has shown that global recessions have been off- cial houses in the world. set by rapid global recovery, leaving trend output As severe as the crisis has been, it could at the same level. That has been the experience have been substantially worse. An early, strong, in the United States for over a century, and held forceful and coordinated policy response, true even in the Great Depression. starting in October 2008, has helped staunch For Malaysia, the crisis presents oppor- the worst fears and prevented a panic that was tunities as well as obstacles spreading to non-bank credit markets. That to renewed growth. One con- could have triggered a collapse of markets in a sequence of the crisis is that The global credit crunch range of longer-term securities. CEOs worldwide are reviewing has become a catalyst Emerging economies, like Malaysia, were their strategies so as to enable for a sharper focus on quickly affected by the crisis and recession that their corporations to emerge competitiveness. Those became global — even though they fi rst appeared stronger. The global credit countries and localities to be insulated from the problems in the subprime crunch has become a catalyst that attract global market that triggered the global breakdown. for a sharper focus on compet- corporations’ attention The impact was transmitted through two itiveness. Those countries and can lock in advantages channels. First, the major global fi nancial institu- localities that attract their at- for many years to come. tions needed substantial liquidity when tradition- tention can lock in advantages This requires a review of al funding mechanisms in their home markets for many years to come. This the policies to promote became harder to tap into. They decreased their requires a review of the poli- foreign investment. global exposure. Emerging markets, which had cies to promote foreign invest- previously seen a surge of capital infl ows, were ment. It is no longer enough subjected to sizeable withdrawals. Malaysia saw to offer fi rms fi nancial incentives to invest their repayments to foreign banks in 2008 reaching capital in Malaysia and in Penang. Instead, they US$13 billion. This decline in liquidity had follow- must offer a better fi t with global strategies by on effects. Along with other countries, Malaysia promising and creating: saw a sharp decline in equity prices, not neces- • A stable macroeconomic environment sarily due to fundamental deterioration of corpo- where currency and fi nancial markets rate earnings, but simply because investors were are robust enough to withstand global nervous about whether their peers, including for- turmoil; eigners, still had the liquidity to remain invested • Superb logistics and virtual connectivity in Malaysian securities. to be part of a global supply chain; Beyond fi nance, the Malaysian econo- • An innovative workforce that contributes my was severely affected by adverse devel- to investing companies’ productivity opments in international trade. The global growth; recession led to a softening of commodity pric- • A creative environment where new ideas es. In October 2008, crude palm oil prices fell and solutions can fl ourish; and to almost half the peak levels seen in June of • Global leadership, usually through the same year. World trade in manufacturing a dense cluster of fi rms, in niche areas.
NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY 11 In this fi nancial crisis, Malaysia has done global recession, could double to about US$110 well on the fi rst of these. It has managed the trillion by 2025 (at market exchange rates, ad- macroeconomic turmoil without resorting to justed to exclude infl ation). extraordinary measures. Its strong external po- Asia’s contribution to this growth is likely sition and sound fi nancial sector allowed it to to be at least 50 per cent, so the region’s out- overcome the withdrawal of large amounts of put in 2025 may be approximately the same as foreign capital without fear of a market break- global output in 2004. Eight Asian economies down. But Malaysia must make more progress — China, India, Japan, South Korea, Taiwan, In- on the other four items listed above to take full donesia, Malaysia and Thailand — could have advantage of this crisis. The crisis can be a cat- economies of over US$1 trillion, a size that alyst for reform as it was in 1986 and 1998. would put them in the top 10 global economies today. In other words, a large fraction of global demand will shift to Asia. An even greater frac- tion of consumption of consumer durables will Emergence of East Asia, be in Asia. China and regional In this scenario, by 2025, most of the economics world’s middle class would be in Asia and most of Asia’s population would be middle class. To- Penang’s one great asset is its location. The day, the global middle class is concentrated in economic orientation of the world has changed Europe and the United States. The middle class in the last decade. Between 1965–2004, the in these regions numbers almost one billion Group of Seven (G7) accounted for 65 per people. Asia’s middle class is much smaller, cent of global output, with a range that never numbering only 500 million, of whom one fl uctuated outside +/- three percentage points. quarter is in Japan. 1 Today, that share is less than 54 per cent. This is why most of Malaysia’s and Pen- In the last fi ve years, two thirds of global growth ang’s manufactured exports, which are heavily has come from emerging concentrated in electronics used in consumer economies, especially China products, are oriented towards the rich world. By 2025, most of and India. With the 2009 fi - But by 2025, this pattern will be reversed. The the world’s middle nancial crisis slowing growth majority of the global middle class, numbering class would be in Asia in the West still further, glob- over 2.7 billion people, will live in Asia, while and most of Asia’s al demand is palpably shifting the number living in Europe and the United population would be towards Asia. A global orien- States will stay the same at about one billion. middle class. Penang tation no longer means exclu- In terms of where the consumer market is is well placed to take sive focus on the markets of growing, it will be China, India, the Middle East advantage of this shift the rich world, like the United and surrounding East Asian countries that will in demand. It has a States, Europe and Japan, but show the greatest dynamism. A large fraction multicultural workforce must also include a focus on of consumer purchases and sale of consumer of mostly Malays, emerging economies. durables will be in Asia. Chinese and Indians with The emerging economies This long-term trend has implications for connections and links are adding strength to the Penang’s medium-term strategy and refl ects to the most dynamic global economy and accel- Penang’s history. In the past, northern Malay- economies of the world. erating the pace of growth. sia started to do poorly when close neighbours It is likely that global output like Myanmar, southern Thailand and Sumatra could grow by up to 4 per cent, once recovery is fully under way, even as growth in the rich world slows to 2.5 per cent. That suggests that global output, not- 1 The middle class is defi ned here as households with daily per-capita incomes of between US$10 withstanding the current major problems and and US$100 in purchasing power parity terms.
12 NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY BOX 2: The upcoming Asian “middle billion” urbanites Between now and 2050, according to UN estimates, to the number of poor people joining the ranks of the the global population is expected to increase from 6.9 middle class. Europe would enjoy some early growth billion to more than 9 billion. Some 98 per cent of the in numbers of the middle class, but then see a fall as growth will be in the developing and emerging world populations decline in Russia and elsewhere. where most of the economic growth will happen. Figure 2A below illustrates the shift. In 2000, More than 6 billion people or two-thirds of the popu- Asia (excluding Japan) only accounted for 10 per cent lation will live in cities. of global middle-class spending. By 2040, this could Many people will be moving up to the middle reach 40 per cent, and it could continue to rise to al- class, consuming much more resources per capita. By most 60 per cent in the long term. The two countries the year 2050, Asia will have 5.4 billion people, out of a driving this change would be China and India and, to world-total of 9 billion, and will be home to 63 per cent a lesser extent, Indonesia. Malaysia is conveniently of the global urban population, or 3.3 billion people. located in the neighbourhood of these three econo- Globally, the middle class could increase from mies and should strategically position itself to serve 1.8 billion people to 3.2 billion by 2020 and to 4.9 bil- the many billion Asian middle-class consumers in the lion by 2030. Almost all of this growth (85 per cent) coming decades. will come from Asia. The size of the middle class in North America is expected to remain roughly constant in absolute terms. This is because the number of mid- Source: Kharas H (2010), Vision 2050: The New Agenda For dle-class people becoming rich will be roughly equal Business (2010)
'&& FIGURE 2A: /& SHARES OF GLOBAL .& MIDDLE-CLASS CONSUMPTION, -& 2000–2050 ,& +& *& )& (& '& & (&&& (&&) (&&, (&&/ (&'( (&'+ (&'. (&(' (&(* (&(- (&)& (&)) (&), (&)/ (&*( (&*+ (&*.
Others EU United Japan Other India China States Asia
did poorly. 2 In the future, the most success- man and social connections with the countries ful locations will be those that fi t into regional in the region. production networks serving the new regional Penang is well placed to take advantage markets. Penang must attract MNCs that have of this shift in demand. It has a multicultural a strong regional presence and focus in Asia workforce of mostly Malays, Chinese and In- and ensure that it builds strong physical, hu- dians with connections and links to the most dynamic economies of the world. It has one of the largest centres of economic mass fac- 2 Some of the loss of regional trade was politically ing the Indian Ocean. Under the Association of driven. For example, trade with Aceh was lost Southeast Asian Nations (ASEAN) free trade in 1963, while Singapore, with more pragmatic policies, maintained its trade relationships. agreement, Penang will enjoy free trade within Similarly, trade with Myanmar was lost after the more advanced economies of the region that country’s military coup in 1962. starting in 2010.
NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY 13 FIGURE 1: (+"&&& GDP IN LATIN AMERICA AND EAST ASIA DURING THE 20TH CENTURY (&"&&& Note: The fi gure shows the growth in the range of high-income economies Source: Maddison (2003), & '/&& '/&, '/'( '/'. '/(* '/)& '/), '/*( '/*. '/+* '/,& '/,, '/-( '/-. '/.* '//& '//, (&&& cited in Gill I and Kharas H (2007) upper Latin America 8 upper East Asia 5 developing upper East Asia 5 high-income lower Latin America 8 lower East Asia 5 developing lower East Asia 5 high-income ASEAN has also signed free trade agree- Penang can learn from these experiences. ments with China and India that will expand Figure 1 plots the per-capita income levels of opportunities in those coun- three groups of countries between 1900–2000: tries. But Penang’s orienta- 1 Eight largest Latin American countries Penang faces problems tion and connectivity with that have reached middle-income levels that many middle-income the new growth areas in (Argentina, Brazil, Chile, Colombia, regions have faced East Asia, South Asia and Mexico, Peru, Uruguay and Venezuela); before. It is becoming a the Persian Gulf can be 2 Five East Asian economies that have now victim of its own success. improved further to take reached high-income levels after growing “Trapped middle-income the best advantage of these rapidly through the middle-income stage countries” tend to make large new markets. (Hong Kong [China], Japan, South Korea, two common mistakes: Singapore and Taiwan [China]); and either they cling on too 3 Five current middle-income countries in long to past successful Avoiding the East Asia (China, Indonesia, Malaysia, the policies or they exit middle-income Philippines and Thailand). prematurely from the trap industries that could It shows that by the early 1970s, the av- have served as the basis Penang faces problems that erage per-capita income of the high-income for their specialisation many middle-income re- East Asia Five economies and the Latin Ameri- process. gions have faced before. It is can Eight economies was roughly the same — becoming a victim of its own about US$5,000 (although the East Asian Five success. Its competitiveness group had a larger dispersion). Over the next in traditional areas is eroding as wages rise. three decades, the East Asian economies went Yet it has not developed the creative environ- on to become rich while the Latin American ment in which innovation can fl ourish and yield economies stagnated. higher profi ts and wages. Other countries have By the early 2000s, the middle-income, faced this situation before. Some have succeed- fast-growing East Asia Five had caught up with ed in escaping from it and gone on to become the Latin America Eight and, coincidentally, the advanced economies. Others have failed and range of incomes of countries in the two regions have had extended periods of slow growth. was almost identical. 14 NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY BOX 3: What’s the middle-income trap? The “middle-income country trap” is a development them more productive as they can produce more with stage that characterises countries that are squeezed the same resources. The higher wages that accrue between being low-wage producers and highly-skilled, to high-skilled individuals represent the gains to rich fast-moving innovators. Countries caught in this trap countries of an integrated global labour market. tend to grow slower and often fall behind. Cost advan- Poor countries also gain. They produce better tages in labour-intensive sectors, such as the manufac- and more, thanks to the technology, design and mana- tured exports which once drove growth, start to decline gerial skills brought in from rich countries. The wages in comparison with lower-wage poor country producers of their unskilled rise and this represents their gains (Gill I and Kharas H, 2007). At the same time, they do from globalisation. However, middle-income countries not have the institutions, capital markets, track record, (lower middle-income to upper middle-income) gain or critical mass of highly-skilled people to grow through almost nothing from globalisation as they are likely to major innovations like rich countries. experience “the smallest change in factor-price ratio” Caught between these two groups, many are or no signifi cant change in the ratio of skilled to un- without a viable high-growth strategy. In addition, skilled wages (Udomsaph and Zeufack, 2009). they are faced with new challenges including distribu- Escaping the middle-income country trap is an tion and social cohesion issues. Therefore, they are uphill battle. The move from being a middle-income hard-pressed to develop new growth drivers (Nung- country (MIC) to being a high-income country (HIC) sari and Zeufack, 2009). requires a break from the past in some signifi cant way: The fi gure below provides a good illustration a structural shift. Apart from policies that no longer of the middle-income trap. Only one (South Korea) work to elevate them to a high-income economy, many of the seven countries which were middle-income by “trapped MICs” tend to make two common mistakes: 1975 managed to reach high-income status by 2005. either they cling on too long to past successful poli- Brazil and South Africa, which had double the per-cap- cies or they exit prematurely from the industries that ita income of South Korea in 1975, have remained at could have served as the basis for their specialisation the same level since then. It faced periods of negative process (The Growth Report, 2008). growth, which cancelled all earlier progress. Timing is key. Most MICs fail to anticipate the Evidence of the middle-income trap can also transition and the new demands that come with it. For be found in the dynamics of occupations and wages example, most MICs hold on to a labour-intensive strat- across countries. The integration of the world’s labour egy for too long. They artifi cially maintain non-compet- markets creates big gains for rich and poor countries itive fi rms through a battery of subsidies, continuing alike. For example, blueprints of products fl ow from to pile up fi scal incentives with no consideration of the California to China, while manufacturing goods fl ow take-up rate or effi ciency, and continue to make FDI vol- in the opposite direction. The middle-income coun- umes the key performance indicator for competitive- tries benefi t less from globalisation (Eeckhout and ness (Nungsari and Zeufack, 2009). The second com- Jovanovic, 2007). They are not technologically-savvy mon mistake is a premature shift away from assembly enough to compete with rich countries and are not manufacturing before ensuring an adequate supply of cheap enough to compete with China, Vietnam and high-quality and competitive human capital to support other dynamic low-income countries. the transition to higher value-added sectors. Thanks to communications and transportation technologies, managers, engineers and designers — larger in number in rich countries — have access to a pool of cheap labour in poor countries. This makes Source: Nungsari and Zeufack (2009) *& Syria 1975 )& The Philippines 1975 Brazil 1975 South Africa 1975 (& Honduras 1975 '& & #'& South Korea 1975 Morocco 1975 Income growth (per person growth in GDP, %) in GDP, (per person growth growth Income #(& *&& '"&&& ("&&& *"&&& '&"&&& (&"&&& Income growth (GDP/capita, inflation-adjusted $) Source: Kharas H (2009) NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY 15 This prompts the questions: Some recent work 3 argues that the way • What did the fi ve Asian leaders do to out of the middle-income trap is for developing transit successfully through middle- countries — especially small, open economies income stages of development? — to specialise. This builds on the empirical • What did the Latin America Eight do observation that while MICs have much more wrong? diversifi ed economies than poor countries, rich • What might today’s middle-income countries tend not to be more diversifi ed than countries in East Asia and states like middle-income economies. In other words, the Penang learn from those experiences? growth process from middle-income to rich- country status is associated with specialising, If Penang is to avoid becoming trapped in moving up the value chain and innovating in middle-income, like Latin America, it is these selected products. lessons which are critical. Within rich countries, one also observes Some features differentiating middle- that production of certain goods tends to be income from poor country growth are clear. highly concentrated in specifi c localities. In Growth tends to become more capital- and the new economic model, it is surmised that skill-intensive. The domestic market expands the forces driving specialisation are closely and becomes a more important engine, espe- linked to the ability to generate economies of cially for service-sector growth. Wages start to scale in certain products. They then become rise, most rapidly for high-skilled workers, and the products in which rich countries specialise, shortages can emerge. like aircraft, machinery and fi nancial services, The traditional low-wage, manufactur- and fi rms producing such goods tend to con- ing-for-export model does not work well for centrate in specifi c localities, forming clus- MICs. They seem to become ters. Rich countries withdraw from products trapped unless they change with constant returns to scale in which they strategies and move up the gradually lose competitiveness to lower-wage The Growth Report value chain. Cost advantages countries. Many manufacturing activities fall emphasises that for in labour-intensive sectors, into this category, such as apparel and textiles, middle-income countries such as the manufactured leather, footwear, fi shing, sawmill products and to become rich, they exports which once drove agricultural crops. must do different things, growth, start to decline in In this environment, the policy maker’s and do things differ- comparison with lower-wage role must change. The Growth Report emphasis- ently. Understanding poor country producers. At es that for MICs to become rich, they must do what needs to be done the same time, MICs lack the different things, and do things differently. Un- and how to accomplish institutions, capital markets, derstanding what needs to be done and how to them are the essence of track record or critical mass accomplish them are the essence of the current the current strategic- of high-skilled people to strategic-planning exercise. The emphasis must planning exercise. The grow on the back of major in- be on geographic and sectoral specialisation, emphasis must be on novations like rich countries. and on the ability to execute such a strategy. geographic and sectoral Caught between these two specialisation, and on groups, MICs can become the ability to execute trapped without a viable such a strategy. high-growth strategy. 3 An East Asian Renaissance, Gill I and Kharas H, The World Bank (2007). 16 NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY BOX 4: The Growth Report by the Commission of Growth and Development Few countries manage to achieve of saving and investment; high levels of sustained growth for • Reliance on markets and market-based prices over a generation and even fewer to allocate resources; and continue their high growth rates • Leadership committed to growth and inclusion once they reach middle-income. with a reasonable capacity for administration. The Growth Report by the Commis- sion of Growth and Development, The success factors appear to be deep rooted in chaired by Nobel Laureate in Eco- local institutions, but they are insuffi cient for contin- nomics, Michael Spence, identi- ued growth. Some countries with these characteristics fi ed 13 developing countries 1 that grew fast, but often could not sustain the growth. As sustained growth of more than 7 per cent for over 25 examples, East Asian MICs suffered severe setbacks years in the postwar period. These success stories in 1997–98 and Brazil has yet to regain rapid growth have fi ve common characteristics: after its disastrous hyperinfl ationary episodes of the • Openness to the global economy in knowledge 1980s, even though it was one of the fastest-growing and trade; developing countries in the 1960s and 1970s. • Macroeconomic stability; The Growth Commission went on to report that • “Future orientation”, exemplifi ed by high rates reaching income levels associated with the advanced countries is uncommon: Only six of the high-growth cases achieved this. It is more common for growth to slow markedly at the middle-income level. Many Latin 1 The 13 success stories are Botswana, Brazil, American and Middle Eastern countries have suffered China, Hong Kong (China), Indonesia, this fate of falling into a “slow growth, middle-income Japan, South Korea, Malaysia, Malta, Oman, country” trap. The reasons why this is so common are, Singapore, Taiwan (China) and Thailand. however, less understood. Doing different things cal, national and regional markets. The PMP also recommended that manufacturing for export and doing things and tourism become the lead sectors, given the differently: Strategic assessment that natural resource endowments planning in Penang were poor, but that human capi- tal and physical infrastructure Penang has a long tradition of strategic planning, were comparatively strong. The The essential insight of starting with the Munro Report in 1964. The PMP was enormously effective the Nathan Report was report recommended the development of an in generating rapid growth and that for a poor economy industrial site, charting the course of Penang’s employment, especially during to advance, the critical future industrialisation. The report also argued 1975–80 when GDP grew by growth driver would that because Penang alone is not large enough 11.2 per cent annually. The main need to be a strategy to constitute a planning region, the development thrust of the Nathan Report that employed all of a greater region, consisting of Perlis, Kedah — to put to productive use the available labour, land and the Krian district of Perak, should be con- underemployed labour force — and capital in productive sidered and regional policy should be linked to was achieved. But the strategy ways in the setting of a the overall national development programme. also made Penang more vulner- market economy. However, despite the sense of urgency of the able to global business cycles, Munro Report, intensive industrialisation would and the slowdown in the United not happen in Penang until the early 1970s. States in 1980 and 1982 meant that Penang’s In 1970, a report prepared by the US-based growth for 1980–85 also slowed dramatically, to Nathan Associates, and sanctioned by the feder- just 3 per cent per year. Other objectives, such al government, became the Penang Master Plan as reducing income disparities, improving inter- (PMP). That exercise was triggered by the loss industry linkages and diversifying exports, were of Penang’s free port status and the correspond- less-effectively met. ing need to transition away from an entrepot The essential insight of the Nathan Re- trading hub to a new approach. The recom- port was that for a poor economy to advance, mended strategy was to establish market link- the critical growth driver would need to be a ages with the global economy, bypassing the lo- strategy that employed all available labour, NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY 17 TABLE 1: HISTORY OF PERIOD PLAN DOCUMENT OUTCOME PLANNING 1964–1982 Munro Report • Industrial development PENANG’S PROGRESS 1970–1990 Penang Master Plan • Export-led manufacturing (Nathan Report) • Global orientation 1991–2000 First Penang Strategic • Solid GDP and FDI growth Development Plan • Few local linkages 2000–2010 Second Penang Strategic • Faltering growth and competitiveness Development Plan • Slow transition to K-economy 2007–2025 Northern Corridor Economic • World-class economic region and a choice Region Socio-economic Blueprint destination for investment, work and living land and capital in productive ways in the set- These challenges remain at the forefront of is- ting of a market economy. Because the region sues that confront Penang today. lagged behind in all sectors, it needed to be or- The Second Penang Strategic Development ganised, like an army, to advance on all fronts Plan (2001–10) (PSDP2) was developed during simultaneously. The PMP was able to utilise the the aftermath of the 1998 crisis, a year when region’s most signifi cant asset — its large pool Penang’s GDP contracted by 8 per cent. Never- of rapidly-growing and initially unemployed la- theless, the PSDP2 was optimistic, forecasting bour force — in an effective way. a return to rapid growth based on a transition By the time of the First Penang Strategic to an ICT-led knowledge economy. The second Development Plan (1991–2000), emphasis had plan reported that Penang’s underlying business shifted to the services sector as a means of di- competitiveness remained strong compared to versifying the state’s economic base. Finance, its neighbours, especially with respect to offi ce insurance, real estate and business services rentals and productivity-adjusted wage costs. were accorded the lead. Various defi ciencies It envisaged growth per capita of 5.9 per in air, water and noise pollution, congestion cent for 2001–05, accelerating to 6.2 per cent (especially in land and housing) and stubborn for 2006–10. It had an upside scenario for even poverty were to be addressed. faster growth if Japan and the United States The growth target of the plan (6.5 per cent performed well. Actually, global growth did between 1991–2000) was substantially met, better than expected, but Penang’s economy but there was less progress towards broad- faltered. Today, Penang’s bold vision outlined in er, structural objectives. As envisaged in the PSDP2 of becoming a fully-developed state the plan, Penang did continue to be a major by 2010 has become unattainable. recipient of FDI and started a shift towards Almost 40 years after its introduction in higher value-added activities in manufacturing the Nathan Report, the basic global, export- and services. But other strategic challenges oriented strategy based on FDI that has driven that were identifi ed in the plan met with less Penang’s economy needs to be revisited. success. Strategies were devised to: • Promote local entrepreneurship and small and medium-sized enterprises (SMEs); The Northern Corridor • Enhance the participation of the Bumi- putera in high-growth sectors; Economic Region • Modernise and revitalise the rural sector; Faced with the realities of a middle-income coun- • Promote commercial and modern man- try situated in Asia, the federal government has agement in agriculture; embarked on a new approach to development in • Improve lifestyle conditions; and Malaysia. It is focused on regional corridors that • Link Penang better to the northern states can benefi t from the labour, land and natural re- of Peninsular Malaysia and regional sources to be found in the hinterland, combined Asian economies. 18 NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY with the manufacturing expertise and global structure, double tracking of the railway and es- connections found in the exporting centres. tablishing Butterworth as the northern transport The Northern Corridor Economic Region hub, upgrading of public transportation with the (NCER) is the expression of this new strategy introduction of Rapid Penang, housing develop- for four northern states of Peninsular Malaysia. ment, sewerage treatment, broadband infrastruc- The strategy was articulated in the NCER So- ture, industrial estate expansion, and improved air cioeconomic Blueprint, 2007–2025, developed links and sea routes with the surrounding region. by Sime Darby in 2007. The NCER combines Other projects that have been led by the pri- the states of Perlis, Kedah, Penang and Perak vate sector — the Penang Outer Ring Road and into a single economic region. It seeks to de- the monorail project — have been temporarily velop the area into “a world-class economic postponed. Between them, these projects prom- region and a choice destination for investment, ise the introduction of several work and living”. 4 billion dollars worth of new in- A new institution, the Northern Corridor vestments into the region, and The Northern Corridor Implementation Authority (NCIA), has been also serve to modernise the strategy rests on given wide-ranging powers to develop and logistics and infrastructure fa- two pillars. First, the execute a new development strategy. Encour- cilities to sustain much higher federal government is agingly, the Northern Corridor Implementation economic growth rates. committed to a range of Authority Act 2008 creating the new author- The second pillar of the important investments ity explicitly recognises the multidimensional strategy is the development of in infrastructure. nature of the challenge. Among the functions new focus areas of business, The second pillar of of the new authority, cited in the Act, are the along with strengthening the the strategy is the promotion of economic and social develop- contribution of existing indus- development of new ment, infrastructure and logistics, arts, culture tries. The Northern Corridor focus areas of business, and heritage, and human capital development plan calls for a focus on increas- along with strengthening in various forms. In other words, the key issues ing the value-added in existing the contribution of identifi ed as critical for Penang — developing industries, along with the devel- existing industries. the cities, people and economy — are already opment of new industries. It was foreshadowed by the Act. envisioned that the Northern In presenting a broad framework for Corridor would be a world-class economic region corridor development, the Act goes beyond by 2025 in E&E products, agriculture, tourism and most strategic plans. It also presents an op- biotechnology. portunity for decision making on important There is a commitment in the blueprint policy issues to take place locally rather than to growth with social equity, by emphasising lo- centrally — the NCIA offi ces have already been cal community involvement in a private-sector established in George Town. Previously, many driven, market-oriented approach. The strategy decisions had to be routed back to Kuala Lum- is broadbased. It mentions padi farming and food pur, complicating the task of timeliness, and of production, new crops and livestock, down- local participation and accountability. stream agricultural processing, higher value- The Northern Corridor strategy rests on added E&E products, 5 oil and gas, biotechno- two pillars. First, the federal government is com- logy, sustainable materials, automotive prod- mitted to a range of important investments in in- ucts, tourism and logistics. Strategies are pro- frastructure. These include the expansion of the posed to drive economic value-added, raise the Penang Bridge, construction of a second bridge, capacity for knowledge and innovation, address the upgrading of the port and supporting infra- social economic imbalances, improve the quality 4 Northern Corridor Implementation 5 Including wafer fabrication, chip design, Authority Act 2008 (Act 687). automation design, and research and development (R&D) into materials or packaging. NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY 19 of life and strengthen institutions and imple- value-added. By creating a better-networked mentation capacity. economy, the Northern Corridor can serve to A corridor approach is new for Malaysia. integrate Penang and Kulim, gain stronger ad- It is consistent with a body of new theories of vocacy in federal agencies, such as the Ma- economic development, including new growth laysian Institute of Microelectronic Systems theory, new trade theory and (MIMOS), on the focused needs of specifi c new theory of economic ge- industries, and push for connectivity that can An important element ography. This study takes catalyse new business opportunities. 6 of the Northern Corridor elements of these theories A corridor approach can be very useful is that it represents a to underpin the proposed for promoting development, if well executed. political commitment approach towards strategic Malaysia is highly centralised, with many “si- to spur development in development in the North- loed” ministries. One-stop shops have had the area. The politics ern Corridor. The approach limited success. Investment and sectoral pri- of place is complicated encompasses measures to orities are centrally determined, but these in every country, and develop the economy, cities may lack coherence when implemented at the nowhere more so than and people. state or local level. The commitment to follow in Malaysia where place, An important element up to solve local implementation problems is ethnicity, poverty and of the Northern Corridor is also limited by distance. The corridor authority other political drivers that it represents a political can resolve these contradictions and is in a po- coincide. commitment to spur devel- sition to assess local capabilities, develop local opment in the area. The poli- clusters, and build up local cities as anchors tics of place is complicated in for a new, geographically-oriented strategy. every country, and nowhere more so than in Malaysia where place, ethnic- 6 One example of such change is the rapid ity, poverty and other political drivers coincide. development of tourism in Sabah once For example, decisions to promote Langkawi as direct fl ights to Kota Kinabalu were a tourist destination created competition with approved by the federal government. tourism in Penang. Efforts to spread develop- ment evenly across the country complicated the emergence of a denser E&E cluster in Pen- ang that could have created higher national 20 NEW OPPORTUNITIES AND PITFALLS IN THE GLOBAL ECONOMY PENANG’S ECONOMY - MACROECONOMIC OVERVIEW - PENANG FACING SERIOUS STRUCTURAL CONSTRAINTS - MOVING UP THE VALUE CHAIN • AGRICULTURE • MANUFACTURING & SERVICES - SPECIALISATION AND ECONOMIES OF SCALE: SIX FOCUS AREAS TO DRIVE GROWTH PENANG’S ECONOMY 21 From a trading port in the 1950s, Penang has evolved into one of the largest global electronics manufacturing hubs. Its further development is being constrained by structural impediments. It must break out of this. The course of change must see Penang retain its core export fi rms and develop them as clusters linked with support services. To achieve excellence and to avoid “blind diversifi cation”, six focus areas have been identifi ed as drivers of Penang’s growth — technology-based manufacturing, biotechnology/life sciences, business-process outsourcing (BPO), logistics, tourism (with niches in medical tourism and meetings, international conventions and exhibitions or MICE) and agribusiness. These six areas were chosen based on the potential to generate scale economy, link Penang with regional and global demand as well as to build on Penang’s existing strengths while offering opportunities for further technological upgrading. 22 PENANG’S ECONOMY Macroeconomic rate of about 7 per cent and by 2008, Penang’s GDP per capita was 58 per cent higher than overview the national average at RM19,120. The manu- Penang has exhibited strong growth for the facturing sector accounted for last four decades, driven by FDI in the assem- 54 per cent of Penang’s GDP bly of E&E products and tourism. Yet the state in 2008 compared with 13 per From a trading port seems increasingly trapped between fast- cent in 1970. In 2008, Penang in the 1950s, Penang moving low-cost giants like China, India and contributed 8.8 per cent of Ma- has evolved into Vietnam at the low end, and by highly-skilled laysia’s GDP and 6.2 per cent of one of the largest research and design centres like Singapore and employment in the country. global electronics Taiwan at the other end. From a trading port in the manufacturing hubs As a consequence, traditional sources of 1950s, Penang has evolved into with more than 200 growth have started to lose steam. The solu- one of the largest global elec- multinational technology tions of the past, for example, the generous fi s- tronics manufacturing hubs manufacturing cal incentives package used to promote manu- with more than 200 multina- companies with all the facturing in the 1970s and 1980s, 1 do not seem tional technology manufactur- major global players to be good enough this time around to attract ing companies with all the ma- in E&E running large the next generation of industries needed for jor global players in E&E running operations there. Penang’s renewal. In addition, Penang is facing large operations there. 2 While serious structural constraints including skills it has a population of only 1.4 shortages, infrastructure bottlenecks and a million, making it the second-smallest state in high regulatory burden. Malaysia, Penang has become the country’s second growth pole, after the Klang Valley. In Penang has done particularly addition, this spell of sustained growth was ac- well in the past 40 years companied by signifi cant poverty reduction. Over the past four decades, Penang’s growth Between 2002–07, the global economy performance has been impressive. GDP grew performed much better than had been expect- from RM790 million in 1970 to RM46,744 ed — global growth averaged an unprecedented million in 2008, achieving an annual growth 4.7 per cent annually, yet Penang (and Malay- 1 The World Bank (2006). 2 AMD, Intel, Agilent, Dell, Bosch, Sony, Siemens, Motorola, Osram, Altera and Braun, among others, have made massive investments in Penang. FIGURE 2: '( REAL GDP GROWTH (%) IN PENANG '& 1970–2008 Source: Malaysia Plans, KRIS . , * ( & '/-& '/-+ '/.& '/.+ '//& '//+ (&&& (&&+ #'/-+ #'/.& #'/.+ #'//& #'//+ #(&&& #(&&+ #(&&. Real GDP, average growth rates Real GDP, average growth rates (%YoY) Penang (%YoY) Malaysia PENANG’S ECONOMY 23 sia) did not benefi t as expected from this surge. Traditional growth engines are In fact, Penang’s growth continued to drop over losing steam successive fi ve-year periods (Figure 2, page Agriculture in Penang has shrunk to just 1.8 per 23). Other competing economies like China, cent of state GDP. It has registered solid growth, Vietnam and India have grown faster and have but has not shown signs of upgrading to high- become competitive threats. er-value production. Manufacturing growth Moreover, MNCs in seems to have peaked by the mid-1990s. After Penang have not established slightly rebounding from the 1997–98 fi nancial MNCs in Penang have strong linkages with the do- crisis, the E&E-dominated Penang manufactur- not established strong mestic economy and, as a ing sector was hit in 2000–01 by the bursting linkages with the result, they can move, and of the dotcom bubble. It rebounded thereafter, domestic economy and, have moved, operations to but has fallen well short of the double-digit as a result, they can other locations that offer growth that was recorded in the past. Con- move, and have moved, lower costs without signifi - struction has also been volatile and, on aver- operations to other cant disruption. age, has contributed little to Penang’s recent locations that offer Penang’s exports led growth. Service-sector growth, including tour- lower costs without Malaysia out of the 1997-98 ism, has been steady but unspectacular. signifi cant disruption. fi nancial crisis and recovered A clear indication of the weakening dyna- rapidly after the cyclical col- mism of manufacturing in Penang is the slow- Data from productivity lapse of the global electron- ing of FDI infl ows. FDI approvals in Penang, in and investment climate ics sector in 2001. Hardcore manufacturing especially, have been declining surveys provide poverty has been substan- since 2000. However, Penang is still an im- preliminary evidence tially eradicated and the em- portant destination for FDI. In 2007, around that Penang may face ployment rate is above the 21 per cent of all FDI approvals fl owing to Ma- serious impediments national average. Yet, despite laysia went to Penang, and around one third of to productivity growth these considerable success, all E&E FDI was directed at Penang (Figure 3). and competitiveness Penang’s economy is fragile. In addition, Penang’s appeal as a destina- in the shape of skills Per-capita income only grew tion for foreign visitors has been fading. For- shortages, infrastructure by 1.9 per cent per year from eign arrivals of tourists are 50 per cent down bottlenecks and a high 2000 to 2005. Investment from the peak in the late 1990s. In 2004, 3.5 regulatory burden, in Penang is shrinking as a million foreign tourists visited Penang. That as well as concerns share of total investment in represented just 43 per cent of the total for about crime. Malaysia (although this re- Malaysia, compared with a share of 62 per versed itself in 2007). cent in 2000. FIGURE 3: , APPROVED MANUFACTURING + PROJECTS IN PENANG * Source: MIDA Penang, KRIS ) RM (billion) ( ' & '/.- '/.. '/./ '//& '//' '//( '//) '//* '//+ '//, '//- '//. '/// (&&& (&&' (&&( (&&) (&&* (&&+ (&&, (&&- (&&. (&&/ Foreign Domestic investment investment 24 PENANG’S ECONOMY Penang facing serious economies like Singapore and Hong Kong, or even Thailand, starting a business in Penang is structural constraints much more expensive. Some studies suggest that the decline in The issue is implementation ineffi ciencies. growth rates in Penang is the result of serious The number of procedures involved in building structural constraints. 3 Data from productivity a warehouse is the same for both Penang and and investment climate surveys provide pre- Malaysia, but the cost in Penang is much high- liminary evidence that Penang may face serious er (Figure 4). The approval process, especially impediments to productivity growth and com- on the planning permission and building plan, petitiveness in the shape of skills shortages, takes longer. infrastructure bottlenecks (electricity and tele- Dealing with construction permits in Pen- communications) and a high regulatory burden ang is worse than in Kuala Lumpur or other (customs and business licensing), as well as states because of the bureaucratic complexity concerns about crime. These constraints ap- in the local authority (it was commented that pear to be more serious in Penang than in other Dewan Bandaraya Kuala Lumpur is more ef- parts of the country, possibly because export- fi cient in its work). Too many procedures and ers in the state face a more competitive climate overlapping of processes also lead to a longer than domestic fi rms and cannot easily absorb time in completing warehouse construction. regulatory costs. Cutting red tape and bureaucracy is essential. One indication of the high cost of entry is Unfavourable business and the time taken to construct a standard ware- investment climate house. Most businesses need some facility for The constraints are highlighted by data obtai- storage of their goods, but in Penang, the local ned from a report “Doing Business in Penang”. 4 authorities have not been service-oriented in They reveal the regulatory burden faced by providing necessary planning and building ap- fi rms in Penang in terms of entry, operating and provals (by the Planning Department, Town Ser- exit costs. Many other countries have simpli- vices Department, Building Control Department fi ed business startups through reforms. and Public Works Department). As a result, it Penang, and Malaysia, can ease the dif- can take years to obtain the required clearances. fi culties of starting a business by reducing the Among ASEAN countries, it is easier to number of procedures and the time taken to deal with construction permits in Singapore and implement them, cutting the minimum capi- Thailand than in Malaysia. In Singapore, almost tal requirement, introducing a one-stop shop, 99 per cent of applications are now submit- standardising incorporation documents, cut- ted electronically through the Construction and ting antiquated formalities and allowing online ', business startups. FIGURE 4: COST TO START '* A BUSINESS (% High entry costs OF INCOME PER Overall, the cost of starting a business is slight- '( CAPITA) Source: The ly higher in Penang compared with Malaysia World Bank, Doing as a whole and about the same as in South '& Business (2009), Penang Business Korea. However, compared with other island . Survey, Khazanah Nasional Berhad (2009) , 3 The World Bank (2005). 4 Following The World Bank’s Doing Business * methodology, leading law fi rms and tax preparation agents providing services ( to manufacturing fi rms in Penang were interviewed. Results were then compared to & the Doing Business fi ndings for Malaysia. Hong Kong South Malaysia Penang Singapore Thailand & China Korea PENANG’S ECONOMY 25 Real Estate Network (CORENET). In Hong Kong port and terminal handling charges (RM1.40 (China) under the “Be the Smart Regulator” per cubic metre in Penang) and the short dis- programme, a broad initiative to improve busi- tance from the pick-up area to the port. All ness licensing, the government reduced the time procedures, for both export and import, can to deal with construction permits by 36 days and be done within a time frame of 12 days as com- eliminated eight procedures related to inspec- pared with 18 days for Malaysia as a whole. tions and pre-approvals. But these advantages disappear compared Penang, and Malaysia, can with neighbouring competitors. For example, improve by reducing permit- Singapore has the shortest time in the world A worker with 20 years processing times, setting up to process imports. of employment in a a one-stop shop, comput- Singapore, South Korea and Hong Kong have medium-sized business erising the permit process, made great strides in improving logistics and receives a severance setting statutory time limits have halved the time taken to process exports payment of 84 weeks’ for issuing permits, introduc- and imports compared to Penang (Figure 5). salary in Penang (75 ing a new building code and They still charge more per container weeks in Malaysia) improving inspection for con- (US$456, US$742 and US$625 respectively) compared to four weeks struction projects. compared to Penang (US$373) but this re- in Singapore, 10 weeks If businesses try to get a wards greater effi ciency. Others have also in Hong Kong and 54 fast start by purchasing other been reforming faster than Malaysia or Pen- weeks in Thailand. businesses, they still face sig- ang. Thailand was the top reformer in 2009, nifi cant obstacles. The time cutting the number of necessary documents to purchase a property from and introducing a new Internet-based customs another business, and to transfer the title to the clearance system in 2009. buyer’s name, can take up to fi ve months in Pen- ang, compared to fi ve days in Singapore. High exit costs One obstacle for many fi rms in Penang is the High operating costs rigidity of labour laws. When the economic Penang still enjoys advantages compared to environment changes, as has happened peri- the rest of Malaysia in effi cient trade logistics. odically, especially in cyclical industries such as Export and import costs are lower due to cheap electronics, most fi rms adjust by reducing their 20 FIGURE 5: '&& TIME TO EXPORT AND IMPORT 18 /& (RIGHT) Source: The 16 .& World Bank, Doing Business (2009), Penang Business 14 -& Survey, Khazanah Nasional Berhad 12 ,& (2009) Days 10 +& FIGURE 6: of salary Weeks FIRING COST 8 *& IN WEEKS OF SALARY (FAR 6 )& RIGHT) Source: The World Bank, Doing 4 (& Business (2009), Penang Business 2 '& Survey, Khazanah Nasional Berhad 0 (2009) & Hong Kong South Malaysia Penang Singapore Thailand Hong Kong South Malaysia Penang Singapore Thailand & China Korea & China Korea 26 PENANG’S ECONOMY FIGURE 7: GOVERNMENT )*$) ' Macroeconomic instability REGULATIONS (,$) ' AFFECT PENANG FIRMS MORE (%) (& (.$' ( Tax rates Source: Zeufack '/$, ( and Gopalan (2009) '. ()$& ) Cost of financing '.$) * ', ('$/ * Crime, theft & disorder '-$' , '* Skills and education of ('$) + available'( workers '/$) ) (&$. , Tax administration '& '+$* - (&$( - Economic policy. uncertainty '-$- + Customs, & trade (&$( . regulation administration ')$' / * '-$* / Corruption ')$& '& ( Access to domestic credit '-$* '& ''$- ') & & + '& '+ (& (+ )& )+ *& Per cent of firms identifying indicated problem as one of top-three concerns Malaysia (number in parentheses denotes rank in respective year) Penang labour force. But in Penang (and more gener- have to provide high severance benefi ts. Such ally in Malaysia), the cost of this is much higher a policy package transfers the burden of social than in competitor countries. protection from fi rms to the government, mak- For example, a worker with 20 years of ing fi rms more competitive. employment in a medium-sized business re- Overall, the costs of doing business in ceives a severance payment of 84 weeks’ sala- Penang are higher than in Malaysia, and this ry in Penang (75 weeks in Malaysia) compared puts the state at a disadvantage. More than to four weeks in Singapore, 10 weeks in Hong one-fi fth of the fi rms in Penang rank macro- Kong and 54 weeks in Thailand (Figure 6). The economic and policy uncertainty, high tax rates high severance payments in Malaysia and Pen- (including on labour), high fi nancing cost, theft ang compared to other countries is partly the and security, worker skills and tax regulations result of a policy that protects jobs, not people. as obstacles to doing business. Signifi cantly, In more advanced economies, such as in these obstacles are more serious for fi rms in Europe and those within the Organisation for Penang than for fi rms elsewhere in Malaysia. Economic Co-operation and Development The regulatory and licensing reform agenda is (OECD), public unemployment insurance pro- more important for Penang than the rest of the vides protection to workers, so a fi rm does not country (Figure 7). PENANG’S ECONOMY 27 Moving up the that recorded negative growth in the 1990– 2000 decade. Since productivity gains in agri- value chain culture during that decade were unable to offset Internationally, Penang has been one of the an outfl ow of human resources from agricul- world’s most successful stories of rapid indus- ture to the other sectors, agriculture’s share of trialisation. The share of agriculture in the state Penang’s GDP decreased signifi cantly, from 7.2 GDP dropped from 12 per cent in 1970 to around per cent in 1990 to just 1.8 per cent in 2008 2 per cent in 2008 while manufacturing rose (Figure 8). from 23 per cent to 54 per cent in the same pe- There has since been some resurgence riod. The share of services to Penang’s GDP has in agricultural growth for the Penang region, remained close to the national average. thanks mainly to the commodity boom of re- cent years (Table 2). AGRICULTURE Favourable climatic advantage Penang enjoys a favourable year-round equa- Agriculture’s role in the regional economy of Pen- torial climate, which is warm and sunny, along ang is much smaller than in the national economy with plentiful rainfall, especially during the (Tengku Mohd Ariff, 2001). Nevertheless, it is an southwest monsoon from April to September. important source of livelihood for many people Temperatures are uniformly high throughout and a major resource of the states surrounding the year. They average 78°F to 82°F (25°C to Penang. Like other middle-income regions, Pen- 28°C) for most lowland areas. Temperatures ang and the rural areas in the Northern Corridor are lower in the interior highland regions. The can benefi t by integrating better with each other, mean annual rainfall is approximately 100 developing supply chains that connect modern inches (2,540mm). agriculture with global markets. These climatic conditions, good for grow- Agriculture was the only sector in Penang ing crops, are infl uenced by the surrounding FIGURE 8: 0.3% 1.8% PENANG GDP BY 7.2% SECTOR 42.5% 1.6% 12.0% 5.1% Source: Malaysia 0.3% Plans, Mid- term reviews of 60.3% 3.9% 49.3% Malaysia Plans, 1975 1990 2008 KRIS 23.4% 38.1% 54.0% Agriculture Mining & quarrying Manufacturing Construction Services TABLE 2: 2001 2002 2003 2004 2005 2006 PENANG: GROWTH RATE OF GROSS GRP (RM mil) 16,773 17,501 18,788 20,032 21,128 22,254 REGIONAL PRODUCT -2.5 4.3 4.2 6.6 5.5 5.6 (IN 1987 CONSTANT GRP growth (%) PRICES) Agriculture 17.6 3.6 3.4 4.5 2.7 4.2 Source: Penang State Government Mining 5.9 -3.1 -4.6 -7.4 -3.0 4.4 Manufacturing -11.9 4.5 4.1 9.6 5.9 5.9 Construction -3.1 -8.8 3.3 -11.1 -1.3 2.4 Services 5.4 5.0 4.5 5.4 5.6 5.5 28 PENANG’S ECONOMY sea and a wind system of eight or nine major Furthermore, within Penang, there are sev- airstreams. The advance and retreat of these eral supporting industries such as input suppliers, airstreams are responsible for the division of equipment suppliers and packaging companies, the climatic year into four seasons: the north- which are essential to value-added agricultural east monsoon (from November or December development. Penang also has numerous trade to March), the fi rst inter-monsoonal period service providers, such as freight forwarders and (March to April or May), the southwest mon- customs brokers, who are crucial to facilitating soon (June to September or early October), and trade and keeping transaction costs down. the second inter-monsoonal period (October to All these conditions, as well as the upgrad- November).5 / 6 However, Penang’s proximity to ing of the main seaport, augur well for efforts to Sumatra, Indonesia makes it susceptible to dust develop Penang into a major logistical hub for ag- particles carried by wind from perennial but ricultural products. Realising this would require: transient forest fi res, creating a phenomenon • More and better exportable supply known as haze. of goods; Soils are strongly acidic and coarse-tex- • Better commercial linkages to markets; tured and have low amounts of organic mat- • Investment tailored to the specifi c com- ter. They have been exposed for a long time to petitive requirements of major value/ intense tropical weathering and most of their supply chains; and plant nutrients have been leached out. Regular • Better coordination between the pas- applications of fertilisers are therefore neces- senger and cargo aspects of transport sary in order to sustain crop yields. Soil erosion service. Open skies policies, cheap back- is always a danger on sloping ground. Building hauls, charters and cold chain logistics are contour embankments or planting protective typically key to achieving a takeoff in the cover crops are therefore required. export of high-value perishable products. Supporting infrastructure and services Penang also boasts a network of research Penang enjoys an excellent infrastructure of institutes and R&D facilities, universities and roads, utilities, ports and airports. There is a training centres that are the cornerstone for large irrigation system for the rice lands but it any knowledge-based economy. While not yet needs to be expanded. The feeder road system agriculture-oriented, they can certainly con- also needs to be upgraded to allow better ac- tribute to food processing and manufacture. cess to the hinterland in order to help produc- And one in particular — the life sciences park ers or traders bring farm products to major — could expand into agricultural biotechnol- distribution and consumption centres such as ogy if the right applications, business models George Town. and partners can be identifi ed. The Butterworth area of Penang on the mainland where the seaport is located is well Creating an agribusiness free trade zone connected to the main interstate road sys- Agribusiness free trade zoning is an innovative tem, especially the North-South Expressway concept implemented as a source of agricul- that traverses the Malaysian peninsula from tural growth in rapidly-developing countries. Singapore to Thailand, linking Penang to the These countries want to leverage on good grow- North-South Corridor to China. Overland ac- ing conditions and strategic geographical loca- cess to China is one of the major comparative tion close to major international and/or region- advantages Penang has to support agricultural al markets. However, many lack the technical development. knowhow, the managerial skills and the avail- ability of packaging and/or processing equip- ment, materials and supplies. 5 Encyclopaedia Britannica. It is envisaged that the major drivers of the 6 http://en.wikipedia.org/wiki/Penang. agribusiness strategy proposed for Penang would PENANG’S ECONOMY 29 BOX 5: Penang as hub of support services for aquaculture industries The market place for sea- certifi cation and verifi cation system. Investments thus food is changing. There is are planned for establishing a fully-accredited shrimp growing awareness amo- diagnostic laboratory, capacity building of food-safety ng consumers about the auditors, an Aquaculture Skills Development Centre, global nature of food pro- and enhancing the capability in shrimp aquaculture duction. Consumers today R&D. are demanding stricter The geography where this global food megatrend food safety and tracea- will play out is the north west region of Peninsular bility, and as well as grea- Malaysia that covers the states of Perlis, Kedah, Perak ter production compliance towards environmental sus- and Penang. This region has a long seafood production tainability. Major retailers such as Wal-Mart, and history and is now a hub for shrimp aquaculture. Within food service companies like Darden, have made this region alone, there are over 3,500 ponds across commitments to buy only fully-certifi ed and sustai- 2,800 hectares producing more than 45,000 metric nable shrimps in their procurement policy. These tonnes (MT) of Panaeus Vannamei. 1 The region is also changes will have a huge knock-on effect all along the home to the highest concentration of seafood processing production chain. As a result, the nature of seafood plants in the country 2 (see Figure 5A). aquaculture production is undergoing a signifi cant long- However, production as a whole has not been term change. These changes towards certifi cation and sustainable and farms frequently experience boom- traceability will inevitably require advanced support and-bust cycles. The sustainability of the aquaculture services in all aspects of the industry. sector is hampered by outdated aquaculture A growing shrimp market demand that now technology and management practice employed by exceeds US$19 billion and changing requirements of farms. Because the vast majority of farms are small, standards in production give Malaysia an opportunity they lack the necessary design and infrastructure to position itself as a country of origin for safe seafood. to support production and ensure biosecurity. Malaysia is well-suited to reach this objective with Compromises are made on food-safety standards and natural endowments of good weather, world-class infrastructure and skilled human capital. In addition, shrimp aquaculture is a high-income venture for the farmer in comparison to other crops like paddy and 1 These fi gures were provided by various feed palm oil. Table 5A illustrates the comparison. companies and averaged out. Assumptions are To position itself as a country of origin for safe also made on two production cycles Paneaus seafood, the Malaysian government has committed Vannamei and at 8 metric ton harvest per cycle. to a programme to increase the production of high- 2 Malaysian Frozen Foods Processors quality shrimp that can be supported by a credible Association, Ministry of Health. TABLE 5A: REVENUE COMPARISON DESCRIPTION PADDY PALM OIL SHRIMP BETWEEN SHRIMP, Production 4.5MT/cycle 7MT/year 12MT/cycle PADDY AND PALM OIL Source: Malaysian Palm Cycle/year 2 — 2 Oil Board (MPOB), NCIA Price/MT RM1,200 RM2,500 RM10,000 & PERDA (Lembaga Estimated turnover RM10,800 RM17,500 RM240,000 Kemajuan Wilayah annually Pulau Pinang) be industries involved in fresh-cut products. They potential and are especially suited to attract tal- process and sell fruits and vegetables produced ent and to contribute to the development of a locally and in nearby countries. Some also culti- knowledge-based economy. Feasibility studies vate bananas for emerging international markets. and foreign partner interests demonstrate the Fresh-cut products are the fastest-growing considerable potential of this sector. items on supermarket shelves in much of the The agribusiness development strategy for developed world, reaching sales growth rates Penang will be centred on an ASEAN free trade of more than 20 per cent annually. These indus- zone (AFTZ) that will promote the creation of tries have the potential to create a large impact different types of agribusinesses capable of util- measured in terms of annual sales, volume out- ising local products, human resources and sup- put, value added, job creation and tax-revenue porting soft and hard infrastructure. Most im- generation. They also have high aggregation portantly, the AFTZ will greatly contribute to the 30 PENANG’S ECONOMY the risk of exposure to disease is enhanced. In Certifi cate to export its products to the EU market addition, there exist a weak aquaculture services since the 2008 export ban. sector that the industry needs to operate at the While Penang is the largest urban centre in the required higher level of standards and expertise. Due Northern Corridor region, the shrimp aquaculture to these weaknesses, the industry hit a crisis when farms of the northwest peninsula represent its pro- in 2008 a team of EU auditors concluded that the duction hinterland. The concentration of 33 seafood supply chain did not meet the standards for import processing plants as well as shrimp-feed operations, into the lucrative EU market. Malaysia was forced to such as Charoen Pokphand and Gold Coin, in the region impose a unilateral export ban to the EU that had a is evident of the already established hub and hinterland tremendous negative impact on the industry. relationship that Penang offers to the industry. As the Emerging from this crisis, Blue Archipelago industry shed its old ways and move towards ”new Berhad, a subsidiary of Khazanah Nasional, developed aquaculture“, strong support in the form of services a joint programme with the Malaysian Department of and logistics from Penang will become crucial. Fisheries to promote ”new aquaculture“ based on the Penang already has an established list of natural principles of fi nancial and ecological sustainability. endowments such as infrastructure of roads, utilities, Blue Archipelago operates the largest integrated ports and airports. The superior logistics of Penang shrimp farm in the Northern Corridor region that and associated services such as freight forwarding, spans 420 hectares. The company took over an ailing insurance and fi nance, will facilitate farmers to gain Kerpan farm in 2008 and put in place a programme access to global markets. Finally, Penang is poised to transform it into a “new aquaculture” operation. to contribute signifi cantly to shrimp aquaculture This involved upgrading of infrastructure such as R&D due to the concentration of research facilities high-density polyethylene lining of ponds and canals, located here. This includes global bodies such as the and investments in an on-site processing plant and Worldfi sh Centre, the Fisheries Research Institute, and a hatchery to turn the farm into a fully-integrated the marine biology research programme of Universiti aquaculture operation. The integration ensures a Sains Malaysia. more effi cient system of traceability and control over food-safety protocols. A key value proposition of Kerpan farm is that all aspects of the production chain — from fries to FIGURE 5A: grow-out to processed shrimps — are guaranteed to CONCEN- TRATION OF achieve particular global standards that are backed SEAFOOD by certifi cation. Standard operating procedures PROCESSING (SOPs) governing all aspects of the production PLANTS IN chain are designed to comply with standards set 33 MALAYSIA by the US Food and Drug Administration, third- 8 Source: party certifi cation bodies such as the Aquaculture Shahridan 4 Faiez, Blue Certifi cation Council (ACC) and the GLOBALGAP. 3 Archipelago A key success of the Blue Archipelago initiative (2010) has been the enthusiastic response of the market for Kerpan farm’s products. In the past, the farm could only sell its products in the domestic market or to neighbouring Thailand. Today, the farm is producing for the premium markets of the EU, Japan and the US. It was the fi rst farm to be awarded the Fish Health development of a knowledge-centred economy duction are pomegranates, pineapples, papa- by bringing in much-needed knowhow, exper- yas and other citrus fruits. tise and state-of-the-art technology to foster These local and regional fruits have the Malaysia’s own agricultural development. potential to (1) compete as fresh products to be distributed locally and exported as whole fruits Promotion of local and regional fruits to nearby markets and (2) enrich the fresh-cut The Northern Corridor region produces a wide mix of products as raw materials. They could variety of fruits and vegetables. Among the also be supplied to plants that process juices, most important economically are mangoes in pulps and concentrates. In the case of papayas northern Kedah, pomelos in northern Perak and pineapples, the Malaysian Agrifood Corpo- and durian in the whole region. Other products ration (MAFC) and the Malaysian Agricultural with high market potential but very little pro- Research and Development Institute (MARDI) PENANG’S ECONOMY 31 have developed new varieties that are very sic infrastructure at export processing zones. promising indeed. Aggressive promotion and direct ap- Recently, the Japanese and Malaysian gov- proaches to meet with CEOs from fl agship fi rms ernments fi nalised a protocol that allows the by the Penang Chief Minister and other senior export of mangoes to Japan, but similar work state government offi cials, the management of must be done to get a different protocol (hot air the Malaysian Industrial Development Author- treatment) approved by China. If that happens, ity (MIDA) and the Penang Development Cor- the same facility can be used for a wider range poration (PDC) were also instrumental in bring- of tropical fruits, including carambola. The Chi- ing waves of electronics MNCs from the United nese market for tropical fruits is vast. States, Europe and Japan to Penang. Electronics manufacturing had, by the 1990s, become a Yield enhancement in rice for food major springboard of Penang’s economy and a security and import substitution major contributor to economic growth for the The Malaysian government has a policy to Malaysian economy. In 2008, manufacturing achieve 91 per cent national self-suffi ciency in accounted for 54 per cent of Penang’s state rice. Since subsidies are involved for producers, GDP, compared to 13 per cent in 1970. and sometimes millers, this creates a market However, existing policy frameworks have opportunity for industry players in the Northern failed to sustain upgrading into higher value- Corridor, long known as Malaysia’s “rice bowl”. added activities as have happened in South Signifi cant opportunities to raise yields Korea, Singapore and Taiwan. Efforts to move for rice through block farming and more in- up the value chain through new institutions like tensive management are MIMOS and Silterra were not as successful already known and proven in transforming the industry and establishing Instead of the traditional elsewhere. In addition, seri- a thick E&E cluster as had been hoped. There “high-volume, low-mix” ous discussions have begun was a lack of a strong institutional commitment production of electronic with the Consultative Group in moving up the value chain, and hence, efforts products, Penang’s on International Agricultural were diffused and lacked a demand-driven fo- industry must graduate Research (CGIAR), the In- cus to address cluster development needs. The to a “low-volume, high- ternational Rice Research future of the electronics and electrical engi- mix” of technology- Institute in the Philippines, neering industry and of other industries rests intensive products. MARDI and other rice indus- upon a more focused transition to profi table try stakeholders on the revi- and higher value-adding activities. talisation of the national rice Instead of the traditional “high-volume, low- improvement programme. They are to work, mix” production of electronic products, Penang’s among others, on “cool rice” adapted to climate industry must graduate to a “low-volume, high- change, as well as better-performing hybrids. mix” of technology-intensive products. More- over, the future growth of Penang’s economy also calls for further diversifi cation of tradeable MANUFACTURING & SERVICES activities so as to complement the core electron- ics industry and nurture new leading sectors. Penang is one of the most successful export- Most recently, there is some evidence that processing zones in the world. Its E&E cluster, a nucleus of Penang-based fi rms in the E&E in- in particular, is the most vibrant of all 10 clusters dustry, mostly MNCs, are upgrading and mov- studied by the UNIDO’s 2009 Industrial Devel- ing up the value-added ladder and leading the opment Report. Over the period of 1971–2005, way in innovation. Between 2001–06, Penang most of the biggest foreign electronics MNCs had overtaken the Klang Valley as the leading re- invested in Penang. They were the prime pillar gion for patents granted to Malaysians. Penang of investment, employment and exports in the generated 37 per cent of all patents against only state. Penang’s proactive strategy included the 29 per cent from the Klang Valley. However, the provision of fi nancial incentives and quality ba- transition is not happening fast enough and in 32 PENANG’S ECONOMY BOX 6: Intel in Malaysia Intel Corporation establi- dles advanced and integrated design and development shed its manufacturing work. The operations in Penang also handle shared ser- operations in Penang in vices for IT, HR as well as fi nance and payroll support 1972, with an initial invest- for other Intel operations globally. In addition to this, ment of US$ 1.5 million and its Embedded and Communications Group, one of the with approximately 100 two offshore sites for Intel Corporation, offers the full employees. It was Intel’s spectrum of developmental capabilities for SoC (sys- fi rst offshore operation tem on chip), covering architectural design, pre- and for a company, which had post-silicon validation to market-enabling activities itself been in operations for less than fi ve years. for the embedded markets. Since then, it has expanded its operations in Throughout the last 38 years, Intel Penang has Penang and into Kulim and Kuala Lumpur, with a total been a signifi cant part of Intel Corporation and what employment of more than 10,000 workers involved in began as a low-cost, high-volume manufacturing cen- advanced manufacturing, research and development tre has evolved into a business centre for the organisation work as well as software development, product design in the region. Its involvement, over and above its core marketing and other local and global shared services. activities, in driving educational development, human One of the biggest milestones for Intel Malaysia was capital development and in supporting the development being part of the Centrino Platform Development and of new vendors and business partners in the region has based on this achievement, it continues to support made Intel a part of the Penang community. mobile products. The Intel Penang Design Centre is one of the largest silicon design centres in the region which han- the scale that can trigger large externalities (see increased steadily since 1995, and especially Annex 4 of the New Economic Model Report). sharply in electronics since 2000 (Figure 9). The core challenge for Penang is to raise The electronics sector is the most impor- the rate of productivity growth. Based on an tant in terms of employment and value-added. analysis of fi rm-level performance for 1,600 It accounts for 60 per cent of manufacturing in fi rm-years, it appears that productivity has Penang and is the largest employment genera- grown by only 1 per cent per year between tor with 53 per cent of total manufacturing em- 1999–2006. The highest productivity came ployment. The sector has a large multinational from large fi rms, MNCs and export-oriented presence as well as a signifi cant small- and fi rms. Older fi rms also show higher produc- medium-industry segment. tivity. However, fi rms in Penang are today less productive than those in the Klang Valley (Zeu- Rapid industrialisation in Penang — fack and Gopalan, 2009). A brief history Nevertheless, Penang still accounts for The fi rst wave of export-oriented electronics 24 per cent of Malaysia’s exports and 46 per fi rms emerged in 1971–74 (Rasiah, 1988). cent of Malaysia’s electronics exports, suggest- Export-oriented industrialisation became the ing it remains a pre-eminent location for fi rms. prime driver of manufacturing growth from In both cases, Penang’s export shares have 1971. Japanese-owned Clarion was the fi rst for- ,& FIGURE 9: PENANG’S SHARE IN MALAYSIA +& (E&E EXPORT AND *& TOTAL EXPORT) Source: )& Department of % Statistics, Bank Negara, (& KRIS '& & '//& '//' '//( '//) '//* '//+ '//, '//- '//. '/// (&&& (&&' (&&( (&&) (&&* (&&+ (&&, (&&- (&&. Penang’s share in Malaysia’s Penang’s share in Malaysia’s total E&E exports total exports PENANG’S ECONOMY 33 eign electronics fi rm to build its manufacturing In the 1980s, there was a distinct slow- facility in 1971 in Penang, followed by National down in electronics production. Prices of micro- Semiconductor from the United States. chips crashed in 1984–86. It resulted in several Earlier export-oriented initiatives follow- corporate moves among MNCs to streamline ing the Investment Incentives Act (IIA) of 1968 their business activities. For example, Mostek and the launching of Malaysia’s New Econom- was acquired by Thomson CSF in 1986, which ic Policy in 1971 did not prove successful until eventually sold the plants to Intergrated De- the free trade zones were opened. They then vice Technology (IDT) in 1987. In a defensive rapidly expanded between 1972 and 1979. takeover, Advanced Micro Devices (AMD) The initial wave of export-oriented E&E fi rms acquired Monolithic Memories in 1988. AMD from the developed countries was driven by a launched the construction of a plant in Bangkok search for low wages. More signifi cantly, they while Intel resumed assembly activities in Ma- came to Penang because of a strategic gov- nila in the mid-1980s. The realignment led to ernment move. The then Chief Minister (now labour cutbacks. Penang was severely hit and Tun) Lim Chong Eu and his offi cials proactively angry workers took to the streets to demon- visited fl agship fi rms abroad to invite them to strate over their retrenchment. move to Penang. It coincided with a time when Nevertheless, the mid-1980s crisis did American and Japanese fi rms were relocating not lead to any closure of the semiconductor labour-intensive operations to host sites en- fi rms. Both incumbent and acquired fi rms in- dowed with large supplies of trainable labour vested extensively to automate and reorganise and good infrastructure. plant layouts, organisational structures and to FIGURE 10: INDUSTRIALISATION IN PENANG, 1960–2010 Source: Rasiah, Hamdan and Gopalan (2009) FTZ Act Promotion of APITD ( 1990) IMP2 (1996) IMP3 (2006) (1971) Investment Act & IMP1 (1986) value added value Electronic component & industrial Electronic assembly, component, fabrication test, consumer & design, industrial R&D & textile Electronic fabrication, component, assembly, consumer & test & design, industrial textile & garments Electronic assembly, Contraction in component, test & design, manufacturing consumer & textile & garments accompanied by Electronic industrial expansion component assembly & test, in engineering assembly & textile & garments and designing Electronic test, textile & component garments assembly, textile & Robotics & other opto- & auto- Smelting, process garments controlled machinery & equipment packing & trade Planting firms Precision engineering & plastic-injection moulding firms Stamping, milling, extrusion & fabrication firms '/,& '/-& '/.& '//& (&&& (&'& Key economic Ancillary Policy drivers drivers instruments 34 PENANG’S ECONOMY absorb state-of-the-art process techniques such na, Vietnam and the Philippines started to take as just-in-time and materials resource planning their toll in the late 1990s. Disk-drive fi rms, (MRPI) and integrated materials resource plan- such as Conner Peripherals and Readrite, relo- ning (MRPII) that uses the cellular manufacturing cated out of Penang. framework. Firms also introduced small group Although Quantum, Seagate and Komag activities and kaizen, a Japanese practice based remained in Penang, their labour-intensive on continuous improvement of work processes. operations were relocated out to Thailand Another wave of foreign investors into and China. Labour-intensive fi rms also be- Penang was triggered by the appreciation of gan to relocate more to Johor, the currencies of East Asian manufacturers af- Senawang, Melaka and Sama ter 1985, the withdrawal of GSP (Generalised Jaya. The fi nancial crisis of The lessons for Penang System of Preferences) benefi ts from more 1997-98 provided temporary are clear. Government advanced Asian economies, and the introduc- relief as domestic costs fell policy must focus on tion of new incentives via the Promotion of In- sharply following the crash in the retention of core vestments Act 1986 and the Industrial Master the ringgit. But further govern- export fi rms, cluster Plan in 1986. So rapid was the expansion that ment efforts could not halt a development and it was constrained by labour shortages. The sharp contraction in productiv- industrial upgrading, Penang Skills Development Centre (PSDC) ity and employment growth. 9 and promoting linkages was launched in 1989 to overcome growing de- Other middle-income within clusters. mand-supply defi cits in skilled workers. Local countries, like South Korea fi rms established stronger collaboration during and Taiwan, also saw a drop this period to avert job hopping by workers. in electronics production and The 1990s was a period of rapid develop- a declining share of global exports as produc- ment of local supplier activities. National Semi- tion shifted to China (Table 3). However, these conductor started its own machine tool fi rm called Micro Machining and set up Dynacraft to manufacture lead frames. Intel began an 9 The Action Plan for Industrial Technology Development (APITD) of 1990 led to the elaborate programme to develop prototypes of enactment of the Human Resource Development machinery and equipment inhouse and to out- Fund in 1992, the launching of the Malaysian source them to fostered local suppliers from Technology Development Corporation (MTDC) and the Malaysia Industry Government High 1984. Plastic-injection moulding fi rms were Technology (MIGHT) in 1993, and the Second also developed this way, with Intel fostering Industrial Master Plan (IMP2) in 1996 . several fi rms and its own suppliers that were later sold to local buyers. 7 1990 2000 2006 TABLE 3: The move to develop independent and pre- COUNTRY (%) GLOBAL SHARE ferred suppliers, such as Atlan and Cirrus, led to China 1.0 4.5 19.8 OF IMPORTANT - 29.2 28.8 ELECTRONICS the emergence of 45 fi rms in 1989 that expanded European Union (25) EXPORTERS, to 155 in 1993 and 455 in 2001. These machine Hong Kong, China 4.3 5.2 8.6 1990-2006 0.0 0.8 0.4 Source: WTO tool and plastics injection fi rms co-evolved with Indonesia (2008: Tables the electronics fi rms. But the number of suppli- Japan 22.5 11.2 6.9 11.37 and 11.64). ers in Penang fell to 189 in 2008, with many en- South Korea 4.8 6.1 5.8 8 gaged only in exporting activities. Malaysia 2.7 5.4 4.7 Serious labour shortages in Penang and Mexico 1.5 3.5 3.2 the emergence of more attractive manufactur- Philippines 0.6 2.6 1.8 ing sites for labour-intensive operations in Chi- Singapore 6.4 7.6 8.1 Taiwan 4.7 6.0 4.4 Thailand 1.2 1.9 2.0 7 For example, Samatech, Shinca, Shintel, United States 17.3 15.9 9.4 Globetronics and Unico. - 0.1 0.1 8 Extracted from interviews with supplier fi rms Vietnam in 2008. PENANG’S ECONOMY 35 countries were able to move up the value chain, anchored by core fi rms. The lessons for Penang and retain higher value-added activities in their are clear. Government policy must focus on the home countries. South Korean and Taiwanese retention of core export fi rms, cluster develop- fi rms are at the technology frontier in electron- ment and industrial upgrading, and promoting ics manufacturing. World-class national fi rms linkages within clusters. in South Korea include Samsung, Hynix and LG- Electronics, and in Taiwan they include Taiwan Industrial upgrading Semiconductor Manufacturing Corporation Penang boasts an ecosystem of electronics (TSMC), Acer, ASE Electronics and Winbond. fi rms co-evolving with a machine tools and The global leader in 2008 in dynamic random plastics industry. Firms in Penang are engaged access memory (DRAMs) was Samsung and in in wafer fabrication as well as in chip, process, logic chips, TSMC. product and system design. Forward linkages to This brief history shows several recurring consumer, industrial and military electronics us- features of the electronics industry. It is driv- ers have been developed along with backward en by cost and technology, is intensely com- linkages with moulds, plating, packaging, bond- petitive across countries, responsive to major ing, lead frames, precision materials, testing and global events and export-oriented. Proactive R&D. Figure 11 below shows how both MNCs government policies can help, as in the 1970s, and SMEs in Penang have upgraded their opera- but cannot substitute for strong fundamentals. tions over time. Continued upgrading of skills and technologies Much of the upgrading occurred after the is required to remain competitive. dotcom crash in 2000. Although there are some An ecosystem of fi rms co-evolves, with fi rms that have upgraded to the most sophisticat- each providing an impetus to the other in clus- ed areas, the number remains few. The challenge ters of activity. These clusters are more resilient is to broaden the degree of industrial upgrading than any individual fi rm, although they must be to a suffi ciently large number of fi rms. FIGURE 11: VALUE 9lj`e\jjdXeX^\d\ek ROADMAP — Quality & R&D sub-con FlkjfliZ`e^ THE PENANG automation support centres J\im`Z\ZfekiXZk STORY I ; Source: Jf]knXi\ Technology >cfYXc_lY J\d`Zfe[lZkfigifZ\jj roadmap for the value-added 8ck\ieXk`m\j`k\j E&E industry of K\jkjpjk\d Penang, PSDC [\m\cfgd\ek (2007) Jlggcp$Z_X`e 9Xj\jf]knXi\ dXeX^\d\ek ;\j`^eZfdgXe`\j ;`jb[i`m\j :fekiXZk MNC value-added J\d`Zfe[lZkfi dXel]XZkli`e^ dXel]XZkli`e^ :fejld\i\c\Zkife`Zj @em\jkd\ek`e_`^_$ CfnmXcl\$X[[\[ 8lkfdXk`fe k\Z_dXZ_`e\j_fgj Global \ogfikj KH: ;i`m\Zfdgfe\ekj competition K\ok`c\&^Xid\ekj gif[lZk`fe CXYfli`ek\ej`m\ K\jkXlkf_Xe[c\ij 9Xj`Z`e[ljki`\j 8^i`Zlckli\ SME value-added '/,&s '/-&s '/.&s '//&s (&&&s 36 PENANG’S ECONOMY One measure of upgrading is the sophis- TABLE 4: YEAR EXPY CHANGES tication of exports from Penang-based fi rms. 1995 11,073.01 IN AVERAGE This can be measured by comparing Penang’s SOPHISTICATION 2000 11,004.57 OF PENANG’S export mix with that of other countries. The 2006 13,768.47 EXPORTS calculation follows the methodology proposed Source: Yusuf and by Hausmann, Hwang and Rodrik (2007). Nabeshima (2009) Each exported commodity is assigned a score But there was considerable upgradingbetween given by the weighted average of the per-capi- 2000 and 2006. On average, Penang’s exports ta income levels of the exporting country, with in 2006 were equivalent to those of a country weights equal to each country’s global export with a per-capita income level of US$13,768. In market share. Commodities that are predomi- other words, Penang is increasingly competing nantly exported by rich countries are accord- with rich countries rather than with poor ones, ingly assigned high scores while those export- and is steadily upgrading the sophistication of ed by low-income countries get lower scores. its export mix. The idea is that rich countries export more Another approach to measure indus- sophisticated products. These product scores trial upgrading is to assess the revealed com- are then combined to a score for a country or parative advantage (RCA) of the products region by weighting them by the share of each being exported. Penang’s RCA is an indicator product in total exports. This is called the re- of the degree to which it specialises in a par- gion’s EXPY score. ticular product. For each product, the RCA is Applied to Penang, the results show a given by Penang’s global export share in that stagnation of upgrading during the late 1990s, product, divided by the island’s share of global when Penang was struggling to hold on to la- exports in all commodities. When this ratio is bour-intensive assembly operations, even while greater than one, Penang is said to have a com- these were relocating to lower-wage countries. parative advantage in that product. TABLE 5: SITC 4 RCA SHORT DESCRIPTION LALL CLASS* PENANG’S 6642 30.75 Optical glass and elements of optical glass (unworked) RB2 TOP 20 COMMODITIES 7631 26.55 Gramophones and record players, electric MT3 BASED ON 4313 24.25 REVEALED Fatty acids, acid oils, and residues; degras RB1 COMPARATIVE 7522 21.51 Complete digital data processing machines HT1 ADVANTAGE, 2007 6871 20.13 Tin and tin alloys, unwrought PP Note: PP: primary 8482 18.72 Articles of apparel, clothing accessories of plastic or rubber LT1 products, RB1: agro-based, RB2: 7528 18.17 Offl ine data processing equipment, nes HT1 other resource- 7628 16.48 based, LT1: Other radio receivers MT3 textile, garment 7768 12.88 Crystals, and parts, nes of electronic components of heading 776 HT1 & footwear, LT2: other, low- 8748 10.69 Electrical measuring, controlling, etc, instruments, apparatus, nes HT2 technology, MT1: 2320 9.66 automotive, MT2: Natural rubber latex; natural rubber and gums PP process, MT3: 7621 9.36 Radio receivers for motor vehicles MT3 engineering, HT1: electronic 7764 8.02 Electronic microcircuits HT1 & electrical, and 7622 7.28 Portable radio receivers MT3 HT2: other, high- technology 8973 6.91 Precious jewelry, goldsmiths’ or silversmiths’ wares LT2 Source: Yusuf 7267 6.85 and Nabeshima Other printing machinery; machines for uses ancillary to printing MT3 (2009) 7599 6.69 Parts, nes of and accessories for machines of headings 7512 and 752 HT1 6852 6.58 Lead and lead alloys, worked PP 7763 5.50 Diodes, transistors, photocells, etc. HT1 4242 4.89 Palm oil RB1 * The Lall Class refers to the classifi cation developed by Sanjaya Lall PENANG’S ECONOMY 37 TABLE 6: 1995 2000 2006/7 NUMBER OF NUMBER OF PRODUCTS by at least one country. Major exporters, like PRODUCTS China 766 763 763 China, have a well-developed manufacturing EXPORTED AND RCA IN Malaysia 740 740 746 base that allows them to compete across the EXPORTS, 582 608 601 whole range of products, and China exported CHINA, Penang MALAYSIA AND PRODUCTS WITH RCA > 1 763 products in 2007. PENANG Malaysia as a whole does almost as well, Source: Yusuf China 274 279 278 exporting 746 products. Penang’s export base is and Nabeshima Malaysia 103 101 122 (2009) a bit narrower, but still signifi cant, at 601 prod- Penang 65 71 72 ucts. But what is of greater concern is that the SHARE OF PRODUCTS WITH RCA > 1 (%) share of its exports in products in which it has a comparative advantage is much lower than that China 35.8 36.6 36.4 of either China or Malaysia as a whole. China Malaysia 13.9 13.6 16.4 has RCA in over one-third of its products while Penang 11.2 11.7 12.0 Penang has comparative advantage in less than one-eighth (Table 6). 1.5 FIGURE 12: The strategy for Penang is to raise the share UPGRADING of exports with RCA greater than one and to de- THE TECHNICAL CAPABILITIES velop new sources of comparative advantage FOR PENANG 1 based on greater technological sophistication. Source: Zeufack and Gopalan (2009) Upgrading initiatives — 0.5 Policies and incentives The Third Industrial Master Plan (IMP3), inter Density alia, targeted the electronics industry for up- 0 grading. This plan included the provision of up- 0.2.4.6.81 front grants to stimulate participation by fi rms Production TCI in high value-added activities such as designing, Penang 2002 Penang 2007 R&D, logistics and marketing. The government approved Penang’s Multimedia Super Corridor Each product where there is an RCA can be (MSC) status in 2006, allowing fi rms in the state categorised according to whether it is a primary to import human capital for their operations. product, resource-based, or has high, medium The government also set up the Northern Cor- or low technological content. In 2007, Penang ridor Economic Region (NCER) to drive upgrad- had a comparative advantage ing in the region. There are plenty of incentives across a wide spectrum of for fi rms in Penang and these are comparable While a handful of products, ranging from prima- with, or better than, incentives available in other largely foreign fi rms ry products like latex and rub- countries, including China and Thailand. have managed to ber, to palm-oil-based natu- Firms in Penang have responded fast in upgrade, the engineering ral resource products, medi- appropriating the grants and human capital intensity of the lion’s um-technology products like privileges to make the transition to higher value- share of fi rms has not radio receivers, and a num- added activities. Intel announced plans to trans- improved substantially. ber of high-tech products like fer its assembly operations to Kulim in 2008 to data processing equipment. specialise in designing in Penang. Osram was In 2007, seven of the top 20 approved capital grants upfront when it sought products ranked by RCA were high-tech com- to introduce wafer fabrication in 2007. Motorola, pared with only four in 1995. Intel, AMD, Fairchild, Alterra and Agilent have Despite the apparent upgrading, Penang managed to import more engineers since 2007. faces challenges in sustaining its export mix in While a handful of largely foreign fi rms the face of stiff competition from abroad. Every have managed to upgrade, the engineering in- year, there are about 780 products exported tensity of the lion’s share of fi rms has not im- 38 PENANG’S ECONOMY TABLE 7: WHAT PERCENTAGE OF YOUR PRODUCTION MACHINE IS COMPUTER CONTROLLED? (%) 2002 2007 PRODUCTION • 1 to 30 23.9 15.5 OF TCI COMPONENTS • More than 30 40.2 48.6 FOR PENANG Source: Zeufack and Gopalan PERCENTAGE OF FIRMS IN PENANG THAT RESPONDED “YES” (%) (2009) • Employ staff exclusively for design/doing innovation/R&D? 14.3 18.8 • Subcontract R&D project to other companies or organisations? 0.9 9.9 • Paid royalties? 46.2 11.4 • Planning to introduce new designs or products in the next two years? 43.9 52.5 • Upgraded machinery and equipment? 56.1 66.3 • Entered new markets due to process or product improvements in cost or quality? 44.7 50.8 • Filed any patent/utility models or copyright-protected materials? 13.9 16.6 • Developed a new product line? 30.1 33.7 • Upgraded an existing product line? 52.0 53.6 • Introduced new technology that has substantially changed 26.8 34.3 the way the main product is produced? • Adapted or conducted R&D on technology transfered from parent 42.5 30.4 establishment to suit local conditions? • Received any government incentives 11.6 5.8 to conduct technological innovation and R&D? • Received any ISO (e g 9000, 9002 or 14000) certifi cation? 34.7 58.0 proved substantially. This is because of a lack gies and received more international certi- of improvements in the embedding institutions. fi cations. On the other hand, the amount of A survey of 73 electronics fi rms in Penang in royalty payments and the adoption of foreign 2008 showed that around 80 per cent regard technologies to suit local conditions have de- the embedding support for R&D and designing clined. Also of concern is the decline of fi rms as weak. This is the result of weak industry- availing themselves of government incentives, university linkages and a lack of centres to train from 11.6 per cent in 2002 to just 5.8 per cent tool and die makers, engineers and lab tech- in 2007 (Table 7). nologists. 10 In addition, 81.3 per cent of the Each fi rm is given a score corresponding electronics fi rms reported little participation in to its technological capabilities, based on its re- university curriculum development. In fact, fi ve sponse to the survey questionnaire. The degree fl agship fi rms reported that such relationships of upgrading that has occurred is clearly visible were much stronger in the early 1990s. in the shifting curve shown in Figure 12 on page To see the way in which technology up- 38. The proportion of fi rms with high techno- grading has occurred in response to new in- logical capabilities is getting steadily larger. It centives, The World Bank’s Productivity and is also the case that fi rms in Penang are sys- Investment Climate Surveys (PICS), covering tematically more advanced in their technology more than 400 fi rms in Penang, are used (The than fi rms elsewhere in Malaysia. World Bank 2005, 2009b) to measure their Better technological capabilities translate technological sophistication. The responses directly into better fi rm performance. An analysis to the survey showed that fi rms have upgrad- of Penang’s fi rms (Rasiah, Hamdan and Gopalan, ed their equipment, introduced new technolo- 2009) shows that productivity in fi rms goes up with more training expenditure, more process technology expenditure, more R&D expenditure 10 International Development Research and more R&D personnel. All these variables also Centre (IDRC) survey (2008). add to the propensity of the fi rm to export. In ad- PENANG’S ECONOMY 39 TABLE 8: ASSESSMENT NUMBER OF FIRMS % ASSESSMENT OF Very poor 0 0.0 QUALITY OF STUDENTS GRADUATING FROM LOCAL Poor 5 7.3 PUBLIC UNIVERSITIES IN Fairly good 50 72.5 PENANG Source: Yusuf and Very good 14 20.3 Nabeshima (2009) TABLE 9: 2002 2007 LINKAGES TCI PERCENTAGE OF FIRMS IN PENANG THAT REPONDED “YES” (%) COMPONENTS • Technology innovation developed in collaboration with other fi rms? 40.2 37.7 FOR PENANG 11.0 15.9 Source: Zeufack • Technology innovation developed in collaboration with universities? and Gopalan • Technology innovation developed in collaboration with research institutions? 18.3 21.7 (2009) • Technology innovation developed in collaboration with other institutions? 11.0 13.0 • If a supplier to an MNC, did you learn any new technology from the MNC? 19.5 24.6 • Use e-mail in interaction with clients and suppliers? 39.3 37.7 • Use websites in interaction with clients and suppliers? 59.3 44.2 TABLE 10: COLLABORATION YES NO • One is that the quality and skills of the PARTNERS WHEN With other fi rms 52 86 workforce are major determinants of DEVELOPING TECHNOLOGIES (37.7%) (62.3%) technological and innovative capacity. LOCALLY With universities 22 116 They also infl uence the supply of entre- Source: Yusuf and Nabeshima (2009) (15.9%) (84.1%) preneurship and, in particular, entry into With research institution 30 108 high-tech activities. (21.7%) (78.3%) • A second reason is the comparative advantage universities can generate (sub- ject to commercialisation) as a result dition, the skill intensity of production is an im- of their basic and applied research. For portant determinant of exports, again suggesting example, Universiti Sains Malaysia (USM) that Penang is increasingly entering higher-skill recently decoded the genome for rubber export markets. The evidence clearly shows that and this can become a source of patents it is possible to substantially raise the technologi- and technology for the Penang economy. cal capabilities of Penang fi rms even more rapidly if attention is paid to these factors, especially the International experience suggests that successful availability of R&D engineers. industrial clusters benefi t from proximity to high- quality universities. Firms interviewed in Penang Research universities and indicated that their R&D or product/process de- university-industry linkages velopment efforts were being impeded by short- Research intermediaries can help drive the ages of specialised skills. MNCs hire some tech- upgrading of technology and industrial diver- nical personnel to work on design, testing and sifi cation in Penang. There are three types of product development 11 but as Rasiah, Hamdan intermediaries that could contribute in this regard: research universities that undertake fundamental research; research institutes 11 While 80 per cent of AMD’s chips are produced which focus on developmental work, based on in Penang, its R&D employees are more involved platform and hybrid technology and training with process innovation, than with chips “design”. Motorola assigns 1,000 engineers institutions, such as PSDC which apart from for product design. Agilent employs 500 R&D human capital development, also provide test- engineers in Penang, mainly on development ing and design services. work. Many of the MNCs identifi ed the low number of engineering and science PhDs and Growing importance should be attached MAs produced by universities as a signifi cant to universities for two reasons: bottleneck. Shortages also contribute to the high turnover among experienced engineers (currently 16 per cent annually) working for MNCs. 40 PENANG’S ECONOMY TABLE 11: NUMBER OF FIRMS (%) REASONS Most Second most Third most FOR NOT important important important COLLABORATING WITH Haven’t heard of them 33 (26.8%) 08 (7.7%) 08 (8.6%) UNIVERSITIES AND RESEARCH Their services are not relevant to INSTITUTES your fi rm’s needs 51 (41.5%) 26 (25.0%) 07 (7.5%) Source: Yusuf and Nabeshima Don’t know anyone there to make (2009) a fi rst point of contact 20 (16.3%) 23 (22.1%) 22 (23.7%) Application process too cumbersome 07 (5.7%) 12 (11.5%) 18 (19.4%) Lack of technical capability inhouse to interact with institutions 01 (0.8%) 22 (21.2%) 15 (16.1%) Afraid of in-fi rm technical knowledge leaking out by collaborating 03 (2.4%) 06 (5.8%) 12 (12.9%) Tried it before and it was not a fruitful experience 03 (2.4%) 05 (4.8%) 09 (9.7%) Others 05 (4.1%) 02 (1.9%) 02 (2.2%) and Gopalan pointed out, “In Penang, the supply versities is underscored by the results from the of R&D engineers and technicians is too small for latest round of the investment climate survey, 12 the [MNCs] to upgrade further into R&D activi- and interviews with fi rms. Firms in Penang ac- ties” (Rajah, Hamdan and Gopalan, 2009). quire technology mainly through purchase While fi rms fi nd the quality of students of new machinery, especially imported ones. graduating from local public universities to be Only a handful regard universities as a source adequate (Table 8), they would welcome im- of technology (Table 9). provement in the level of skills. Even when the technologies were devel- Few Malaysian fi rms — whether in Pen- oped locally, fi rms did not regard universities ang or elsewhere — have sought to cement and research institutes as their main collabo- university-industry linkages for the purposes rators. Instead, they identifi ed other fi rms as of product upgrading and innovation. The in- preferred collaborators (Table 10). teraction is limited to consulting arrangements On a more positive note, the few fi rms and troubleshooting contracts. that collaborate with universities in Penang or This is not unusual for three reasons. First, elsewhere in Malaysia generally regard their fi rms, especially small and medium-sized ones, services to be satisfactory, especially in iden- conduct a minimal amount of R&D and when tifying new technologies, in modifying existing they outsource, they seldom seek assistance technologies, and conducting R&D in technolo- from universities. Second, for larger fi rms also, gies closer to the frontier. The problem lies in universities are ranked low as sources of tech- the small number of fi rms in Penang that regu- nology. Third, most fi rms are specialised in elec- larly collaborate with universities and research tronics and electrical engineering, which are institutes in general. research-intensive fi elds. They are not noted The main reason given by fi rms that have for university-industry collaboration. not collaborated with universities and research Few universities anywhere in the world institutes in recent years is that they do not feel do much downstream applied research in elec- that such institutions can render services that tronics, and USM is no exception, although it has expertise in other selected areas. The preference of fi rms in Penang — much 12 The second round of the investment climate survey was conducted in Malaysia in 2007–08. like fi rms in Britain and the United States — to For the results on the fi rst round, please seek technology from sources other than uni- see The World Bank (2005). PENANG’S ECONOMY 41 TABLE 12: RANKING OF GLOBAL RANK REGIONAL RANK SCHOOL NAME ECONOMY SELECTED 2008 2007 2008 UNIVERSITIES 19 17 01 IN EAST ASIA University of Tokyo Japan Source: Yusuf 25 25 02 Kyoto University Japan and Nabeshima (2009) 26 18 03 University of Hong Kong Hong Kong (China) 30 33 04 National University of Singapore (NUS) Singapore 39 53 05 Hong Kong University of Science & Technology Hong Kong (China) 42 38 06 The Chinese University of Hong Kong Hong Kong (China) 44 46 07 Osaka University Japan 50 36 08 Peking University China 50 51 09 Seoul National University South Korea 56 40 10 Tsinghua University China 166 223 23 Chulalongkorn Universit Thailand 230 246 33 Universiti Malaya (UM) Malaysia 250 309 35 Universiti Kebangsaan Malaysia (UKM) Malaysia 313 307 43 Universiti Sains Malaysia (USM) Malaysia 320 364 46 Universiti Putra Malaysia (UPM) Malaysia 356 401-500 51 Universiti Teknologi Malaysia (UTM) Malaysia are relevant to their operations. This is com- ties have improved their ranking, but this is still pounded by a lack of knowledge of these insti- low (Table 12). They are among the top 200 to tutions, the services they offer, and the people 300 universities in the world and among the top to contact (Table 11 on page 41). 30 to 50 universities in the East Asian region. Lack of knowledge on services and ap- To summarise, under these circumstances, propriate contacts can be mitigated by estab- USM can assist over the medium term by: lishing an intermediary organisation which fa- • Improving the quality of education, cilitates matchmaking between the university particularly in the science and engineer- and the fi rm. There are several different op- ing disciplines, by enhancing soft skills tions, depending on the scope of the interme- and enlarging the supply of technical diary organisation. For example, universities workers. Communication, team working can set up technology licensing offi ces and and analytic skills are the ones that many other affi liated organisations. employers feel students lack; 13 One well-known example is UCSD Con- • Initiating post-doctoral programmes in nect, which has facilitated linkages between key areas so as to deepen the culture of University of California San Diego and the lo- research and to position the university to cal business community. In other countries, generate knowledge in new areas, some a municipality (or a group of municipalities) of which could have commercial potential; sometimes act together to promote university- • Encouraging entrepreneurship with the industry linkages with diverse memberships help of training and specialised services to stimulate the local economy (Yusuf and provided through incubators and a sci- Nabeshima, 2009). However, such efforts are ence park; 14 and unlikely to lead to a major shift in the demand for university-based research. From a longer- term standpoint, the most effective approach 13 Over 60 per cent of the 167 E&E fi rms surveyed in Penang and Johor in 2005 reported that to building university-industry linkages would university curricula in Malaysia lack interface be one that gradually improves the quality of with their fi rms’ activities, thereby forcing them to invest in longer training periods for new teaching and research capacity and carves out a recruits (Rasiah, Hamdan and Gopalan, 2009). reputation for scientifi c excellence. With regard 14 The National University of Singapore has to international reputation, Malaysian universi- initiated some programmes that offer useful pointers (Poh Kam Wong, 2008). 42 PENANG’S ECONOMY • Engaging in exploratory research and Penang needs to remove the barriers that internship programmes with local com- are holding back the services sector’s perfor- panies with government funding serving mance for it to drive future growth. As the econ- as a catalyst. omy moves up the value ladder and becomes more knowledge intensive, the line between The university’s ability to attract more manufacturing and services blurs and the latter students into its science and technology (S&T) would have to play an increasing role in Penang’s graduate programmes and to raise quality will economy. However, the Malaysian services sec- be strongly infl uenced by the demand for high- tor is skilled-constrained and is one of the most level skills refl ected in better entry-level sala- restricted in the world. Restrictions on foreign ries and career prospects for graduates and ownership in particular appear to negatively affect PhD holders. Although employers complain of the performance of fi rms that are not constrained shortages and of staff turnover, it is not appar- by foreign equity considerations are found to be ent that the salaries of the most highly-skilled more effi cient, better in networking, providing workers, and particularly of researchers, have spillover effects to local fi rms (Kee, 2009). Ad- risen suffi ciently to be attractive to them. dressing these concerns would pave the way to a diversifi cation of the sector into linked services. Diversifying into linked services Improving the quality of instruction pro- Services are important for Penang’s economy, vided by USM and expanding graduate and contributing more than 54 per cent of total doctoral programmes would start the process employment of Penang in 2005. However, the of enhancing USM’s reputation in Malaysia and sector faces several serious challenges. Labour abroad. This would begin to draw more foreign productivity of services in Penang are lagging students to Penang and contribute to the het- behind the rest of the country, with the excep- erogeneity of the student body. It could also be tion of shipping services, fi nancial services and a welcome source of earnings for the university, the hotel industry. as well as for local providers of services to the Evidence from business support services school. Elite universities are important export- sector fi rms surveyed consecutively, in 2002 ers of services and can be signifi cant revenue and 2007 as part of the Productivity and In- generators for the local economy (Yusuf and vestment Climate Survey (PICS), suggest that Nabeshima, 2009). University teaching and re- fi rm performance over the past decade has search in the life sciences have the potential to been rather disappointing. Annual growth rate generate synergies with Penang’s hospital sec- of sales of fi rms located in Penang declined tor, itself a growing exporter of medical services, drastically from 30 per cent for the period mainly to visitors from Indonesia although there 1999–2001 to 3 per cent for 2004–06. is ample scope for diversifi cation. 300 FIGURE 13: LABOUR 250 PRODUCTIVITY OF SELECTED SERVICES 200 INDUSTRY, 2004 150 Source: Kee (2009) 100 RM ‘000 50 0 Sea Real Public Road Cinemas Travel Shipping Brokerage Cargo Advertising Hotels Computer transport estate transport haulage agencies agencies services handling agencies services Malaysia Penang PENANG’S ECONOMY 43 Medical services providers, like universities, which are closely connected to the presence can be signifi cant revenue earners for the local of manufacturing capabilities in Penang, offer economy but too often, universities and hospitals the best way forward. remain island sectors in the urban economy with few linkages and low employment capacity. It is when these sectors connect with the real sector, Specialisation and as in the case of Boston and San Francisco, that the multiplier effects start to grow. economies of scale: The backward linkages from medical ser- Six focus areas to vices can be to bio-informatics, to IT-based drive growth fi rms, to producers of diagnostic and imaging equipment and medical im- The way out of the middle-income trap is to ex- plants. They can also link to ploit economies of scale through specialisation, Harvard economist the pharmaceutical indus- focusing on a few products where it is possible to Ricardo Hausmann and try supplying hospitals with achieve global excellence. This is often achieved others argue that many medications and using their through exploiting agglomeration economies countries try to diversify services to conduct drug tri- by concentrating production in a given locality. their production als. Universities can be the Participation in regional supply chains offers one base, but do so with source of ideas and entre- avenue for specialisation that is especially rel- no reference to core preneurship, which contrib- evant for Penang’s future strategy of enhancing competencies. The result ute to fi rms supporting the its network to strengthen its industrial base. of “blind diversifi cation” medical services sector. The In developing a strategy to specialise, is often an expensive electronics and biopharma policy makers must understand that countries mistake. As the authors industries in Penang could or regions cannot artifi cially create a compara- say, “By trying to be evolve to serve the hospital tive advantage in a product simply by decree- good at everything, sector, with USM and lo- ing that that product should be a focus area. you’ll turn up being cal entrepreneurs providing Instead, they must focus on business areas excellent at nothing.” some of the impetus. This where there is already a demonstrated ability electronics-IT-biopharma to compete in a related area. That related area nexus between USM and need not be in the same sector, but it should the hospital sector is one possible pathway to use the same skills. growth via technological upgrading that har- The idea that products can be related in nesses the resources of several key drivers. terms of the core comparative advantage that There has been some discussion about goes into their production has been formalised whether Penang should graduate from a manu- by Harvard economist Ricardo Hausmann and facturing-based economy to a knowledge econ- others. 15 They argue that many countries try omy or a services-based economy. The reality is to diversify their production base, but do so that such changes have to be made incremen- with no reference to core competencies. The tally and that the boundaries between defi ned result of “blind diversifi cation” is often an ex- economic sectors have become increasingly pensive mistake. As the authors say, “By trying blurred in modern economies. Firms are not to be good at everything, you’ll turn up being narrowly confi ned to one sector, but perform a excellent at nothing.” range of activities, covering both manufacturing To illustrate the point, consider the case and services. The range of what is produced will of German and Japanese automobile produc- automatically shift as fi rms upgrade their tech- ers that have successfully outcompeted US car nology and as they link with other fi rms. fi rms. How can this information be used to pre- These linkages must remain the basis for dict other sectors where German and Japanese Penang’s future growth. It implies that services like logistics, business support services, medical tou- rism, and electronics testing and design work, 15 Hidalgo, Klinger, Barabasi and Hausmann (2007). 44 PENANG’S ECONOMY BOX 7: Promoting life sciences as a new source of growth in Penang The defi nition of life sci- (e g B Braun and Ambu); ences (LS) is as broad as “a • It has a strong academic and research base for LS branch of science that deals at USM which is offering a wide variety of courses with living organisms and that cover research, development and innovation life processes” and covers centres; a wide spectrum of fi elds • It has a 250-acre Science Park anchored by three like biology, chemistry, bio- companies utilising 75 acres of land. The Research chemistry, mechanical engi- & Innovation Park in Bukit Jambul (sains@usm) neering and bioengineering. has also been established to provide a platform This innovation-led industry has been identifi ed and infrastructure support for a seamless interac- by a number of countries as the engine to achieve the tion among universities, research intuitions and goal of sustainable knowledge economies. Malaysia industries, as well as to form the value chain of should also embrace LS to avoid inter-generational research, development, commercialisation and poverty — historically, nations that continually em- entrepreneurship; and braced technological development, from the Industrial • It is an attractive place to live and work in Revolution onwards, have prospered. The Asian Tigers (especially for expatriates) with its modern embraced the ICT revolution and prospered whereas commercial infrastructure. Mexico and the African countries did not, even though these countries had similar GDP numbers some 30 As an overall strategy, Penang should adopt a low- years ago. With the ageing demographics pushing up risk approach to build its LS industry. It should build on its healthcare costs, new technologies for early detection, existing competencies in ICT and precision engineering treatment and prevention of diseases will be critical to to further develop its medical devices sector. The state help manage health budgets. already has several MNCs manufacturing and exporting Due to new LS technologies, our economy, which medical devices. Penang accounted for 70 per cent of has been petroleum-based, is changing. Polymers, plas- the total medical devices produced in Malaysia in 2006, tics and other industrial hydrocarbons can now be pro- which translated to a value in excess of RM400 million duced from corn; and biofuels from corn, soya, palm, ja- (as depicted in Figure 7A). tropha and sugar cane. Food ingredients can be cultured There is a growing trend for the global pharma and in laboratories and genetically-modifi ed (GM) crops are biotech companies to outsource services to lower-cost growing in acreage. Failure to fully embrace the LS in- countries. These include toxicology, clinical, manufactur- dustry risks impoverishing the next generation. ing and analytical services. Penang can capitalise on this Penang has been identifi ed as one of the potential as it has one of the largest toxicology and biomanufactur- states in Malaysia to further develop the existing na- ing facilities in Asia. As the hospitals have experiences in scent LS industry due to some comparative advantages performing clinical trials, they can be scaled up to take on that the state possesses: international multicentred trials with some incremental • It has a strong electronics-industry base developed investments. Western institutions and companies have a over the past 30 years that has a crossover with LS; surplus of intellectual property (IP) and technologies in • It has a growing network of more than 30 LS com- LS and are constantly looking for development partners. panies and supporting industries in Penang, the This represents a lower-risk approach for Penang to de- majority of which are in the medical devices fi eld velop new products in LS in a shorter time frame. FIGURE 7A: CONTRIBUTION OF '&&& PENANG’S MEDICAL DEVICES TO TOTAL MALAYSIAN .&& PRODUCTION Source: Socio-Economic ,&& & Environmental Research Institute *&& RM (million) (&& & (&&& (&&' (&&( (&&) (&&* (&&+ (&&, Malaysian-made medical devices Penang-made medical devices Total merchandise PENANG’S ECONOMY 45 fi rms might be competitive? The answer does role of China and neighbouring countries. They not lie in automatically thinking about related ac- build new niches based on Penang’s existing tivities, like auto parts, but on understanding the strengths while simultaneously offering poten- key source of German and Japanese compara- tial for further technological upgrading. tive advantage in automobile production. Stud- Looking fi rst at the characteristic of scale ies suggest this rests with teamwork and effec- economies, the three manufacturing sectors of tive communication among workers, something focus have been studied in detail in academic which is essential for quality when long chains of research (Figure 14). Electrical and electronics production are involved, as in automobiles. The manufacturing has estimated scale economies of implication is that manufacturers in Germany 1.2, meaning that doubling the quantity of inputs and Japan of other products involving long pro- of capital and labour leads to an increase in out- duction chains are also likely to be able to com- put of 2.4 times. Instruments (including medical pete with the United States, given the observed devices) have scale economies of 1.12. Pharma- success of automobile producers. ceuticals (as a proxy for biotechnology) have an In applying this principle to Penang, Khaza- estimated coeffi cient of 1.31. If these industries nah Nasional has identifi ed six focus areas that can be expanded, more and more resources will can become drivers of Penang’s growth: be made available to be distributed as profi ts, • Technology-based manufacturing wages and for investing in innovation. These sec- including more sophisticated electrical tors can accordingly support sustained growth, and electronics manufacturing, medical even in high-wage, middle-income areas. devices and automation; It is less clear that the scale economies • Biotechnology/life sciences; are present in the other areas. Some agribusi- • Business process outsourcing (BPO); nesses exhibit such characteristics, and that • Logistics; should be the focus of efforts in the NCER. • Tourism (with niches in medical tourism Data on service industries is harder to obtain, and meetings, international conventions but industry sources suggest that scale econo- and exhibitions — MICE), and mies also exist in BPO, logistics and tourism. • Agribusiness. The second characteristic relates to re- gional demand and linkages. Electronics has These six sectors share three character- perhaps the best-developed regional supply istics that together increase the likelihood that chain in East Asia. Medical tourism in Penang they can be successfully developed in Penang. is largely focused on Indonesian clients. The They are in areas where scale economies are logistics approach is to create a regional hub in important. They link with regional demand as Penang, serving the Bay of Bengal and the Indo- well as global demand to accommodate the nesia-Malaysia-Thailand Growth Triangle. By harnessing Penang’s regional centrality and its FIGURE 14: position between important economies in East Instruments SCALE Asia and India, additional value can be created, ECONOMIES Electrical machinery IN SELECTED building on the concentration of skills and infra- SECTORS Non-electronic Source: Antweiler machinery structure that is already present in Penang. and Trefl er 2002; Iron and steel The last characteristic relates to building on Calculations of the authors Pharmaceuticals Penang’s existing strengths. Hausmann and oth- Wood products ers argue that successful new products are devel- Footwear oped in areas that are “close” to existing produc- tion structures. He constructs maps to depict this Leather concept of “closeness” in a visual way. Apparel Scale elasticity > 1 Hausmann’s product space rests on the Textiles Scale elasticity = 1 intuition that the ability to produce any new -2 0 2 46product in a country can be assessed by look- Change in export share, 1994 – 2004 ing at the actual ability of other countries with 46 PENANG’S ECONOMY BOX 8: A choice location for sun, surf and scalpels Penang, primarily known credited by the Joint Commission International (JCI). for its electronics sec- The collaborative efforts of the private hospi- tor and UNESCO World tals in the state have also yielded two key institutions, Heritage Site listing, as namely the Penang Health Association and the Allied well as being Malaysia’s Healthcare Centre of Excellence. While the former fo- food haven, now stands cuses on promotion of medical tourism for the state at the forefront of medi- of Penang, the latter is a training centre dedicated to cal tourism, accounting the upgrading and development of allied healthcare for more than 70 per professionals in the state. cent of the receipts for Another plus factor would be Penang’s four de- this sector in the country. While a major portion of cades of experience in electronics and manufacturing. the market in Penang is derived from Indonesia, es- This track record, coupled with a strong base of local pecially from Sumatra, the number of medical tour- suppliers skilled in precision engineering, plastic and ists from Australia, Europe and the United States has tools, provides the foundations for a thriving medi- been on the rise.1 cal devices sector. A synergy between the medical In anticipation of a compound annual growth devices and medical tourism industries will position rate of 10 per cent over the next fi ve years, hospitals Penang as the cornerstone to develop the country’s in Penang have begun to undertake expansion of their healthcare industry into a high-income growth sec- facilities. Based on a survey conducted recently, the tor and spearhead Malaysia’s aspirations to become number of private-sector hospital beds is expected a fully developed nation by 2020. to increase by more than 60 per cent over the next three years. In addition to this development, hospi- 1 Nearly 200,000 foreign visitors used Penang’s tals are also investing in higher-end equipment and hospital facilities in 2006 for everything from setting up centres to deal with more complex medical routine physical exams to heart-related procedures conditions, from life-threatening illnesses to injuries to hip and knee replacement. Each visitor spent and chronic medical disorders. There are also moves approximately 2.5 days in a hospital (not including towards improving standards through accredita- any additional time spent in Penang or other tion. While most hospitals have Malaysian Society resorts to convalesce) and was accompanied by for Quality in Health (MSQH) accreditation, Penang at least one additional person who generated Adventist Hospital is the fi rst in the country to be ac- revenues for local merchants and hotels. similar production structures to produce the sector would need to be “green fi eld”, lowering product in question. He has constructed a the probability of successful implementation. global product space map for manufactures When Malaysia’s product space is com- that refl ects this information. 16 pared with Singapore’s, there seems to be more An analysis of the product space map for potential for upgrading in Malaysia. But com- Penang and Malaysia shows ample opportunity pared to Thailand, Malaysia appears to be at a to raise technological sophistication especially disadvantage. Thailand has scope to move into in electronics, engineering, process industries, more new industries and these appear to be other high-technology industries and some more closely linked with existing fi rm opera- resource-based industries. These subsectors tions. Thailand seems to possess many more have productivity levels higher than the norm. opportunities than Malaysia in agro-processing, They also employ capabilities similar to existing building on their existing success. industries. Agro-based industries and primary Aggregate measures such as these are only products offer less potential. They are either less indicative. It does appear, nevertheless, that: technologically sophisticated, implying limited • Malaysia (and Penang) are right to be scope for productivity gains or they lie far from selective because only a few sectors are the origin, indicating that development of the close to existing capabilities and thereby offer good chances for successful imple- mentation of productivity enhancements; 16 One drawback of the methodology is that • The subsectors chosen in Khazanah services sectors are not covered despite Nasional’s strategic approach towards their importance in economic growth and development. This is because international Penang coincide with the subsectors that statistics on services are less available. appear to offer good prospects for moving PENANG’S ECONOMY 47 BOX 9: Navigating the product space The concept of product space mapping is rooted in the comprise fi ve high-tech products in 1995, nine in 2000 hypothesis that a country’s capability to produce one and eight in 2007. The product-space analysis therefore good is somehow tied with the installed capability in the shows evidence of capabilities developing for high-tech production of other similar goods (Hausmann and Klin- products in Penang. Furthermore, it establishes pros- ger, 2007). The concept of proximity is used to capture pects for further upgrading given its untapped oppor- this intuitive idea that the ability of a country to produce a tunities in products that have yet to attain comparative product depends on its ability to produce other ones. advantage, although capabilities are increasing. For example, a country with the ability to export Nonetheless, from a more dynamic standpoint, apples will probably have most of the conditions suit- the prospects of technological upgrading are fast di- able to export pears. They would certainly have the minishing if current opportunities are not seized. While soil and the climate, together with the appropriate there is evidence of capabilities developing between packing technologies, frigorifi c trucks and containers. 1995 and 2007, the distribution of products has actu- They would also have the human capital, particularly ally remained relatively unchanged between 2000 and the agronomists that could easily learn the pear busi- 2007. This suggests that the development of capabilities ness. However, when we consider a different business has become stagnant since 2000. Moreover, products such as mining, textiles or appliance manufacture, all or that have highest density including some cutting-edge most of the capabilities developed for the apple busi- high-tech products are moving gradually away from the ness are rendered useless. origin — a sign of weakening capabilities. Meanwhile, The vertical axis in the product space is basically products that are growing in density are not products a measure of a particular product’s sophistication from that can compete at the technological frontier. the average sophistication of a country’s export bas- ket. The horizontal axis, on the other hand, captures the amount of related products that a country exports, the product space for penang used here to proxy “capabilities” developed for partic- (&&&& ular products. Products that are located closer to the origin indicate higher capabilities (see “Navigating the product space: A technical appendix” on page 95, and “The product space for Penang, Malaysia, Singapore '&&&& and Thailand” on page 96). The product space chart for Penang shows that the distribution of products that are exported and have & revealed comparative advantage (RCA) has moved clos- er to the origin between 1995 and 2007, demonstrating the fact that capabilities have developed for those prod- ucts. Some of the medium- to high-tech product groups #'&&&& in Penang that have seen evidence of industrial capabili- ties developing include electronic products, engineering products, and other high-tech products. However, the opportunity to develop capabilities #(&&&& +'&'+(& has not been fully exploited. The distribution of products Invdensity with no revealed comparative advantage has tightened from 1995 to 2007, signifying increased capabilities. For legend and details, please refer to Among these, the products with the highest capabilities Annex 5 at page 96 up the technological ladder while not mov- ing too far from existing capabilities; and • The challenges faced in developing suc- cessful agro-processing in Malaysia are likely to be greater than for electronics, be- cause there is little existing internationally successful commercial experience to draw on. An exception to this may be in the palm oil and rubber-based industries, which have long histories in the northern Malaysian states and which lend themselves to scale economies in commercialised plantations. 48 PENANG’S ECONOMY PENANG’S SPACE - PENANG AS A HUB - PENANG AS A SECONDARY CITY IN MALAYSIA - IMPROVING GEORGE TOWN’S LIVEABILITY - GEORGE TOWN AS A WORLD HERITAGE SITE PENANG’S ECONOMY 49 Traditionally, Penang has been a successful trading hub for northern Peninsular Malaysia and the Indonesia–Malaysia–Thailand Growth Triangle, leveraging on its position, protection of property rights, low transaction costs and openness. Coupled with its present agglomeration of manufacturing and services expertise, it is well positioned to become a highly- successful secondary city of Malaysia. For this to occur, it must enhance its economic density (as part of a larger integrated Northern Corridor), reduce distance to markets and specialise vis-à-vis the world markets. Physical connectivity via infrastructure development will be important for this. Just as important is the need to make Penang more attractive in terms of “liveability” by international standards. Towards this end, the key is in making George Town, its heart, a global example of liveability. It has to be a catalyst for sustainable multidimensional growth where history, heritage and culture play an integral part. 50 PENANG’S SPACE Penang as a hub Penang has a long history as a trading hub, emerging as one of the fi rst free trade ports in Penang does not seek to compete directly with East Asia in the late 18th century. It was cen- Kuala Lumpur, Singapore or Bangkok, let alone trally located with access to major markets in Mumbai, Shanghai or Tokyo, but it can still be Burma (now Myanmar), southern Thailand, Su- a place of centrality and act in complementary matra and northern Malaya. It thrived on trade ways to larger regions. Smaller places have be- in rubber, tin, rice and other commodities in this come signifi cant global hubs for niches. important economic area. Like all other trading Helsinki is a hub for new technology, East- hubs, it based its success on the protection West relations and security matters. Dublin, of property rights, low transaction costs and as a hub, connects many American companies openness. These characteristics remain the to Europe. Reggio Emilia in northern Italy is fa- basis for Penang’s new opportunities as a hub, mous for innovative social experiments from and are the reason why MNCs like Agilent and citizens budgeting to new approaches to social NGOs like the Third World Network and the care and intercultural understanding. Even tiny World Alliance for Breastfeeding Action can places like Davos can have global resonance. organise themselves globally from Penang. The National Physical Plan has identifi ed In general, Malaysia and Penang do well in three major urban conurbations in Malaysia, of terms of trade facilitation, in comparison with which George Town is one. This plan now has neighbours and with high-income countries, to be translated into effective action. both in terms of costs and number of days. How- FIGURE 15: BXe^Xi Kangar HIERARCHY OF Population 2020: 0.09mil CONURBATION Source: National Alor Setar 8cfiJ\kXi Kota Bharu Physical Plan, Jabatan Population 2020: 0.39mil Population 2020: 0.42mil Perancangan Bandar BfkX9_Xil dan Desa GEORGE TOWN Kuala Terengganu CONURBATION BlXcX Population 2020: 0.37mil >\fi^\Kfne Population 2020: 2.42mil K\i\e^^Xel IPOH CONURBATION @gf_ Population 2020: 1.09mil KUANTAN Lumut-Sitiawan- CONURBATION Manjung Population 2020: O.64mil Conurbation Temerloh-Mentakab Conurbation BlXekXe KUALA LUMPUR J_X_8cXd CONURBATION Population 2020: 8.46mil Level 1: National growth conurbation Level 2: Regional growth conurbation J\i\dYXe Level 3: Intermediate (connective) growth conurbation Level 4: Urban growth centres / MELAKA CONURBATION D\cXbX future conurbation Population 2020: 0.67mil JOHOR BAHRU State capital Muar-Batu Pahat- CONURBATION Kluang Conurbation Population 2020: 1.84mil Highway Federal road Af_fi9X_il Railway PENANG’S SPACE 51 FIGURE 16: ECONOMIC DENSITY AND DISTANCE TO MARKETS IN EAST ASIA ever, Malaysia is not as streamlined as Singapore, Access to attractive regional markets which leads the region, nor even as the Philip- Figure 16 1 shows a map of the East Asian re- pines in terms of days taken to export or import. gion, with economic density, estimated as GDP The World Bank has emphasised that per square kilometre, plotted on the verti- poor trade facilitation is one of the major im- cal axis. The higher the spike on the map, the pediments to developing trade, potentially greater is the economic density of that area. more important than even tariff barriers (Shep- For convenience, concentric circles of 1,500 herd and Wilson, 2008). Customs, administra- and 2,000 miles from Penang are also shown tive procedures, regulations, and maritime and to give a sense of distance. airport infrastructure are among the areas for Several features of Figure 16 are worth major improvements. Malaysia stands to gain highlighting: by improving its own trade facilitation as well • The map of East Asia clearly shows that as through the benefi ts of expanding markets economic activity is not at all evenly dis- when neighbouring countries improve their persed across countries. A few areas tend trade facilities. Overall, improved trade facilita- to dominate, largely those on the coast tion could increase welfare in ASEAN by up to that enjoy advantages in low-cost trade. 10 per cent in the long run. • East Asian economic activity is heavily Trade facilitation is important as it mostly centred on northern East Asia and most affects smaller enterprises. Large, productive of this is over 2,000 miles (about fi ve to enterprises can offset the higher cost of trade six hours by air) from Penang. The density through economies of scale, but SMEs cannot of economic activity in Japan, South Korea do the same. Reducing the cost of exporting and, increasingly, the coastal areas of and importing intermediates can have a major China and Taiwan, is far higher than impact on these fi rms. the density of localities in ASEAN. Even Two strategies that are needed for Penang Singapore, despite its high per-capita in- to develop further as a hub are: come, does not boast the same economic • Improve performance in terms of its density as is found in northern East Asian existing pattern of freight; and • Develop specialised facilities to reduce freight costs for new products and services. 1 This map and the underlying data are courtesy of The World Bank’s World Development Report 2009 team. 52 PENANG’S SPACE FIGURE 17: centres. From this perspective, Penang is Myanmar OVERVIEW at a disadvantage, as it is not as close as Laos OF PENANG’S Vietnam CATCHMENT economies like Vietnam and the Philip- Yangon Thailand AREA AS DEFINED pines to the major markets of East Asia. Bangkok Subic Bay Chennai BY AIR • Penang is situated between two large Cambodia TRANSPORT economic masses represented by Bang- 2 hours Phnom Penh Philippines TIME 3 hours Ho Chi Minh Source: kok to the north, and Kuala Lumpur (and Khazanah Singapore) to the southeast. The higher Nasional Medan Penang Berhad density of these cities makes them more 1 hour Kuala Lumpur (2007) likely to attract new fi rms in many sectors Singapore and so limits the nature of products in Indonesia which Penang can expect to compete. • Although Penang is ideally suited as a Jakarta gateway to India, that country’s economic mass remains modest. Delhi, Kolkata and Mumbai (not shown) have signifi cant eco- nomic density, but Chennai and Bangalore remain small by international standards. choosing higher-cost options like trucking to and These localities may well be fast growing, from the Kuala Lumpur International Airport but at present, they represent future (KLIA) or Changi Airport in Singapore for out- potential markets and not large markets bound and inbound transportation. that can be exploited immediately. Further- Limited capacity also exerts excessive pres- more, Penang will face stiff competition sure on cargo capacity during peak periods. Lim- from Bangkok, Kuala Lumpur and Singapore ited direct connectivity to end destinations also for business that is oriented towards India. increases transportation lead times. With more than two stop- On a more positive note, Penang is well overs and multiple fl ight changes Penang has the highest placed to become a hub for the Northern Corri- for most outbound transactions, economic density and dor, the Indonesia-Malaysia-Thailand Growth customers end up incurring high- lowest distance to market Triangle and the Bay of Bengal, although both er inventory costs. for a large local area in Kuala Lumpur and Kolkata will be signifi cant Adding additional capaci- the Indonesia-Malaysia- competitors for the last. A hub permits a con- ty presents a challenge as large Thailand Growth centration of activity within which it is easier to trade imbalances with key trad- Triangle. It is closer than resolve coordination and market failure issues. ing partners result in signifi cant Kuala Lumpur to Medan, It can generate agglomeration economies. The asymmetry in air cargo vol- Indonesia, the only other whole Northern Corridor is well situated as the umes. Penang’s total outbound locality with signifi cant dominant economic mass in the Indonesia-Ma- cargo volume (in tonnage) is 36 economic density in the laysia-Thailand Growth Triangle and has close per cent higher than its inbound triangle area. historical trading links with these areas. cargo volume. This difference Penang has the highest economic density is large compared to Singapore, and lowest distance to market for a large local which recorded a 6 per cent difference between area in this triangle. It is closer than Kuala Lum- outbound and inbound cargo volumes. For Pen- pur to Medan, Indonesia, the only other locality ang, the cargo volume mismatch is highest with with signifi cant economic density in the triangle destinations in the United States, Hong Kong, area. Critically, the distance between Penang and Australia and the Netherlands. Outbound car- most regional markets, including the east coast go by tonnage to the United States and Hong of India, is within three hours by air. Penang also Kong is approximately two to three times more has the closest major seaport to Chennai. than the inbound cargo tonnage from the same However, several key issues exist. Shor- location. tage of capacity on key routes results in leakage Inadequate warehouse space at the Penang of trade fl ow from Penang, with customers International Airport also decreases its overall PENANG’S SPACE 53 cargo handling capacities. Cargo warehouses • Air and sea connectivity to markets and are located on either sides of the runway, re- raw materials must be improved. sulting in longer lead times and higher handling costs. In addition, the current runway is unable The current layout of the cargo handling to support fully-loaded wide-bodied aircraft. area at the Penang airport is suboptimal and Penang’s seaport is currently challenged leads to ineffi ciencies. Cargo terminals on differ- by limited depth and improper design. Its cur- ent sides of the runway result in higher cost, ad- rent draught of 11m is insuffi cient to support ditional lead times and extra documentation for larger vessels that require a minimum draught movement of goods across terminals. By consoli- of 13m. In addition, its wharf length is limited dating cargo terminals on one side of the runway, to 900m, which reduces the number of vessels customers will have access to higher warehouse that can dock at a time. capacity. In addition, the current practice of using Several constraints exist, which must be tractors to tug cargo from one side of the terminal immediately addressed: to the other would no longer be required. With • Infrastructure constraints at airports all the cargo consolidated on one side, security and seaports must be fi xed through management would also be much simpler. infrastructure upgrades and operational Current design constraints of Penang’s improvements; port have resulted in lower effi ciencies com- • Cumbersome regulatory processes need pared with top ports in the Asia-Pacifi c region. to be simplifi ed and streamlined; and On average, the Penang port is only capable of moving 18 containers per hour, compared with 40 containers per hour in Hong Kong, 35 in Sin- FIGURE 18: OVERVIEW OF current scenario gapore and approximately 30 in Johor’s Port of THE PROPOSED Tanjung Pelepas (PTP), Shanghai and Jebel Ali. “ONE-STOP Starting operations requires interfacing AUTHORITY” with 21 different agencies Three essential steps need to be taken to SOLUTION address these issues. First, cranes and other Source: Khazanah Nasional Berhad equipment need to be refurbished to improve (2007) MIDA crane movements, thus reducing turnaround DOE MITI time. Second, there is a need to expand the wharf, stocking area and barging centre to enable more ships to dock simultaneously. Increased docking FIZ company space would also mean faster loading times for vessels. Finally, dredging to increase the draught to 14m will enable larger vessels to directly call at Land the port without the need for barges. Others authority Local Complicated customs procedures, manual authority processes and infl exible regulations that do not allow manufacturing and commercial activities proposed solution to be performed in one free zone are some of the key regulatory issues that exist currently. FIZ company Going forward, key changes in policies are re- quired. Import approvals should be processed electronically. Commercial activities should also be allowed in industrial zones as logistics One-stop players are typically involved in both activities authority MIDA Others (assembly, packaging, sorting and so on). To address current issues and the multi- MIDA DOE plicity of authorities, Penang should establish Local Land a one-stop industry and regulatory authority to authority authority handle all free industrial zone (FIZ)-related is- sues and liaise with the necessary government departments (Figure 18). 54 PENANG’S SPACE BOX 10: Lessons for Malaysia from The World Bank’s World Development Report 2009 The messages of the very infl u- At the basic level, agglomeration can be obser- ential World Development Report ved in population densities: the more densely-popu- (WDR) 2009 published by The lated an area, the more it can be assumed that people World Bank entitled Reshaping choose to move there to take advantage of agglom- Economic Geography do not seem eration economies. This then provides the rationale to be in “perfect sync” with Ma- behind urban concentration. An examination of the laysia’s corridor development pattern of urbanisation also indicates that the central strategy. The stated objective of region is the focus of agglomeration for Peninsular Malaysia’s corridors policy is re- Malaysia. The fi gures below illustrate the population ducing “regional imbalance and density in the top 10 metropolitan areas in 1991 (Fig- bringing about equitable growth, investment, and ure 10A) and 2000 (Figure 10B). employment opportunities to all regions of Malaysia”. The WDR 2009 proposes interventions via “3Is” The WDR, using its 3Ds (density, distance and divi- for the 3Ds it highlights. These are: sion) framework concludes that growth is “naturally” • Institutions for developing and spatially unbalanced because it stems from agglom- managing density; eration economies. • Building infrastructure for reducing The report further concludes that instead of distances: and “fi ghting” density and attempting to ensure that • Providing incentives to lower divisions. economic growth is uniform across regions by relo- cating production, governments would do better to At the national regional level, the policy implication integrate “lagging” with “leading” areas. This “unbal- from the WDR 2009 is that while economic growth anced growth” can lead to “balanced development” if will be spatially divergent, this imbalance should be governments could create connective and spatially- mitigated by “balanced (connective and spatially-blind blind infrastructure and institutions and grant some respectively) development” in terms of infrastructure “spatially-focused” incentives. and institutions. In other words, “lagging” and “lead- The fi ndings of the WDR 2009 highlight the im- ing” areas could be integrated via interventions such as portance of agglomeration economies in determining building highways and other transportation networks the success of any cluster-based development strat- in order to improve labour and other forms of mobility. egy, such as the one for Malaysia’s economic devel- opment corridors. Agglomeration economies are said to exist whenever concentrations of people lead to improve- ments in an individual’s productivity, therefore leading to more concentration. The last stylised fact is per- haps the most pertinent when considering Malaysia’s regional development corridor, which exemplifi es the way in which policy makers have tried to create ag- glomeration economies by “manipulating” the physi- Source: World Development Report 2009, Intan Nadia cal space through spatially-targeted incentives. (2009) and Khazanah Nasional Berhad (2009) Density, 1991 Density, 2000 8.0 8.0 FIGURES 7.0 Alor Setar7.0 Alor Setar 10A & 10B: TOP 10 6.0 Bukit Mertajam 6.0 Bukit Mertajam METROPOLI- Ipoh TAN AREAS IN 5.0 5.0 KL - Ampang Jaya - PJ PENINSULAR Subang Jaya - Shah Alam - George Town George Town MALAYSIA BY 4.0 Taiping Ampang KL 4.0 Klang POPULATION Klang PJ DENSITY IN 1991 3.0 3.0 AND 2000. Source: WDR 2.0 2.0 (2009), Intan Johor Bahru Johor Bahru 1.0 1.0 Nadia (2009) Latitude, degrees N Latitude, degrees Latitude, degrees N Latitude, degrees 0.0 0.0 100.0 100.4 100.8 101.2 101.6 102.0 100.0 100.4 100.8 101.2 101.6 102.0 Longtitude, degrees E Longtitude, degrees E PENANG’S SPACE 55 FIGURE 19: MAJOR FLOWS OF OUTBOUND europe: 10k mt CARGO FROM Amsterdam PENANG TO AIR HUBS (2006) London Paris Frankfurt Seoul Massachusetts Note: Includes 30K MT New York the estimates of Los Angeles Nashville cargo leakage usa: 55k mt from Penang to Taipei 27K MT the KLIA and Dubai 9K MT Changi by road PENANG Subic Bay 4K MT Source: Khazanah Kuala Lumpur Nasional Berhad Singapore 13K MT (2007) 12K MT Australia estimate 8K MT ?lY KiXejj_`gd\ek B\p mfcld\j [\jk`eXk`fej Seoul ~25K MT USA To the final destination Taipei ~24K MT USA KL ~12K MT USA / AUSTRALIA Singapore ~8K MT AUSTRALIA / EUROPE To the transshipment hub Subic Bay ~3K MT USA Seoul and Taipei constitute more than 50% of the transshipment volume FIGURE 20: IMPORTS AND Imports Category Exports Direct connectivity EXPORTS BY COUNTRY FOR PENANG 8.3 China 3.0 3 SEAPORT 1.4 6.3 (RM BIL, 2006) USA NA Note: Product 3.4 Japan 3.9 3 categories ranked 3.9 0.6 based on the Singapore 3 total value of 2.5 Indonesia 1.1 3 trade (exports + imports) 2.1 Korea 0.7 3 Source: Khazanah 2.0 0.6 Nasional Berhad Taiwan NA (2007) 1.4 Australia 1.2 NA 0.6 Germany 1.9 NA 0.2 Hong Kong 1.3 3 0.8 Thailand 0.7 3 0.2 United Kingdom 1.2 NA 0.2 Netherlands 1.2 NA 0.6 India 0.5 3 4.7 Others 10.0 — Total: RM34.3 bil Total: RM32.3 bil Only about 40% of entire trade is done through directly-connecting vessels Currently, Penang leverages on fi ve trans- treme pressure on capacity, especially during shipment hubs — Seoul, Taipei, Singapore, quarter-ending peak periods. Kuala Lumpur and Dubai — for movement of To address this capacity issue, there is a air cargo (Figure 19). Seoul and Taipei currently need to incentivise airlines to develop more out- constitute more than half of Penang’s cargo bound cargo space on these key routes. Better volume with an average outbound capacity connectivity should also be provided to nearby utilisation of 85 to 88 per cent a week. Aver- hubs such as KLIA and Changi in Singapore. age outbound utilisation for Europe is also very Penang also needs to look at improving its high, at over 95 per cent a week. This adds ex- direct sea connectivity to major destinations. 56 PENANG’S SPACE Only 40 per cent of total trade is conducted us- typically do not suffer from pollution, crime and ing vessels with direct connectivity (Figure 20). overcrowding in the same way as many primary There is a need, for example, to develop direct cities. Low costs of dealing with “grime, crime sea routes to the United States, which accounts and time” can be major competitive factors in for US$16 billion worth of rubber products ex- favour of secondary cities. port. Penang should also strengthen connec- In the framework of The World Bank’s tivity to various Chinese and Taiwanese ports World Development Report 2009, which identi- for the sourcing of electronics equipment and fi es strategies for secondary cities across the machine parts. world, the key challenges for Penang are to For new industries, like shrimp farming build density and reduce distance to markets. and rubber processing, specialised connectivity The bank suggests that institutional changes may be required, such as cold chain warehous- and infrastructure investments are key instru- ing, break bulking and packaging facilities. ments for these localities. It recommends expanding ad- ministrative jurisdictions to Penang is a secondary Penang as a secondary permit more inclusive plan- city in Malaysia and ning and connective infra- secondary cities have city in Malaysia structure to increase density different sources of Penang is competing with other major agglom- and reduce congestion. growth. erations in Malaysia, notably the Klang Valley One example of how and Johor, host to another corridor develop- this approach can be imple- In the framework of The ment programme, Iskandar Malaysia. To be mented is South Korea’s World Bank’s World successful, Penang must understand how its adoption of a rural-urban Development Report local economy relates to the broader national integrated city programme 2009, which identifi es economy and competing localities. in 1994.2 In that programme, strategies for secondary The economic density map (Figure 16, rural counties were integrat- cities across the world, Page 52) shows clearly that Penang is a second- ed with cities in an effort to the key challenges for ary city in Malaysia, not the dominant or prima- improve local public servic- Penang are to build ry. This does not imply, of course, that Penang is es and local administration density and reduce doomed to second-class status or second-rate and to reduce rural-urban distance to markets. growth. Quite the contrary. Internationally, sec- disparities. Better land-use ondary cities have grown at the same rate as planning in urban areas was primary cities and sometimes even faster. Sec- another positive outcome. ondary cities, however, have different sources of The South Korean approach helped Dae- growth. They base their dynamism on special- gu, a major secondary city, to expand rapidly. ised production in specifi c areas, often mature The broader administrative area permitted industries, whereas primary cities base their Daegu to integrate with its hinterland. It devel- dynamism on new products, and innovations oped fi ve industrial centres around the metro- generated by cross-sectoral interactions. politan hub. These centres specialised in manu- Understanding the unique nature of sec- facturing specifi c products, namely, electronics, ondary cities is critical to a successful strategy phones, LCDs, machinery and automobiles. By which would differ markedly from that of pri- locating the facilities in the hinterland, land and mary cities. Secondary cities typically specia- labour costs were kept low. By integrating the lise early on in the production of a few goods industrial centres with the hub, Daegu became in which they can generate scale economies. Sometimes, secondary cities develop because manufacturing becomes too expensive in the 2 Shanghai had earlier pioneered integrated primary city, when land and labour costs start rural-urban planning in 1987. One outcome to rise. At other times, secondary cities develop was the transformation of Pudong from an agricultural area to one of the most their own niche markets and advantages. They distinctive skylines in the world. PENANG’S SPACE 57 a vibrant city. By linking to Seoul and the port of • Double tracking of the railway and Busan with high-speed rail and a highway sys- establishing Butterworth as the northern tem, distance to export markets was reduced. transport hub; As Daegu grew, so did its economic density and • Upgrading of public transportation with it achieved signifi cant scale economies. the introduction of the Rapid Penang bus Lessons can also be learned from policy service; failures. In Mumbai, city leaders tried to reduce • Provision of adequate, affordable, density by tightening regulations limiting the liveable homes; building space for every square metre of land. • Compact liveable city development; The predictable result was a shortage of accom- • Industrial estate expansion and modation and high prices. Households spend up upgrading; and to 20 per cent of their incomes • Improved air links and sea routes with on rent. More than half of all the surrounding region. The Northern Corridor households live in slums. Busi- Implementation nesses fi nd that land costs eat With these in place, connectivity within Authority (NCIA) into their profi ts. Mumbai has the Northern Corridor will be greatly expanded, provides Penang with slipped from 25th to 40th spot industrial parks can link more easily with each an opportunity to build in an index of the best places other and ensure that land prices remain afford- density on the basis of to do business largely because able, and the distance between major research an integrated land use of its overcrowding. The effort centres, such as the USM School of Engineering, plan. Connectivity with to contain density has back- and business headquarters will be reduced. the primary, capital city fi red. Large-scale physical investments are only is also critical. The lessons from these one aspect of proper development of second- experiences for Penang are ary cities. Global experience suggests that other The best-run cities clear. The new Northern Cor- factors are important. 3 The best-run cities have have strong own- ridor Implementation Author- strong own-revenue fl ows, good fi nancial man- revenue fl ows, good ity (NCIA) provides Penang agement, improved municipal information sys- fi nancial management, with an opportunity to build tems, and local management of procurement. In improved municipal density on the basis of an in- Penang, substantial progress must be made in information systems, tegrated land-use plan. The each of these areas. Municipal revenue fl ows re- and local management example of Daegu suggests main low and tax collections on land are limited, of procurement. In that localities thrive when therefore reducing the incentive to link property Penang, substantial there are several centres of development and provision of municipal ser- progress must be made industrial activity surrounding vices in a sustainable way. Information systems in each of these areas. a city but closely connected are poor, and benchmarking of service provision to that city. Connectivity with against other localities is not used as a way of the primary, capital city is setting priorities for municipal improvements. also critical. Expanding public services to rural areas is the basis for long-term supply of adequately trained workers. Improving George Town’s A number of critical physical investments in infrastructure are needed to realise the po- liveability tential to add economic density and reduce dis- Penang offers a lifestyle that is relaxed, cos- tance in Penang: mopolitan and balanced. This can appeal to • Enhancing connectivity between the leading professors, doctors, lawyers, manag- island and mainland — expansion of ers, teachers, nurses, artists and craftsmen Penang Bridge, construction of a second bridge, upgrading of ferry service; • Upgrading of the airport, port and sup- 3 Improving Municipal Management for Cities to Succeed, Independent Evaluation porting infrastructure; Group, The World Bank (2009). 58 PENANG’S SPACE BOX 11: The new economics of geography The new economics of The new economic geography suggests that geography offers some prospects for any locality depend on three factors: clues to where growth • Economic density; is most likely to occur • Economic distance to market; and within a country — it • Economic division from global markets. 2 is concerned with the choices fi rms make Economic density, defi ned as the concentra- about location. 1 In ge- tion of economic activity in a given locality or GDP per ography models, fi rms square kilometre, has long been associated with scale tend to concentrate production in one location so economies. Several studies have confi rmed that pro- as to enjoy plant-level economies of scale. They also ductivity tends to rise when fi rms and consumers are like to be near their customers and suppliers in order located close to each other. Empirically, doubling eco- to reduce transport costs, thereby giving rise to “ag- nomic density or doubling the density of employment glomeration economies” or advantages of coalescing can increase productivity of a fi rm by 4.5 to 8 per cent. geographically. Once established, perhaps due to his- Economic distance measures how far the mar- tory or simply luck, cities tend to grow. ket is from producers. Physical distance is clearly an The tendency of fi rms to invest in a particular important component of distance, but by no means location depends on the agglomeration economies of- the only variable of importance. Timeliness, logistics fered by that locality, as well as on a host of traditional infrastructure, transport costs and other elements business factors. For a start, fi rms like to share input also enter into the concept of distance to markets. The suppliers. When the market for inputs is broad, sup- empirical fi ndings on distance suggest that a doubling pliers can reap internal, plant-level scale economies of distance to a regional market centre lowers fi rm and reduce prices because of large-volume production profi ts by 6 per cent. A doubling of travel time to a city runs. Suppliers can also afford to customise products centre reduces productivity by 15 per cent. to meet the exact specifi cations of the fi rm. At the Economic division refl ects the idea that coun- same time, when many fi rms producing similar goods try borders provide signifi cant barriers to trade, even are in one location, the labour market deepens. Firms when borders are seemingly open. In one famous can more easily fi nd specialised skills and training pro- study 3 , Canadian fi rms were found to trade 22 times grammes can be organised. Workers and employers more with other Canadian provinces compared to their would reduce the risks of not being able to match skills. trade with states in the United States. This is despite Lastly, common locations enable the rapid diffusion of the 1988 free trade agreement between the United cutting-edge ideas in an industry. For businesses that States and Canada that should have implied border- compete in global markets, the ability to operate on the less transactions. Other studies fi nd smaller effects, frontier of new products is critical. Learning and inno- but most economists agree on the trade-reducing vating are key strategies for survival. character of national borders. 1 See Fujita, Krugman and Venables (2009). 2 World Development Report 2009, The World Bank, November 2008. 3 See McCallum (1995). around the world. The “Malaysia My Second manage environmental effects is not in place. Home” (MM2H) programme is designed to Traffi c congestion has soared in the absence make it easier for skilled people from around of a plan or strategies to manage the growth in the world to relocate to Penang and help build the number of private cars — Penang has the the connections, networks and knowledge that greatest per capita car ownership in Malaysia a vibrant city needs to fl ourish. (Figure 21, page 60) — and the absence of pub- Interviews with Penangites suggest a lic transport alternatives. strong attachment to the area, but it is not a Urban amenities like libraries have place that fi gures in the long-term plans of largely taken the form of mobile units rather many young or ex-Penangites. The most at- than permanent structures in the city and tractive attributes, that are summarised by the its suburbs. The university campus is too term “liveability”, have depreciated along with far away to integrate the student population economic growth of the past 20 years. — with its attendant restaurants, cafés and Air and water quality indicators have de- entertainment — into city life. Governance, teriorated, with limited infrastructure improve- in the form of lively civic participation, suf- ments, and an effective legal framework to fers because many key decisions over city PENANG’S SPACE 59 improvements are taken by federal authori- the world is disseminated; ties in Kuala Lumpur rather than by locally- • The cultural experience for international elected officials. residents and travellers; and A commitment to improve the liveability of • Global engagement in shaping and Penang must start with a discussion and mea- participating in global policymaking and surement of its key attributes dialogue. that citizens are concerned Cities today compete about. A baseline is available Penang does poorly on the human capital against each other for a for some indicators in the Pen- side — its best graduates look for job oppor- niche in global markets. ang People’s Report of 1999. tunities elsewhere — and on the connectivity That study foresaw the dete- side, where high-speed broadband has lagged riorating trends in traffi c ac- other regions in Asia. cidents, environmental indicators and air pollu- Lower stress, open spaces, convenient tion but actions to reverse these trends have not and fast access to shopping, heritage sites, been taken, and sustainability has yet to be fi rmly medical care, bookstores and libraries, sports built into economic development strategies. The and social facilities, and cultural events are study has not been repeated in a decade. features of liveability that young professionals Liveability can be measured, monitored have cited as most important. Incorporating and benchmarked against other localities. Cit- these attributes into the design of Penang’s ies today compete against each other for a development strategy is essential if the strat- niche in global markets. But a global city has egy is to attract and retain the core group of multidimensional connectivity, not only as a young, skilled professionals that provide dy- market. One recent comparison of global cities namism to the area. looks at fi ve dimensions: 4 The provision of quality public services • Business activity, measuring the extent of — education, health, transport, safety and economic opportunity; security and waste disposal — is a prereq- • Human capital, measuring how well a uisite for liveability in a city. These services city acts as a magnet for diverse groups are mostly provided by a local government, of people and talent; but large projects are funded and executed • Information exchange, measuring how by the federal government. For example, the well news and information about and to new sewerage treatment plant was a federal project,5 as is the local bus-service improve- ment project. In most countries, such projects are un- 4 AT Kearney and Foreign Policy “The 2008 global cities index”. Other popular indices dertaken by the local government, which has are the Economist Intelligence Unit’s “Livable accountability for service provision enforced cities ranking” and Mercer Human Resource through democratic elections. In Malaysia, this Consulting’s “Worldwide quality of living survey” has not been the case since 1965, and is con- stitutionally excluded by the Local Government Act 1976. In the absence of a major reform FIGURE 21: &$++ PRIVATE &$+& of this Act, other forms of accountability and MOTOR &$*+ democratisation of local government must be CARS &$*& REGISTERED &$)+ PER CAPITA &$)& Source: &$(+ 5 Sewerage piping and treatment are critical in Department &$(& of Statistics avoiding the haphazard disposal of waste water, &$'+ mostly into the sea. Long delays in providing &$'& adequate sewerage caused signifi cant pollution of &$&+ '//& '//( '//* '//, '//. (&&& (&&( (&&* (&&, Penang’s beaches and a loss of competitiveness to Langkawi. Sewerage in Penang is the responsibility of Indah Water Konsortium Sdn Bhd, a company Malaysia Penang wholly owned by the Ministry of Finance. 60 PENANG’S SPACE BOX 12: Environmental concerns in Penang Rapid economic growth creasing number of motor vehicles. Road infrastructure in the last four decades development has not kept up with vehicular growth. through industrialisation Traffi c management remains poor and public transport and tourism development in the form of buses is improving but still inadequate. has resulted in a host of Among the other long-standing environmental issues environmental problems in Penang are road widening and tree cutting, coastal in Penang. The increased land reclamation and the destruction of mangroves as prosperity, overdevelop- well as lack of public recreational space, public open ment, lack of planning and space, parks and gardens. growing population have also aggravated some of the Penang never had a comprehensive environmen- problems. These concerns have been expressed via a tal plan. Environmental problems that emerged were constant stream of reports on an almost weekly ba- usually handled on an ad-hoc basis. The fi rst attempt to sis in the press. In more recent years, blogs in Penang identify all the environmental issues and collect the data have also carried stories on the issue. A survey of these was in the studies for the fi rst Penang Island Structure blogs indicates that the environment is the second- Plan. However, this was not an environmental manage- most common topic after politics. ment plan and there were only broad policy statements The fi rst well-publicised case of the human im- on how the environment should be managed. pact of industrial pollution in Penang was that of the The next major effort on a state-wide basis was Perai Industrial Estate, one of the fi rst to be estab- the studies for the Environmental Conservation Strat- lished. Untreated effl uents from many of its factories egy for the state, commissioned in 1996 and completed resulted in the poisoning and contamination of fi sh and two years later. This is the comprehensive strategy and other marine life in Sungai Juru and the coastal waters. action plan for dealing with the major environmental is- The plight of coastal fi shermen who lost their liveli- sues of Penang. It identifi ed 100 major issues and after hood as a result of pollution attracted international discussions with the stakeholders and the government press coverage. That was in the 1970s. To date, Sungai departments, the issues were put into three categories Juru still ranks among the worst polluted in the country depending on their urgency and importance. The Pen- alongside Sungai Pinang and Sungai Prai, both in Pen- ang State Economic Planing Unit (UPEN) was identifi ed ang. They have been classifi ed by the Department of as the secretariat and driver for the implementation Environment as “grossly polluted” since the 1980s. of the strategy and action plan. However, after some Coastal water pollution in Batu Feringghi has transfers in UPEN, there was no more interest and the existed since 1980s and even now, the water quality is plan was never implemented. below WHO standards for recreational use. There is The Penang state government has undertaken now much more hill cutting in the north coast for hotel two strategic development plans that would guide long- and condominium development. Besides increasing term planning in the state. Both these documents were the sediment load of the coastal waters, hill cutting based on studies in the different sectors. The First Pen- and soil erosion also pose dangers in the form of land- ang State Development Plan (PSDP1) advocated the slides and land slips. These have happened along the need to incorporate environmental considerations in north coast and inland areas like Air Itam and Paya economic development. The Second Penang State De- Terubong, where large boulders have come crashing velopment Plan (PSDP2) put sustainable development down. The issue remains unresolved as building per- and environment as one of the fi ve major thrusts of the mits are still being approved. plan. However, these seem to have very little infl uence Penang has also been suffering from traffi c on the decision-making processes in the state. congestion and poor air quality as a result of an in- 29.0 FIGURE 12A: MEAN 28.5 TEMPERATURE IN BAYAN LEPAS, 28.0 PENANG (1951–2009) 27.5 Source: Meteorology °C Department, 27.0 Malaysia 26.5 26.0 1951 1981 1972 1975 1993 1957 1963 1978 1987 1954 1999 1969 1996 1966 1984 1990 1960 2002 2005 2008 PENANG’S SPACE 61 found. Transparency, accountability and com- Guidelines. This is a signifi cant opportunity for petence must become the norm. various stakeholders to work together and de- Turning these concepts into processes vise new ways of how to improve liveability in will not be easy. Transparency implies that the area. George Town is considered historical- goals be discussed and prioritised, that ex- ly signifi cant because of its original urban mor- penditures for activities be made publicly phology — colonial origins and multitextured, available and that benchmarking standards two-storey shophouse buildings with terracotta with other localities be pro- roofs — architectural variety and a multiethnic, vided regularly on a compa- multicultural social community. George Town’s rable basis. Accountability This broad concept of heritage poses transformation into implies that overlapping ju- problems of tradeoffs which have still to be a liveable space and risdictions are clarifi ed and resolved. Conservation and restoration of in- a global example simplifi ed, and authority and dividual buildings are feasible and practical, of sustainable resources for implementa- but may not preserve the feel and traditions development will have tion are strengthened. of a neighbourhood. The lifting of rent con- a catalytic effect. Competence can be trol offers an opportunity for land markets to Without sensitively judged only if feedback me- function more effi ciently in allocating space to and appropriately chanisms from citizens are activities for which there is demand, but runs revitalising Penang’s activated. At present, the im- the risk of gentrifi cation and expulsion of low- heart, it is extremely mediate priorities for action income communities that have historically diffi cult to make other are to solve traffi c problems, provided the cultural base for the city — the economic strategies reduce pollution, and create hawker stalls, fi sher folk and others. Densifi ca- work. This is because an inviting city where there tion is needed to provide a critical mass or clus- history, heritage and is a balance between natural ter of like-minded professionals, but it must be a depth of culture are and built environments, and a managed properly to avoid compromising the signifi cant factors social inclusiveness that pro- stress-free lifestyles and less congestion that in the assessment motes civic participation in liveable cities provide. of liveability. the key decisions that shape A revitalised George Town will lead to a the nature of the city. new phase in Penang’s economic development. “Bringing world ideas ho- The factors that determine competitiveness are me” is a concept that recognises that Penang changing away from a solely low-cost, high-pro- has contributed to many global innovations, ductivity model to one where issues of liveability, but has done so largely through the emigra- high urban quality and a vibrant culture are more tion of its talent. It is losing ideas and energy important and become the central objective of as the best and brightest move abroad. They economic and urban planners. The designated can meet their aspirations at home if Penang World Heritage Site within George Town can be becomes a city of comfort, safety, innovation, used as the place to demonstrate cutting-edge sophistication and leadership. concepts of transformation and to become a model for others in the region to emulate. A new George Town Transformation Pro- George Town as a gramme (GTTP) can implement this vision of a Penang with greater drawing power and pull, with World Heritage Site a larger global resonance and with a distinct im- In July 2008, UNESCO awarded World Heri- age and identity. The GTTP can provide a holistic tage status to both George Town and Melaka. approach to the physical, social and economic In the case of George Town, cultural diversity elements of maintaining George Town as a heri- was the key component that secured the award. tage site and carefully choosing among the devel- To maintain that status, the city needs to meet opment tradeoffs that we face, based on citizen the requirements of the Heritage Management debate and participation in decision making. 62 PENANG’S SPACE Pictures courtesy of Penang Heritage Trust, Anak-Anak Kota and iGeorgeTownPenang BOX 13: The George Town Transformation Programme (GTTP) The George Town Transformation Programme The GTTP puts forward the idea that a reposi- (GTTP) is a concept study for the transformation of tioned George Town Conurbation must focus on the George Town from a moderately-functioning urban clustering of specialised industry sectors, developing centre into a model 21st century “secondary” city. education, research and development, and enhanc- Implicit in the programme is the opportunity to posi- ing regional and local linkages. As part of this body of tion Penang and George Town as a regional hub serv- work, some tentative plans for the revitalisation of key ing the Indonesia-Malaysia-Thailand Growth Triangle areas have been developed and a grants programme (IMT-GT) and Bay of Bengal growth areas. The GTTP has been implemented under Think City Sdn Bhd. recognises that inner-city George Town is hollowing Thus the GTTP is central to the wider develop- out and there is an overall decline in urban amenities ment of the George Town Conurbation. By enhancing and connectivity. As an urban regeneration strategy, the links between historic George Town and the future the GTTP seeks to make George Town more liveable transportation hub across the Penang Channel in But- and connected. The programme will also meet the terworth, the GTTP will be the nexus of an integrated broader objective to transform the local economy network linking up the major towns and business from its current low-cost supply/manufacturing base centres in the Northern Corridor Economic Region to a value-added, high-tech regional economy. It ar- (NCER). The GTTP will also encourage more knowl- gues that improved amenities and liveability are the edge-centric activities to reside in a revitalised George key elements leading to this transformation. Lever- Town whilst key interventions like the rehabilitation of aging off its rich cultural history, the central tenets the waterfront will help make Penang more attractive are creating: to high-income heritage and cultural visitors. Better • A “sticky space” to attract local and global talent; transport infrastructure and improved “connectivity” • A place where high-value individuals visit and together with new and attractive real-estate develop- conduct business; and ment across the channel will make Penang more at- • A destination of choice for knowledge workers tractive to global talent whilst improved liveability will and creative industries. raise the living standards of all Penangites. George Town’s transformation into a live- which ranges from imams, priests, urban plan- able space and a global example of sustain- ners, gardening enthusiasts and shopkeepers to able development will have a catalytic effect. craftspeople. They encounter people a normal Without sensitively and appropriately revital- tourist would never meet. Tourism becomes a ising Penang’s heart, it is extremely diffi cult to way of earning money by exposing traditional make other economic strategies work. This is lifestyles to others. It also becomes a way of because history, heritage and a depth of cul- strengthening personal connections and inter- ture are signifi cant factors in the assessment actions between Penangites and foreigners. of liveability. Those connections, in turn, form the basis of a George Town’s heritage designation pro- competitive niche in the global economy. vides a new opportunity for transforming the The GTTP 6 is a catalytic programme de- tourism industry in Penang to attract wealthy signed to demonstrate George Town’s capabili- globally-oriented people whose vacation choic- ties to serve as a regional hub, a global example es are based upon visiting “culturally rich” heri- of sustainable development, and a regional tage sites. Heritage travellers are concerned leader in the creative industry. It is organised with living culture and intangible heritage, as around four pillars: well as preserved buildings. They are seeking • Support for nascent R&D and the unique and distinctive. It is the historic ex- educational institutions; perience of George Town that will attract them, • Greater public access to the waterfront; not skyscrapers one can see everywhere. • Improved public transport; and In this context, a link can be made to the • Promotion of culture, diversity living culture and the “creative tourism” move- and heritage. ments associated with places like Santa Fe and Rotterdam. Here, the attempt is made to involve tourists far more intimately with the host shar- 6 Envisioning Change: The George Town ing experiences and learning skills. Visitors may Transformation Programme, November 2008. choose the kind of people they want to meet, 64 PENANG’S SPACE PENANG’S PEOPLE - PROVIDING BETTER LIVELIHOODS - GROWING, ATTRACTING AND RETAINING TALENT - A LOCATION OF CHOICE - CONTINUED EXCELLENCE IN EDUCATION - LEVERAGING THE DIASPORA PENANG’S PEOPLE 65 One of Penang’s greatest assets is its people. In the last few decades, however, it has had problems retaining its talent. Penang’s success, however, will be closely tied to its ability to grow, retain and compete in attracting talented youth. Penang cannot do this on the basis of wages alone. The competition among cities to attract top global talent depend very much on the “liveability” of a city, the ability to grow, retain and enjoy a high standard of living, engage in creative activity and develop a sense of community. Personal wellbeing, environmental balance and civic participation are independent, yet interconnected, aspects of liveability. As Penang becomes a better place to live, work and play, it can seriously reconnect with its diaspora, former residents and others who have spent stints studying or working in Penang, who demonstrate a strong sense of attachment to the place. 66 PENANG’S PEOPLE Providing better managers, professionals and skilled technicians livelihoods are fewer in number, while the bulk of the popu- lation continues to be employed as plant and The purpose of Penang’s new strategy is to machine operators and assemblers (Figure 23). improve the livelihood of its people. The state This is unfortunate. The wage gap between has achieved considerable success in reducing a skilled technician and a plant operator is sub- poverty with less than 0.3 per cent of the popu- stantial — the technician earns almost twice as lation below the poverty line as at 2006. Com- much and professionals earn even more. This pared to the 29 per cent poverty rate in 1980, wage gap has been widening over time. The ed- this is a major accomplishment. ucation system is producing workers with more Poverty has come down, thanks to em- education, but not producing workers who can ployment opportunities and rising wages. move into different types of occupations. Between 1995 and 2007, total wage rates in Penang grew by 4.5 per cent annually, while ("+&& FIGURE 22: consumer price infl ation averaged only 2.5 per MEAN cent. The pressing concerns of providing for im- ("&&& MONTHLY WAGES IN mediate basic needs have now passed. Instead, ("+&& PENANG’S URBAN AND the issues in Penang have to do with sustaining RM '"&&& RURAL AREAS gains in livelihoods and managing success. Source: With success in economic growth, Pen- +&& Household survey data, ang faces growing inequality. That has contin- KRIS & ued despite the slowdown in economic perfor- '/// (&&( (&&* (&&- mance in this decade. In fact, the ratio of wages between skilled and unskilled workers has wid- Urban Rural ened. The gains in wages have been skewed towards those with better education. Workers with more than 12 years of education saw high- er gains in real wages (2.1 per cent per year) '&& FIGURE 23: compared to those with less than 12 years (1.1 GREATER PENANG: per cent). Refl ecting this, those in urban areas COMPOSITION /& OF WORKERS saw more rapid wage gains than those in rural Source: Household areas. In fact, rural wages hardly grew at all in survey data, .& real terms (Figure 22). KRIS Almost all the wage increases can be ex- -& plained by higher levels of average education Elementary occupation for Penang’s workforce. For many years, wom- Plant & machine-operators ,& & assemblers en in Penang have had higher levels of educa- tion than men, and a higher rate of participa- Craft and related +& trades workers tion as wage earners. These trends have held Skilled agriculture true over the past decade. Female workers in *& and fishery workers Penang today have about 10.3 years of educa- Service, shop and tion, while male workers have about 9.8 years. )& market sales workers Typically, higher-educated workers would Clerical workers move into more skilled and better-paying oc- (& Technicians & cupations. But in the last decade, this has not associate professionals been happening. In fact, the proportion of skilled '& Professionals workforce declined between 2002 and 2007 in Senior officials the Greater Penang area (including Kulim). The & & managers high-paying occupations of senior offi cials and (&&( (&&* (&&- PENANG’S PEOPLE 67 FIGURE 24: SKILLS INTENSITY 50 IN ELECTRONICS AND IN MANUFACTURING 45 45 IN PENANG Source: Rasiah, 40 Hamdan and 40 Gopalan (2009) 35 32 30 30 25 24 22 20 17 15 15 13 13 10 5 0 1980 1990 1998 2004 2007 Electronics Manufacturing Without that, the potential gains from ad- Surveys of electronic fi rms suggest a ditional education are limited. Penang needs shortage of engineers is a critical bottleneck better-quality higher education to give workers in the expansion of higher value-added prod- the qualifi cations to enter new types of jobs. ucts. Medical hospitals report that a shortage The ladders for advancement of nurses and doctors is the critical bottleneck. in traditional occupations can Heritage reconstruction is slowed by a short- The fundamental no longer be relied on to pro- age of skilled construction workers. Broaden- dilemma for Penang is vide continued wage gains. ing the scope of training institutions to recog- that while the workforce New ladders are needed. nise the needs of all sectors of the economy is is gaining experience Thus, the fundamental desirable. For Penang to perform well, it needs and becoming more and dilemma for Penang is that a diversity of talent. more qualifi ed, they are while the workforce is gain- The key strategy for Penang today is no not moving into higher ing experience and becom- longer to maintain a cheap but literate work- skilled occupations. ing more and more qualifi ed, force of assemblers. It is to produce a critical There is a mismatch they are not moving into high- mass of skilled professionals to encourage busi- between the supply of er-skilled occupations. There nesses to locate in the area. What is happening and demand for labour. is a mismatch between the is that the skill levels demanded in individual supply of and demand for la- fi rms are going up, while the aggregate supply bour. For less-skilled occupa- of skills is holding steady. That is constraining tions, the labour force is improving in its quality economic growth in Penang. — more workers are better educated. But for The fi nancial rewards to education can be higher-skilled occupations, the improvement in handsome. For those who have completed more workforce quality is lagging behind what indus- than nine years of education, each additional try needs. year adds 20 per cent to lifelong earnings. By 68 PENANG’S PEOPLE demographics chart—penang demographics chart— malaysia &&& &&& /+! /+! FIGURE 25: & & +& /&#/* +& /&#/* PENANG’S '&& '&& +&& +&& .+#./ .+#./ '"&&& '"+&& ("&&& DEMOGRAPHIC '"+&& '"&&& PYRAMID .&#.* .&#.* COMPARED Female -+#-/ Female -+#-/ TO MALAYSIA Male Male Source: CLSA -&#-* -&#-* Asia-Pacifi c ,+#,/ ,+#,/ Markets, ,&#,* ,&#,* Economic Planning Unit ++#+/ ++#+/ +&#+* +&#+* *+#*/ *+#*/ *&#** *&#** )+#)/ )+#)/ )&#)* )&#)* (+#(/ (+#(/ (&#(* (&#(* '+#'/ '+#'/ '&#'* '&#'* +#/ +#/ &#* &#* contrast, each completed year of education up Growing, attracting to 9 years only adds 5 per cent to earnings. The 1 difference between the two refl ects the differ- and retaining talent ence between equipping workers to achieve Penang has been able to attract young tal- higher productivity within the same occupa- ent from the rest of Malaysia, thanks to its tions versus providing them with the skills to excellent universities, research institutions venture into new occupations where productiv- and economic opportunities. ity levels are higher. The latter was the driver of But that attraction is waning. Penang’s past success, as workers moved from Many of the best and bright- A larger pool of farms to manufacturing assemblers. est students leave Penang be- qualifi ed graduates can The challenge is to raise the quality of cause of perceived limited job create the preconditions schooling suffi ciently to encourage students prospects in the area. for new business sectors to continue their education, while at the same Figure 25 shows Penang’s to expand. And a greater time raising the quality and quantity of higher demographic pyramid com- diversity and density education to produce the graduates demanded pared to Malaysia as a whole. of people will add life by industry. In education, the links between Pen- In Penang, there is a far higher to Penang’s cities. ang’s economy, its people and the city are most proportion of workers in the evident. Better education can attract talent. Those total population, especially of who come to Penang’s universities from the rest workers between the ages of 20 and 40. There of Malaysia tend to stay on in the area once they is a disproportionate number of female work- graduate. A larger pool of qualifi ed graduates can create the preconditions for new business sectors to expand. And a greater diversity and density of 1 This section is based on background work done people will add life to Penang’s cities. by the late Professor Ooi Giok Ling. PENANG’S PEOPLE 69 100 FIGURE 26: 5.6 5.6 because of higher wages. In general, wages in PERCENTAGE 90 20.3 DISTRIBUTION 23.5 Penang have not grown as rapidly as wages in OF LABOUR 80 FORCE BY other major metropolitan areas. EDUCATIONAL 70 For this reason, between 2002 and 2007, ATTAINMENT 61.8 51.0 IN PENANG the share of skilled workers in Penang de- 60 AND clined from 27 per cent of the workforce to MALAYSIA 50 56.3 (1990 & 60.2 22 per cent. The fraction with tertiary educa- 2007) tion has also stalled. Almost 30 per cent of Source: 40 Department Percentage (%) the workforce in the Klang Valley has comple- 30 of Statistics 33.8 ted tertiary education, while only 18 per cent of 20 29.2 those in Penang have the same qualifi cations. 10 19.3 Penang’s success will be closely tied to its 14.6 9.5 ability to compete with other areas of Malaysia 0 3.4 1.6 4.0 in attracting young graduates. It cannot do this 19901990 2007 2007 on the basis of wages alone. In fact, a skilled Total labour Penang Malaysia Penang Malaysia worker could increase his or her wages by almost 470,300 6,685,000 667,600 10,538,100 force one third by choosing to move to Kuala Lumpur instead of Penang. With wage differentials of this Tertiary Secondary Primary No formal education size, it is not surprising that the major movement of population within Malaysia has been into Se- langor rather than into Penang. In fact, seven of ers, refl ecting the job opportunities for women the 10 largest metropolitan areas in Malaysia are in assembly operations. At the same time, Pen- now in the Klang Valley. George Town is no lon- ang has relatively few children. That means it ger one of the largest conurbations in absolute does not have to bear the cost of education and size, although it is still one of the top 10 most provision of other services densely-populated areas (Zeufack, 2009). for children, but it also shows The challenge for Penang is how to attract Penang’s success will that Penang’s success in the and retain creative and technically-advanced be closely tied to its future, and its potential for people. The state is not alone in facing this ability to compete with growth, will be measured by challenge. It is one that all small countries and other areas of Malaysia its success in attracting con- less-advanced regions in large countries face. in attracting young tinued emigration from the Policy makers have found that successful strat- graduates. It cannot rest of Malaysia. egies involve three programmes: do this on the basis The prospects for great- • Developing Penang into a location of of wages alone. er emigration depend partly choice, where people want to live, work, on income levels. Workers raise a family and retire; in Penang get higher wages • Developing excellent educational estab- than the average workers elsewhere in Ma- lishments, with life-long learning that can laysia, taking into account their educational ensure that professionals have continued achievement, but they get fewer than workers opportunities for upgrading their skills in Johor, Selangor and Kuala Lumpur. and interacting with other leaders in their Penangites tend to be richer than Malay- fi eld; and sians as a whole; per-capita incomes are about • Leveraging the diaspora of those who 45 per cent higher. But this gap is partly be- have left, but who still retain ties of cause of lower dependency ratios (fewer chil- family and culture. dren and old people per worker) and only partly 70 PENANG’S PEOPLE A location of choice The competition among cities to attract top global talent can be condensed into the concept Global cities generate economic density by at- of the “liveability” of a city, the ability to enjoy a tracting and retaining talented people. A major high material standard of living, US survey 15 years ago noted that 80 per cent engage in creative activity and of educated people chose a job or company develop a sense of community. The competition fi rst and located wherever the job took them. Personal wellbeing, environmen- among cities to attract By 2007, the same survey showed 64 per cent tal balance and civic participation top global talent can fi rst chose the city where they wanted to live are independent, yet intercon- be condensed into and then looked for a job in that city. nected, aspects of liveability. the concept of the The challenge for Penang is to become Certain elements of live- “liveability” of a city, the the location of choice for a young, educated, ability can be measured statis- ability to enjoy a high and creative population. As mentioned earlier, tically. Table 13 provides some material standard of air and water quality indicators have deterio- indicators for Penang. living, engage in creative rated with industrial growth. Traffi c conges- These indicators provide a activity and develop a tion around George Town has become a major snapshot of liveability in a static sense of community. challenge, partly because of limited success in sense. They can be tracked over Personal wellbeing, coordinating transport and land-use develop- time to identify areas of improve- environmental balance ment. The university is distant from the heart ment or deterioration. In the case and civic participation of George Town, so the city does not benefi t of Penang, traffi c volumes, road are independent, yet from amenities like libraries, coffee houses accidents and air pollution are interconnected, aspects and bookshops. headed in the wrong direction. of liveability. TABLE 13: INDICATORS SELECTED Ratio open space (ha) per 1,000 population 0.47 INDICATORS FOR ASSESSING pH value* (measured in Bayan Lepas) 4.77 LIVEABILITY IN 5.2 PENANG Persons per car Source: SERI Persons per motorcycle 2.5 (1999) Range of normal growth rates of annual traffi c volumes 5.7 - 8.3 in Tg Bungah, Gelugor and Bayan Lepas (%) Traffi c volume (two-way, 16-hour count) in: • Gelugor 89,510 • Bayan Lepas 30,802 • Tg Bungah 16,615 Number of students enrolled in kindergartens and nurseries per facility 45.3 Life expectancy (years) 72 Public sector health expenditure (as % of GDP) 2.3 Low-income housing as proportion of housing stock (%) 51 Number of registered employees 780,281 Number of industrial accidents per registered employee (1998) 0.015 Juvenile crimes in 1995 270 HIV cases in 1998 138 Road accidents per 100,000 persons 14,406 Fatal accidents per 100,000 persons 415 Road accidents per 1,000 private vehicles registered per year 20.2 Library users per 1,000 population 49.52 *Malaysian Meteorological Service defi nes acid rain as rainfall with a pH value of less than 5.2. PENANG’S PEOPLE 71 TABLE 14: ECA- LOCATION ASIA RANK GLOBAL RANK cialised skills are in demand. Jobs in engineering INTERNATIONAL Year 2010 2010 and logistics pay good salaries and these profes- RATING FOR BEST CITIES TO LIVE IN Singapore 1 1 sions have less diffi culty in retaining talent. But Source: ECA- Kobe 2 3 those interested in pursuing careers in a range International website Yokohoma 3 4 of service industries, like event management, Tokyo 4 5 are likely to move to primary cities where oppor- Hong Kong 5 8 tunities are substantially greater. Taipei 6 55 The economic development strategy for Penang must consider the impact of policy choic- Macau 7 57 es on attracting and retaining top talent by focus- Kuala Lumpur 8 62 ing on liveability considerations. The importance Bangkok 8 62 that residents attach to these considerations has George Town 8 62 already been seen in the community action or- Seoul 11 71 ganised by the Friends of Penang Hill in 1991 to Shanghai 12 77 combat the “Disneyfi cation” of a treasured land- Bandar Seri Begawan 13 94 mark. As plans develop for Gurney Drive, down- Nanjing 14 97 town historic George Town and other places, the Beijing 15 100 essence of Penang’s liveability must be improved. Otherwise, sustained densifi cation and economic growth will not be possible. A survey of Penangites resident abroad One good index of the desirability of Pen- and those choosing to stay suggests that the ang as a location is the index of housing prices. attractions of Penang are its simplicity, stress- The combination of housing prices and housing free lifestyle, low cost of living and relaxed at- volumes helps separate two causes of higher titudes. Parks, open spaces and sports facilities demand — from more people and from higher are praised. Food is highly appreciated. Social incomes. In Penang, the housing market has networks of friends and neighbours, and an traditionally been divided between the north openness to innovation and change are rated and south of the island. In the north, com- highly. Drawbacks include traffi c volumes, road mercial and residential development is more congestion, cleanliness of public spaces and important; in the south, industrial develop- environmental quality. Pro- ment dominates. Since 2000, in the north, fessional networks are also the growth in property transaction volumes The economic thought to be limited. Some has been driven by prices, which are up by 40 development strategy concern about growing crime per cent since 2000, compared with just 30 for Penang must rates is observed. While per cent for Malaysia as a whole. There was a consider the impact George Town ranks favour- decline in transaction volumes, however, until of policy choices ably among Asian cities (8th 2008. Commercial development also saw fl at on attracting and most liveable city out of 49 development in this decade, until 2008. retaining top talent by Asian cities), but globally, The interest in new property develop- focusing on liveability George Town ranks much ments and their rapid take-up rate suggest that considerations. lower (62nd). 2 builders have confi dence in Penang’s future The principal reason for ability to attract residents. Most new develop- Penang’s liveability must leaving Penang among young ments are occurring on sites that will take ad- be improved. Otherwise, university graduates is lack vantage of the new connectivity between Pen- sustained densifi cation of career opportunities and ang Island and the mainland. This, along with and economic growth good jobs. This is inevitable in MM2H, provides positive structural reasons will not be possible. a secondary city where spe- to believe that an infl ux of population will con- tinue to add density to Penang. 2 ECA Survey. 72 PENANG’S PEOPLE Continued excellence Instead, government policy should place empha- sis on the stepping up of educational upgrading. in education A target for the number of R&D In Penang, slightly less than half of labour value- engineers and scientists in elec- added accrues to skilled workers. That percent- tronics should be raised gradu- Skills intensity, training age is about the same across both the manu- ally to reach at least 2,000 by expenditure, the number facturing and service industries. Compared to 2015 and 3,500 by 2020. of R&D personnel and other locations in Malaysia, the degree of skill The current production of expenditures all have a intensity is middling. Penang ranks as a higher engineers is inadequate to meet signifi cant impact on skill-intensive location compared to Perak and these goals. There has been a productivity and export Kedah, but lower as compared to Selangor and sharp decline in the number of intensity of electronics Kuala Lumpur. enrolments and new entrants fi rms in Penang. These Within the important electronics sector, in Malaysian public and private fi ndings point the way surveys suggest an improvement in skills in- universities in the information forward for public policy. tensity and fi rm-level training expenditures be- technology (IT) sector. The tween 2000 and 2007. Although the intensity of number of graduates in 2007 R&D engineers in the workforce has increased, has fallen to 40 per cent of its level in 2002, fi ve foreign semiconductor fi rms contributed a major step backwards for the economy. 5,549 engineers out of the total 7,010 engineers Currently, Penang is home to two public in a recent sample survey of electronics fi rms. It universities, the Penang Medical College (a joint is no wonder that local small and medium-scale venture with the National University of Ire- fi rms complained about their engineers being land) and more than 30 private colleges. poached by foreign MNCs. In addition, the Penang Skills Development Skills intensity, training expenditure, the Centre (PSDC), founded in 1989, is one of number of R&D personnel and expenditures the best training centres in Malaysia. PSDC all have a signifi cant impact on productiv- offers courses on technical issues, leadership ity and export intensity of electronics fi rms and business management, specialised skills in Penang. These fi ndings point the way for- and IT. It has trained more than 128,000 in- ward for public policy. The current approach dividuals in its 18 years, providing over 6,500 of using less-skilled, imported foreign labour courses. Other training institutions have also as a substitute for developing a more-skilled proliferated in Penang in recent years — so workforce is no longer sustainable. The profi ts much so that there is often an overlap of activi- of fi rms using this approach are being squeezed. ties and underutilised facilities. '(&"&&& FIGURE 27: TOTAL '&&"&&& SUPPLY OF IT GRADUATES, 2002-07 .&"&&& Source: Rasiah, Hamdan and ,&"&&& Gopalan (2009) *&"&&& (&"&&& & (&&( (&&) (&&* (&&+ (&&, (&&- New +-"/)* **"',. *'",/. (+")-- (/"*)( (*"'&( Entrants enrolments ''/"++, '&&"./+ /-")() --"*/) .."..* -/",-- Output +)"-'( *+"&+( **"+/+ ((".,( (,")') '/"*/, PENANG’S PEOPLE 73 The institutions of higher learning and students to gain hands-on experience through vocational training are the core means for at- internships. In its fi rst phase, the CEE is fo- tracting and retaining talent through continued cused on semiconductors and ICT, materials excellence in education. They play a central engineering, radiofrequency and microwave role in the transformation of the workforce that technologies, and optoelectronics and lighting. is required over the next de- cade. They provide the basis for the incubation of new Leveraging the diaspora The institutions of ideas as well as for indus- higher learning and try-university linkages and Penangites of all categories — former residents, vocational training are public-private partnerships. people living in Penang, returning residents and the core means for One incubator of ideas is the fi nal-year university students — demonstrate a attracting and retaining Malaysian Institute for Phar- strong sense of attachment to the place that talent through continued maceuticals located in USM. is called “Penang”. This diaspora and the rich excellence in education. The presence of private array of personal, professional and social net- They play a central role colleges is one way of fa- works between those resident in Penang and in the transformation of cilitating the matching of in- those outside can be mobilised to encourage the workforce that dustry demands and worker high-skilled individuals to maintain a connec- is required over the skills that a modern economy tion with Penang. next decade. needs. But for some specia- It is common for skilled labour to fl ow lised skills, private colleges from small, developing economies and regions Penangites of all may be unable to generate to larger, richer localities. Most of these mi- categories — former the quality and scale that are grants move in order to benefi t from higher residents, people living needed. For Penang, the most wages and better living conditions. But a sig- in Penang, returning urgent need is to revitalise the nifi cant fraction of them also point to the de- residents and fi nal-year skills of the electronics and sire to gain experience, upgrade qualifi cations, university students — electrical sector. A new part- work with others who are skilled and talented, demonstrate a strong nership between USM, the and seek security and health for themselves sense of attachment Indian Institute for Technol- and their families. to the place that is ogy Kanpur and industry in Penang will not be able to compete with called “Penang”. This Penang to create a Centre for other localities on wages, but it can offer bet- diaspora and the rich Engineering Excellence (CEE) ter lifestyles, and plentiful opportunities. These array of personal, will fi ll this gap. attributes would provide an encouraging envi- professional and social The CEE is a new pub- ronment for migrants to return and use their networks between those lic-private partnership that global skills to develop new ventures. resident in Penang and enriches the industrial eco- The link between the business environ- those outside can be system in Penang through ment and the return of the diaspora is strong. mobilised to encourage a not-for-profi t foundation. But new businesses continue to face bottle- high-skilled individuals The centre provides an ex- necks in Penang. There are obstacles to setting to maintain a connection pert resource pool drawn up a company and further obstacles to recruit- with Penang. from industry and academia. ing labour. The share of fi rms reporting dealing It conducts short courses, with procedures for local workers as a major academic programmes, ap- business obstacle is the highest in Penang, com- plied and fundamental research, as well as pro- pared to other regions in Malaysia. The number vide for sabbaticals, seminars and internships. of weeks to recruit skilled professionals is also The collaboration with industry ensures highest in Penang. Meanwhile, the number of that topics are relevant to the most pressing entrepreneurs and new businesses has gradu- needs, while also providing the opportunity for ally fallen over time. The conclusion: Penang is 74 PENANG’S PEOPLE far from the easiest place to do business in Ma- that welcome them and their families to stay, laysia. Barring major improvements, the best provide security through granting permanent students will continue to migrate abroad. residency, and offer them an environment in In many countries, a number of interac- which they can innovate and build a new busi- tions take place between migrants and their ness. Signifi cantly improving effi ciency of home countries. Indian and Chinese immi- services and the quality of services delivery grants to the United States have been impor- will be key to attracting the diaspora back to tant agents in developing manufacturing and Penang. Further liberalising the services sec- IT hubs back in their home countries. Trade and investment links between countries are '&& facilitated when there are large numbers of 9.8 FIGURE 28: ADULT skilled migrants. Skilled workers serve as in- MALAYSIANS /& 22.0 IN AUSTRALIA & termediaries, commercial ambassadors, role UNITED STATES .& BY EDUCATIONAL models, mentors, partners and investors for QUALIFICATION, ventures back home (Clemens, 2009). They 2000 -& can help spread new industries and niches via Source: Udomsaph 30.4 and Zeufack (2010) international networks. There is evidence that ,& 59.0 international migration causes more rapid dif- fusion of science and technology as measured +& As % of total by patent citations, for example (Kerr, 2008). *& 15.3 In Penang, potential future growth areas like biotechnology depend for their success on re- )& 13.4 15.9 turning migrants. (& Many countries have specifi c programmes and incentives designed to attract migrants to '& 16.2 16.4 return. In Mexico, a Presidential Fund for Re- 1.6 & tention operated between 1991 and 2000 to Australia US give salary support for one year to returning graduates — about 2,000 took up the offer. Postgraduate Bachelor’s degree Diploma Some may have returned anyway, but even di- High school Below high school rect subsidies are a limited substitute for bet- ter opportunities to work. Returning migrants are most likely to be attracted by programmes , FIGURE 29: PERMANENT + ARRIVALS IN AUSTRALIA BY * NATIONALITY Source: Udomsaph and Zeufack (2010) ) Thousands ( ' & '//, '//- '//. '/// (&&& (&&' (&&( (&&) (&&* (&&+ Hong Kong Taipei Malaysia PENANG’S PEOPLE 75 tor and relying further on citizens’ voice to other than quality may be applied. All phar- enforce compliance and accountability would macists getting a licence to work in Malaysia be critical. Equally important would be greater must fi rst work for the government for three meritocracy, which would help realign the in- years. Such measures discourage those who centives system. have gone abroad from coming home. Profes- Overregulation of the services sector, in sional qualifi cations should be reviewed to en- particular, is a major barrier for returning mi- sure they do not become a barrier to attracting grants. Many qualifi cations obtained abroad talent from abroad. are not recognised domestically and criteria 76 PENANG’S PEOPLE LEVERS OF CHANGE - STRATEGIC DEVELOPMENT THRUSTS - LIGHTING THE FUSE: POLICY AND INSTITUTIONAL REFORM - CATALYTIC GRANTS AND INVESTMENTS FOR CHANGE - MONITORING, DATA AND KEY PERFORMANCE INDICATORS - NEW MINDSETS - SUPPORTING PENANG TO SUPPORT MALAYSIA LEVERS OF CHANGE 77 This book offers a development strategy for Penang based on an understanding of its place in the global economy, in regional supply chains and of one of its key features: a secondary city in Malaysia. In order to es- cape the middle-income trap and become an advanced economy by 2020, Penang needs to be globally con- nected, regionally oriented and locally centred. Moving to high-income would require Penang to intensify activi- ties with increasing returns to scale, foster agglomera- tion and seek specialisation. At the regional level, it will be critical to strive for unbalanced growth (in cities), but balanced development (of all people) through economic integration, moving from spatial targeting to spatial integration. This new spatial approach would bring speed, nimbleness and coherence — if there is devolved decision-making and local-agency autonomy. Most importantly, Penang will have to aggressively nurture, attract and retain talent, as talent breeds talent. For this strategy to succeed, implementation should be system- atically monitored. A set of customised indicators that measures the outcome of this study should be adopted and actions to address weaknesses identifi ed should be continuously taken. 78 LEVERS OF CHANGE The approach laid out in this study emphasises a In other cases, the incentives must be align- macroeconomic scan of key challenges and is- ed to promote more effi cient regional develop- sues undertaken through a process of consulta- ment. Budget processes which are based on tion with stakeholders and policymakers at the sectoral considerations rather than regional/geo- local, regional, state and federal levels. The pur- graphic concerns can produce incentives for local pose is to foster a common vision for what needs advocacy of projects, regardless of the economic to be done and the direction of change, along benefi ts. Conversely, they can lead to high-return with a sense of urgency to address competition projects with large localised spill- from abroad. This plan views Penang’s progress over benefi ts being sidelined un- as the development of an ecosystem where the til there is a fi t with the national, The federal government economy, cities and people interact in mutually- sectoral programme. is making catalytic dependent ways. The overview vision and con- With policies in place, a grants and investments cept provide the foundational base for coordinat- series of catalytic grants and through Khazanah ing the actions of elements of this ecosystem. investments provide critical in- Nasional Berhad to fi ll Coupled with this overview are a series of gredients for the implementa- identifi ed gaps in the technical reports providing detailed recommen- tion of the strategy and achieve- ecosystem. This can dations for each subsector, and covering the ment of its objectives. These give rise to change and economy, cities and people. The conclusions of investments are identifi ed be- provide the basis on these reports are as follows: low. They are the responsibil- which other elements • Penang and the Northern Corridor are ity of different stakeholders. of the system can grow in a favourable geographic location; The federal government is re- organically. • Funding for key projects is available; sponsible for most of the ma- • The timing is right for a fresh strategy jor projects, especially related that can take advantage of emerging to infrastructure, but local civil society groups global trends; and and local authorities also have a role to play in • What is most lacking is the supply of identifying priorities for federal investments. skilled people and the capacity to execute In some instances, such as the Penang Global the strategic plan in an effective way. City Centre and the Penang Outer Ring Road, projects have been postponed as a conse- One fi nding of this book is that spatially- quence of lack of public consensus and lack of based planning needs to be accompanied by an strategic fi t with the new development model. institutional commitment to execute strategies. The federal government is making cata- This requires a monitoring and trouble-shoot- lytic grants and investments through Kha- ing capability at the regional level and an insti- zanah Nasional Berhad to fi ll identifi ed gaps in tutional commitment to achieve key targets. the ecosystem. This can give rise to change and The technical reports, in turn, offer guid- provide the basis on which other elements of ance for a series of policy and institutional the system can grow organically. changes to provide the foundation on which the The private sector is to provide most of new development model can be built. The fo- the new investments, confi dent in the business cus on regional development is a new concept environment and direction of the new Northern in Malaysia and requires a changed mindset Corridor economy. and approach across a range of agencies, that Implementation of the strategy needs to be goes beyond creation of the Northern Corridor monitored, preferably by an independent body or Implementation Authority (NCIA). In some unit. As many stakeholders are involved in imple- instances, granting greater autonomy to local mentation, monitoring must be broad-based and bodies will be essential. Already, the Acceler- cover the proposed programmes to develop Pen- ated Programme for Excellence (APEX) under ang economically, spatially and in terms of talent. which Universiti Sains Malaysia (USM) oper- Successful implementation of the strate- ates is demonstrating the benefi ts that such an gy depends on the joint actions of the key stake- approach can yield. holders. Coordination and consultation among LEVERS OF CHANGE 79 FIGURE 30: MOVING VERSION 1.0: 35 YEARS VERSION 2.0: KNOWLEDGE-INTENSIVE/CENTRIC TO PENANG OF GROWTH DRIVEN BY ECONOMY IN NICHE AREAS VERSION 2.0 MANUFACTURING AND TOURISM Source: Khazanah Nasional Berhad (2009) • Penang’s GDP grew from • Reposition it as the business hub for the Indonesia- RM1.5bn in 1970 to RM21bn Malaysia-Thailand Growth Triangle (IMT-GT) and northern in 2005, achieving a ASEAN regions compounded annual growth rate (CAGR) of 11 per cent • Focus on strengthening and optimising existing growth areas: • Today, the GDP per capita (in - Manufacturing: Focus on high-tech segment of the value purchasing power parity or chain including medical devices PPP terms) of US$15,000 is - Leisure & tourism: Medical tourism and MICE 40 per cent higher than the (meetings, international conventions and exhibitions) national average - Logistics: Regional passenger and cargo hub • However, the primary engines • Promote growth in new areas: of growth, manufacturing and - Agribusiness: Modern farming and supply-chain management tourism, are decelerating, - Biotechnology, medical services and diagnostics having peaked in the 1990s - BPO (business process outsourcing), ITO (information technology outsourcing) and ITC (information technology • Competition is intensifying consultancy), leveraging Penang’s Multimedia Super with the emergence of new Corridor (MSC) status and the presence of large MNCs growth cities like Hanoi, Chennai, Guangzhou and • Brand the new Penang by turning it into a: Shenzhen - “Sticky place” for retaining local talent and attracting global ones - Destination for high-value individuals to visit and/or conduct business - Place where high-value workers want to live, work and play these groups is new for Malaysia, but the challen- tegy is also based on the understanding that ges must be dealt with in a cross-cutting way. it is ever harder for small locations to make their mark on the global economy and that links with the hinterland are therefore a necessary Strategic development element for continued growth of a hub. The global economy provides ideas, best thrusts practices and standards of excellence. The re- The vision for Penang that is laid out in this gional economy will provide an increasingly study takes a holistic approach to develop- important source of demand and an effi cient ment. In the past, the economic sector had supply chain. The local economy will provide pride of place, but strategies to promote cities the magnet for talent, the critical mass to sup- and people development have lagged. These port a cluster of activity, and an abundance of must be debated, elaborated and implemented capital, people and natural resources to sup- to sustain future growth. port growth. Although there is much talk about moving This is a new economic model programme to a knowledge economy, Penang’s strength con- of catalytic grants, strategic investments, pol- tinues to lie in its manufacturing prowess. More icy and institutional reform, and monitoring knowledge can be built into existing products as for results. The entire programme is based on fi rms move up the value chain, but the old econ- the vision of an advanced economy, integrated omy cannot be cast away. The characteristics of with the world, the region and the hinterland, future development will be different. specialised in high value-added activities and If these three conditions are met, Penang offering job opportunities in an inclusive way can be transformed into a knowledge-centric, across a range of sectors. It differs from the skills-intensive platform in selected areas. previous strategy based on export-led assem- The strategy is oriented globally, but re- bly manufacturing and tourism because of the cognises that new opportunities and the most changing economic conditions in Penang and rapidly-growing markets are in Asia. The stra- the world (Figure 30). 80 LEVERS OF CHANGE Lighting the fuse: Policy upgrading public transportation (with the introduction of Rapid Penang), and and institutional reform expanding the industrial estate; Business as usual is not an option for Penang. • Increasing bandwidth and virtual connec- The hollowing out of industry would continue tivity to enhance the value of existing net- and competition from other localities would works of professionals and businesses; and jeopardise progress that has already been • Taking advantage of a completed free made. A new strategy is required. Three pro- trade agreement with India. grammes underpin the new strategy, each fo- cused on one aspect of the triad of economy, EQUIP (Economic Quality Improvement cities and people that will drive sustainable de- Programme) will shift the emphasis of policy- velopment in the region in the medium term. making from a concern over quantity to a fo- cus on quality. The programme recognises that POLE (Penang’s Offer of Logistic Excellence) quality of economic activity (in terms of moving is a series of investments that re-establishes up the value chain, technology diffusion, link- Penang as a good-value transaction hub, con- ages with local suppliers, human resource ma- necting some of the most dynamic economies nagement, demonstration of new products and in the world. These investments need to be penetration of new markets) is as important as approved and fi nanced by the federal govern- quantity in a sustainable development strategy. ment. Penang can position itself as a hub, prin- It will focus efforts on easing the regulatory bur- cipally for the Indonesia-Malaysia-Thailand den on companies, providing incentives for high- Growth Triangle where it is already the most quality activities, generating high-value pro- developed area, and secondarily for a larger ducts and processes, and easing entry and exit region including rapidly-growing areas in India of fi rms in response to changing and the Middle East. As South India develops, market conditions. the economic centre of gravity in Asia will shift Initially, the programme Focus must be on towards the south and Penang’s geographic aims to address issues high- quality, not quantity. situation will improve. lighted by existing fi rms in That quality will be The hub concept would restore Penang manufacturing, services and observed in three to its former position as a major transshipment logistics. Many of these fi rms characteristics. port, and would build on historical linkages with have signifi cant potential for The economy should India, the Organisation of the Islamic Confer- growth, especially those that be based on: ence states, ASEAN, and the rest of Asia. Hubs are trying to move up the value • Sectors in which there are based on having the lowest-possible trans- chain and raise productivity are increasing returns action costs and the best-possible connectivity. by specialising in higher value- to scale; added activities. That implies • Operations in niches Penang can move ahead by: greater attention to technologi- within regional and • Improving physical connectivity with cal upgrading and streamlining global supply chains; neighbouring countries through better business regulation. and and higher-frequency air and port con- But fi rms entering new • Areas where existing nections to regional nodes. This would growth areas can also be helped. capabilities provide be helped by upgrading the seaport Selecting specifi c subsectors for a competitive and supporting infrastructure, double- support remains controversial, foundation. tracking the railway, establishing Butter- even in highly-successful econ- worth as the northern transport hub, and omies like Singapore, where improving air links and sea routes with billions have been sunk into life sciences with the surrounding region; as-yet scanty returns. New economic theory • Improving connectivity within the North- provides some guides as to which sectors offer ern Corridor by expanding the Penang the most potential, based on the revealed com- Bridge, constructing a second bridge, parative advantage of the existing economic LEVERS OF CHANGE 81 base, but such guides are rough and no guar- • Abolish the system of Approved Permits antee of success. (APs) and replace it with a short negative What is more, identifi cation of new growth list; areas is not the same as identifi cation of public • Introduce a “single window” licensing policy interventions to support such activities. through e-government portals to en- The latter must be based on a detailed under- compass all state and local government standing of the obstacles to private sector deve- approvals through creation of a one-stop lopment and the opportunities for public policy to authority with genuinely-delegated au- coordinate activities (critical mass issues), com- thority from central ministries; pensate fi rms for market externalities (discovery • Review legislation on the fi ring and hiring and learning externalities), and to provide appro- of workers and ease other bureaucratic priate incentives, policies and infrastructure. obstacles to doing business; Despite the risks involved, there are sev- • Review and adapt bankruptcy laws to eral promising areas where new businesses can support high-risk ventures in innovation- thrive in the local economic environment, if ap- based fi rms, encourage risk taking and propriate supporting public-private partnerships eliminate the stigma of failure; can be developed. Medical tourism, biotech- • Negotiate sanitary and phytosanitary nology and aquaculture are examples of areas (SPS) agreements for tropical fruits with where potential for growth appears to be signifi - neighbouring countries; and cant. Bureaucratic regulations affecting these • Provide catalytic grants for R&D for se- industry segments should also be targeted. lected fi rms deemed important to cluster Two words summarise the key needs for development in the selected priority areas. developing growth opportunities across a num- ber of sectors: technology and institutions. The state government also has respon- Technology upgrading is a prerequisite sibilities to contribute to productivity growth. for developing a globally-competitive industry It must: in a specialised niche area. About one-third • Speed up approvals for business permits, of all fi rms in Penang report introducing new especially on construction permits, ware- technology that markedly changed the way a housing and other local ordinances; product is made in the last two years. Almost • Encourage linkages between local univer- two-thirds report upgrading machinery and sities and businesses; equipment. But the core technological capabili- • Adopt the concept of an agricultural free ties of fi rms have not improved signifi cantly in trade zone (AFTZ); and the last fi ve years. This needs to change. • Promote better land-use planning and Institutional change is one way to encour- management. age better use of technology. This book evaluates some of the critical changes that are required to TARGeT (Talent Attraction and Retention foster R&D, boost university-business linkages, in George Town) meets the need for George encourage venture capital and promote proper Town to become identifi ed as a place where planning to transform George Town and its sur- young, high-skilled professionals want to live. It rounds into a dynamic space. Institutional coor- seeks to provide a new brand for Penang. In the dination is needed to provide better security for competitive global labour markets for skilled goods, reduce delays between the airport and the professionals, each location has niche com- industrial zone, provide needed educational skills, parative advantages that serve to attract and and promote coherence across different levels of retain the needed talent to drive knowledge- government. Growth suffers from the perception centric growth. that regulation poses large costs to business. New In other words, efforts must be made to fi rms and exporters are particularly affected. The make Penang a “sticky place” where profession- key priorities for the federal government are to: als choose to live. Strategies that enhance the 82 LEVERS OF CHANGE liveability of Penang can help sustain growth. Improvement of bus service Those that reduce it, through congestion or envi- Given the deterioration of public transport servic- ronmental effects, can be damaging to the brand. es, the federal government in February 2007 an- From this perspective, culture, heritage and the nounced the establishment of Rapid Penang Sdn arts must take on a more prominent role to ensure Bhd, a new entity operated by Rapid KL, with an that development is inclusive and sustainable. initial allocation of RM50 million to provide seam- The federal government strategies to sup- less, reliable and safe public transport service. port this would be to: Rapid Penang has already made inroads • Introduce a fast-track procedure for work into alleviating congestion in the state. The permits for high-tech and high-skilled fi rst phase of operations started with 150 bus- businesses and individuals, and for work es while the second phase will introduce an in research and universities; additional 200 buses, by 2010. • Review and shorten the process for obtain- ing Permanent Resident status for foreigners; Upgrading the ferry service • Pursue further autonomy for higher edu- The Penang Ferry Service, connecting the Sul- cation institutions based on their track tan Abdul Halim ferry terminal in Butterworth record of success in placing graduates; to the Raja Tun Uda ferry terminal at Weld Quay • Encourage more students to take techni- in George Town, is the oldest ferry service in cal, engineering and science-based Malaysia. It began operations in 1920, under degrees; and the management of a Chinese-owned compa- • Assess the need for a national Talent ny. Today, it is jointly operated by the Penang Authority to play the same role in human Port Commission (PPC) and Penang Port Sdn resources, as MIDA does for investment Bhd (PPSB). It was the only link between the is- promotion. land and the mainland until the bridge was built in 1985. High-speed ferries to the resort island At the state or local level, there is a need to: of Langkawi, Kedah in the north as well as to • Create the Penang Centre of Engineer- Medan, Indonesia, are also available daily. ing Excellence as a pilot centre for the The ferry service that is being provided introduction of global best-practices, in does not meet demand and public service collaboration with MIT and the Indian standards. Little has been done to upgrade the Institute of Technology (IIT) systems; infrastructure as the operator has been incur- • Establish a non-profi t organisation to fos- ring losses over the last 10 years. The federal ter links and networking with the Penang government is considering taking over the re- diaspora; and sponsibility for operations and upgrades. This • Implement the George Town Transfor- project is important for the success of the mation Programme effectively. Northern Transportation Hub, which will see the integration of road, rail and sea. Catalytic grants and Penang Sentral Penang Sentral is the gateway to the Northern investments for change Corridor of Malaysia. A new centre of connec- Federal projects tivity, it will be a hub for integrated rail, ferry The federal government plays a critical role in and bus services, serving the Northern Corri- ensuring connectivity, improving the business dor. The hub also integrates retail, commercial environment and enhancing liveability in Pen- and residential development within a planned 6 ang. Ten major projects have been identifi ed, of million square feet of development. The project which seven have been approved for a combined is estimated to cost RM2 billion. funding of approximately RM5.24 billion, while Penang Sentral will be developed in two another three projects are under consideration. phases, starting with the transport hub and fol- LEVERS OF CHANGE 83 TABLE 15: ISSUE: SHORTAGE OF DOMAIN EXPERTS / TALENT CITIES, PEOPLE AND THE PROPOSED SOLUTIONS KEY MEASURES FOR ACTION IN 12 MONTHS REMARKS ECONOMY – 10 KEY • Actively attract foreign talent • Introduce a fast-track procedure for work • Follow the H1 Visa system in POLICY AND both directly and leveraging on the permits for high-tech /skills businesses and the US to attract talent INSTITUTIONAL SOLUTIONS Malaysian diaspora universities • Singapore is a model for • Allow fl exibility for entry, exit and • Review and shorten the process of delivering retaining foreign talent residence for 10,000 highly-skilled the Permanent Resident status for foreign professionals and domain experts talent with clear deliverables • Attract the diaspora as a principal • Establish a non-profi t organisation to foster • Enterprise Ireland / Singapore source of talent links with the diaspora International • Establish high-end research • Establish CEE as a pilot centre in collaboration • ITRI (Taiwan), Cambridge centres to nurture & retain talent, with global research centres like IITK with Science Park, A-Star attract global talent free access to foreign talent and fl exible (Singapore), R&D labs in Bay • Provide a suitable work mechanism to involve the diaspora Area: CEE is a hybrid learning environment for the diaspora from these four models ISSUE: PERCEPTIONS OF MALAYSIA AS A DIFFICULT PLACE TO DO BUSINESS PROPOSED SOLUTIONS KEY MEASURES FOR ACTION IN 12 MONTHS REMARKS • Increase the ease of doing business • Abolish the system of Approved Permits and • Improve security for both • Reduce the regulatory burden from replace it with a short negative list the living and business Approved Permits (APs) requirements environment • Reduce the lack of transparency in • Introduce “single window” licensing through the licensing system stemming from e-government portals and to include local / multidepartmental functions state governments • Promote technopreneurship and • Review and adapt bankruptcy laws to support • Explore best practices in high-risk ventures in targeted high-risk ventures in innovation-based the developed world similar sections by reducing cost of entry businesses, allow more risk taking and eliminate to Chapter 11 for innovation and exit the stigma of failure in these targeted areas ventures ISSUE: ABSENCE OF AN URBAN CENTRE THAT SERVES THE IMT-GT AND THE BAY OF BENGAL AREA PROPOSED SOLUTIONS KEY MEASURES FOR ACTION IN 12 MONTHS REMARKS • Create a viable and vibrant urban • Focus on enhancing the George Town • Penang Sentral needs to be well centre for the IMT-GT region Conurbation and develop an integrated plan designed to ensure integration • Focus on establishing Penang for George Town and Butterworth of various modes of transport as a leader on sustainability and • Redevelop the waterfront and ensure and access to the public liveability seamlessness like Hong Kong-Kowloon Island • Adopt a city strategy to reinvent Penang as a leader for sustainability • Enhance virtual connectivity with high- • Increase bandwidth and virtual connectivity to • Ensure seamless connectivity, speed data and voice connection technology hubs both virtually and physically • Improve physical connectivity through • Establish fl ights to Chennai and enhance port frequency of air and port connections and rail connectivity to IMT-GT • Create a seamless business • Reduce TPT for imports / exports and trans- • India and Malaysia are environment within the IMT-GT, so shipment items so as to boost the position of targeting to sign as to create greater synergies for Penang as a value-adding transshipment hub Comprehensive Economic businesses in the region • Integrate into the region and reduce barriers Cooperation Agreement • Leverage historical ties to strengthen through multiple FTAs with key partners (CECA) by end of 2010 business linkages with India, China, primarily India and the South Asia countries ASEAN and OIC 84 LEVERS OF CHANGE lowed by the commercial hub. The fi rst phase Expansion of the Penang Port and is scheduled for completion by 2013, but the deepening the North Channel project remains in the planning stage and im- The federal government expansion and upgrad- plementation is behind schedule. ing are outlined in the NCER blueprint; it has invested RM1.1 billion over the last fi ve years Broadband in Penang to upgrade infrastructures at the port and con- Broadband is the backbone of knowledge-econ- tainer terminal as part of initiatives to improve omy sectors, and critical in realising the vision of the infrastructure. Penang has the potential to Penang fi rms moving up the value chain through be the leading port in the Indonesia-Malaysia- knowledge, creativity and innovation. The in- Thailand Growth Triangle and a premier port in dustrial parks in Penang have been identifi ed the region. This also depends on the deepening as amongst the fi rst to be upgraded with high of the North Channel. The depth of the current speed broadband infrastructure under the high port, which is between 9m and 11m, must be speed broadband (HSBB) programme. This pro- deepened to between 15m and 17m to enhance vision of a globally-competitive and reliable high the port’s competitiveness and allow it to grow speed broadband service is a prerequisite to- beyond a small, feeder port. wards driving higher value-added activity in the The federal government had shelved this region. There is a need to widen the implemen- project in the context of the Ninth Malaysia tation to include the conurbation as a whole, in Plan (9MP) Mid-term Review but has since order to improve virtual connectivity. announced its intention to resume work. The project is a critical component of POLE. Expansion of the Penang International Airport Penang Bridge expansion The expansion of the Penang International Airport The Penang Bridge, which was mooted in the (PIA) began in 2009 and is expected to be com- 1960s and planned in the 1970s was opened to pleted by 2010. The airport handles more than traffi c in 1985. Upon reaching its capacity, ex- 3.4 million passengers a year and cargo of more pansion work was commissioned by the bridge than 193,000 tonnes annually. It is responsible for operator to improve traffi c fl ow, enhance con- more than 30 per cent of Malaysia’s total manu- nectivity and reduce congestion. The bridge is facturing exports and is the second major entry also linked to the North-South Expressway in point for international visitors into the country. Prai and Jelutong Expressway on the island. At The expansion of the airport, which will 13.5km (8.4 miles) long, it is among the longest cost RM250 million, was one of the key proj- in the world, the longest in the country, and has ects approved under the Second Stimulus Pack- become a national and state landmark. age. It will involve physical expansion to handle There have been continuous efforts to greater passenger capacity, a major facelift improve services, and ensure commuter safe- to improve its ambience and provision of bet- ty and satisfaction. The bridge operator and ter facilities such as multistorey carparks, im- concession holder, Penang Bridge Sdn Bhd proved security and better retail outlets. These, (PBSB), has introduced upgrades to facilitate coupled with the intensive promotional efforts toll payment, improve traffi c fl ow, strengthen of the relevant agencies, are expected to result the bridge structure and maintain the system. in an increase in the number of domestic and The Penang Bridge was expanded to three international passengers. lanes in each direction in 2008-09 at a cost There is also a need to upgrade the airport of RM585 million. Carrying capacity has been cargo terminal, which is scheduled under the increased by 30 per cent and the expansion next phase of development. Increased industrial has eased traffi c fl ow, enhanced connectivity activity in the region and the opportunities which and reduced congestion. can be derived from better air connectivity can make the PIA a major gateway for the region. LEVERS OF CHANGE 85 Second Penang bridge supermarkets and shops. The main objective The proposed RM4.5 billion second bridge is to reduce the environmental and ecological spanning 24km comprises four-lane dual car- damage within the eco-town, through waste and riageways in each direction. It provides a link pollution minimisation. The project introduces to the PIA and the major road network on the the concept of green productivity to Penang. It is mainland. This project has been included as a catalytic component for improving liveability one of the 9MP national projects. It will be the in the area. In 2008, UNEP offi cially appointed longest bridge in Southeast Asia. Work has the Socio-Economic & Environmental Research commenced and the targeted to be completed Institute to be the implementing agency and in 2013. chief coordinator for this project. The completion of the second bridge, like the expansion of Penang Bridge, will play a ma- Khazanah Nasional grants jor role in improving Penang’s connectivity with Several grants programmes have been initiated the mainland. Due to its close proximity to the by Khazanah Nasional to catalyse develop- airport, it could serve as a land-based cargo- ment in key sectors and to revitalise the Pen- movement corridor. ang economy. These initiatives are undertaken in partnership with other stakeholders and are Multimedia Super Corridor aimed at improving the overall environment. By (MSC Malaysia) Cybercity in Penang sharing the fi xed-cost of activities with substan- The MSC Malaysia Cybercity is an area des- tial externalities, the grants make commercial ignated by the Multimedia Development Cor- investments more viable and so are expected poration to catalyse and support the growth to catalyse signifi cant complementary invest- of ICT industries. Penang is the fi rst state in ment by partners. The current experience sug- Malaysia to be offi cially granted “cybercity” gests that small grants can be an important new status, providing it with a platform on which form of public-private partnership that permits the knowledge economy can fl ourish. deep engagement with the private sector and To date, 116 companies have been granted the fl exibility to provide what the private sector MSC status in the 923ha Penang Cyber City 1 needs and wants. By demonstrating positive (PCC1), a zone upgraded at a cost of RM240 change to public-private partnership, these ini- million. PCC1 covers the entire Bayan Lepas In- tiatives will spur rapid economic development. dustrial Zone, Bayan Mutiara and the Commer- cial Centre of Bayan Baru. Penang now needs Shared Services Centres for Industry to expand the geographic basis of the MSC and The concept of Shared Service Centres for In- leverage the presence of MNCs. dustry is aimed at providing centralised facili- ties in the form of equipment, design and test- Penang Eco-town ing services and software, which is accessible The Penang Eco-town concept aims to reduce to industry on a pay-as-you-use basis. These the environmental impact of human activities centres sharply reduce lead times and costs for so that the ecological sustainability of the area companies and individuals to undertake design within the eco-town is increased. A project and development activities. They also lower the concept was developed in 2006 by the United entry barrier for startup companies, by way of Nations Environment Programme (UNEP) at providing these services at an affordable level. the request of the Majlis Perbandaran Pulau This project, which is done in partnership Pinang (MPPP). with PSDC, will focus on three priority areas: It focuses on the Penang Cyber City of • Embedded systems; Bayan Baru and covers the industrial zone, • Radio frequency/ wireless testing labs; and residential areas, institutions of higher learning • Electro mechanical chambers testing — USM and International College — and com- facilities. mercial establishments such as hotels, offi ces, 86 LEVERS OF CHANGE The project was allocated RM30 million To date, two short training programmes under the Second Stimulus Package and is ex- have been conducted jointly by USM and IITK, pected to be commissioned and in operation and at least two research programmes are on- before the end of 2010. The technical specifi ca- going with industry. tions and the process of determining the equip- As Rasiah, Hamdan and Gopalan (2009) ment and services were managed through con- has pointed out: “In Penang, the supply of R&D sultation with the relevant industry players. engineers and technicians is too small for the MNCs to upgrade further into research activi- Allied Healthcare Professionals ties”. The CEE can reduce this bottleneck. Centre of Excellence This centre is focused on the provision of George Town Grant Programme (GTGP) facilities to enhance and upgrade human The George Town Grants Programme (GTGP) capital in the healthcare sector, specifically, is a small-grants programme designed and allied healthcare professionals. This is done implemented to encourage private-public part- with the direct involvement of private-sector nerships. Its initiatives help build resilient local hospitals, which will also be the main benefi- communities living in the George Town UNES- ciaries of the centre. CO World Heritage Site. The programme: The centre, set up as a company limited by • Enhances George Town’s “outstanding guarantee, draws its membership from fi ve ma- universal values” including its multi- jor hospitals in Penang, which have come togeth- ethnic and multireligious heritage, and er to address this need. The centre also has the provides incentives for the conservation support of the Association of Private Hospitals of Southeast Asia’s largest collection of Malaysia (APHM). It will focus on programmes pre-World War II built heritage; aimed at upgrading the nursing profession, the • Promotes awareness about George skill sets of therapists and continuous skills up- Town’s multicultural history, building grading for the hospital support staff. It is aimed and developing local capacity for the at providing a higher level of professionalism protection of both living and built heri- and care within the industry. tage; and With a launching grant of RM30 million, • Provides support for the planning of the the centre commenced operations in July 2010 historic city into a sustainable liveable and has already rolled out its fi rst programme. urban space. Centre of Engineering Excellence (CEE) It is funded by the Malaysian Ministry of The Centre of Engineering Excellence is aimed Finance with catalytic interventions in four ar- at bringing together industry and academia eas: physical realm, social capital, knowledge, onto a common collaborative platform, which and capacity building. focuses on research projects, postgraduate Think City Sdn Bhd (TCSB), a special-pur- education and enhancement of technical pose vehicle, was set up by Khazanah Nasional knowhow. to manage the GTGP. It also supports the na- The centre has the full support of major in- tional urban regeneration efforts by promoting dustrial companies operating in Penang, Univer- the transformation of urban centres into ecolog- siti Sains Malaysia (USM) and the Indian Insti- ically and economically sustainable cities. In line tute of Technology, Kanpur (IITK). A taskforce with the 10th Malaysia Plan with its emphasis comprising industry leaders actually identifi ed a on cities as engines of growth, TCSB provides total of 187 academic programmes, 34 research thought leadership about the best practices in programmes and 83 shared services, for the global urban rejuvenation. Some of its key objec- centre to collaborate on. USM and IITK signed tives are to promote best ideas about city mak- a memorandum of understanding (MOU) to es- ing; advocate urban regeneration based on the tablish this centre in August 2009. principles of sustainability; meet new demands LEVERS OF CHANGE 87 for knowledge and management of multicultural less concerned with implementation of its own cities; provide a multidisciplinary approach to projects but focus on monitoring the whole solving urban problems; and be at the forefront array of investments and policy changes that of knowledge creation and play a catalytic role form the body of the plan. It would need to have in the shaping of a new city paradigm. TCSB also processes in place for consultation with the helps build capacities of local stakeholders in- people and for data collection that are needed cluding governmental agencies and civil society to underpin an effective monitoring function. to better manage cities. To achieve its vision of This process should include bodies like lo- becoming an enabler of sustainable urban reju- cal authorities, SERI, Majlis Tindakan Perse- venation, TCSB works closely with a wide range kutuan Negeri (MTPN), Khazanah Nasional, of global organisations like The World Bank, civil society and private business. A successful UNESCO, the Aga Khan Trust for Culture, Aus- monitoring function must be built on greater Heritage, and the British Council, among others. transparency, sound empirical measurement and benchmarking of outcomes against others, both within and outside Malaysia. Monitoring, data and key Monitoring must capture progress on key investments, policies and institutional changes performance indicators as well as outcome indicators and results. The The vision of Penang as an advanced economic latter must be based on sound data. Major data region at the centre of a dynamic Northern Cor- sources, including the quality of life survey, the ridor will only be realised if implementation is household income and expenditure survey, the systematically monitored and follow-up action investment climate survey, and regional GDP, initiated where execution weaknesses are iden- are not generally available to the public and, tifi ed. Some of the components of the strategy, in some cases, the collection of data has been like streamlining of business visas, the rollout of discontinued. Monitoring needs may require broadband and the prevalence of costly business new data collection efforts. For example, sur- regulations have been identi- veys of the diaspora and tracking surveys of re- fi ed as obstacles to growth in cent graduates from Penang-based universities The vision of Penang Penang for several years. Yet, could provide a basis for measuring the success as an advanced action to resolve these prob- of programmes to attract and retain talent. economic region at the lems has been limited. Individ- The heart of a spatially-based develop- centre of a dynamic ually, each obstacle may ap- ment strategy is that it should be fact-based and Northern Corridor pear small. Collectively, they data-driven, with comparisons to other localities will only be realised have become considerable. used as a benchmark to assess performance. if implementation This history underlines the Key results should be monitored in the follow- is systematically importance of a monitoring, ing domains. Mostly, the databases should be monitored and follow-up review and follow-up capabil- compiled by the National Statistical Offi ce (or action initiated where ity in implementing the new other federal agencies) in a manner that permits execution weaknesses growth strategy. Monitoring benchmarking of Penang and the Northern Cor- are identifi ed. must be broad-based, cover- ridor with other localities in Malaysia: ing the three key aspects of • Economy: GDP (state, Northern Cor- A successful monitoring the development strategy: the ridor); GDP per capita; wages; employ- function must be economy, cities and people. ment; investment (foreign and domestic); built on greater There are no provisions in tourism receipts; exports; number of new transparency, sound the current institutional land- fi rms in new growth sectors; techno- empirical measurement scape for such a monitoring logical capability of fi rms; technological and benchmarking unit. The Northern Corridor upgrading by fi rms; output in new growth of outcomes against Implementation Authority sectors; broadband connectivity; logistics others, both within and (NCIA) could undertake this connectivity; hectares planted with new outside Malaysia. function, provided that it is crops; innovation activity (patents); land 88 LEVERS OF CHANGE values and property rates. a secondary city in Malaysia. It presents a strat- • Liveability of cities: Security, health egy for moving to an advanced economy by 2020, and sanitation; schools and education; globally connected, regionally oriented and locally public services and transport; traffi c centred. Penang would become a destination of accidents and average peak-hour road choice for fi rms, tourists and Malaysian citizens. speed; affordable and quality housing Malaysia long ago understood the global availability; consumer-goods availability; nature of fi nance and the strategic gains from environment pollution (ambient air qual- attracting fi nance to its shores. It must now ity, noise, water quality) and waste; civic recognise that the same applies to talent. Pen- engagement and participation; culture, ang and the Northern Corridor can become a sports and entertainment; heritage; citi- magnet for global talent in Malaysia. zen satisfaction. Designing a set of customised indicators • People: Education; worker-skills upgrad- that measure the outcomes of this book will be ing; locational choice of new graduates; one of the key elements of implementation. Such expatriate employment; poverty reduction indicators should benchmark Penang against and inclusiveness of economic opportunity; other areas within Malaysia as well as compet- shortage of skilled workers; wage differen- ing cities in the region as far as tials (by skills, compared to other locations possible. in Malaysia); links with diaspora; global The approach here sug- The heart of a spatially- networks and connectivity; employment in gests that there is no “one-size- based development creative sectors (scientists, engineers, pro- fi ts-all” strategy that can be ap- strategy is that it fessors, poets, novelists, artists, designers, plied everywhere in Malaysia. should be fact-based architects, analysts, journalists). There needs to be a strategy and data-driven, with for the country as a whole, plus comparisons to other Baseline data must be developed immedi- strategies for different localities. localities used as a ately. A mid-term plan review will be prepared Thinking about develop- benchmark to assess based on updated information on the above ment from a spatial point of view performance. Designing key indicators. is new for Malaysia and requires a set of customised Key performance indicators for federal a change in mindset for federal indicators that measure and local agencies charged with helping to de- and other agencies. Although the outcomes of this velop Penang should include these outcome the NCIA has been explicitly book will be one of measures. In some areas, like training or pro- established as a geographical- the key elements of vision of incentives, agencies have focused on ly-oriented agency, most other implementation. their own activities, losing sight of the bigger federal agencies do not have picture of what is happening as a result of their this mindset. Even in the NCIA, programmes. That approach risks duplication some fi nal decisions have to be referred back to and ineffectiveness. In other instances, agen- government offi cials, risking that they will be- cies have not recognised the high-costs of their come another bureaucratic layer. The nature of action (or inaction) on other parts of Penang’s their authority needs to be clarifi ed. ecosystem. A common set of outcome indica- Data in Malaysia is not organised on a spa- tors can help ensure a common understanding tial basis. The importance of the speed of deci- of progress in implementing the strategy. sion making and local understanding of prob- lems and issues suggest a need for a greater degree of local autonomy and accountability. New mindsets A spatial approach asks only how to encourage business and talent to locate in the northern part This book offers a concept for the development of of the Peninsular Malaysia. It focuses on the de- Penang’s economy, cities and people. It is based velopment of a dense, clustered ecosystem and on an understanding of Penang’s place in the tailors policy and programmes to activities that global economy, in regional supply chains and as improve the health of that ecosystem. LEVERS OF CHANGE 89 FIGURE 31: CONTRASTING CURRENT PROPOSED THE PROPOSED APPROACH • Set national targets • Set targets for cities WITH THE CURRENT • Develop regions in a balanced manner • Build density and agglomeration PRACTICE • Plan sectorally • Achieve coherence spatially • Build infrastructure • Enable connectivity • Attract FDI • Attract talent • Pick sectors • Develop clusters • Identify “sector of the future” • Facilitate fi rms’ evolution • Invest in rural areas • Link rural to urban growth • Building centres for training • Building skills • Silos of people, industry and institutions • Networked economy By contrast, sectoral strategies of federal agencies are often oriented towards spreading Supporting Penang to activities evenly across the nation. There is no support Malaysia strategy to develop critical Strengthening Penang’s development is not a mass in any area. By operating standalone objective. Penang with the North- The strategy concept in silos, federal agencies can- ern Corridor is one of the principal engines for laid out in this book not guarantee cohesiveness of Malaysia’s economic development. The targets responds to the their policies at a geographic of Vision 2020 cannot be achieved without challenges posed level and so, when their activi- successful development in Penang. to a middle-income ties are large and potentially Penang is at the heart of the Northern Cor- region in a globally transformational for the local ridor. The new strategy for Penang focuses on competitive world. economy, they cannot realise building stronger connectivity with the main- externalities in the rates of re- land. Greater density of economic activity in the turn on investments. Northern Corridor will benefi t all states and ac- Globally, economic activity is concen- celerate the reduction of poverty in Malaysia. trated in cities and cities compete with each The strategy concept laid out in this book other, domestically and internationally. Each responds to the challenges posed to a middle-in- city must develop its own distinctive com- come region in a globally competitive world. Busi- parative advantage. A heritage of stress-free, ness as usual is not an option. That would lead environmentally-conscious, and neighbourly to a slow erosion of hard-won development gains approaches to life differentiates Penang from since Independence. This book lays out what the other Asian cities. That differentiation can be government can do to facilitate sustained devel- turned into a strategic advantage through a opment in a middle-income region. Penang’s ex- deliberate branding that focuses attention on perience will provide lessons for other states in the “creative economy” and “conviviality” as- Malaysia as they too become more advanced. pects of life, coupled with a strong technologi- This book charts a path for citizens to un- cal economic foundation. The cultural vibrancy derstand the direction of change and the nature that delights professionals and skilled workers, of global trends and forces. That will help high- along with natural and culinary attractions, light the limitations of the government’s ability provide a local identity that will shape the con- to manage development and the importance tours of economic development. of citizens’ participation, responsibility and ac- countability for their own economic wellbeing. That change in mindset can start in Penang and become an example for the entire nation. 90 LEVERS OF CHANGE REFERENCES Antweiler W & Trefl er D (2002), “Increasing returns and Landry, C (2009), “A pocket sized metropolis: The all that: A view from trade,” American Economic Review, prospects for Penang”, mimeo, Khazanah Nasional Berhad American Economic Association, Vol 92(1), pp93-119, March, 2002 Lim Chong Eu, Tun Dato’ Seri Utama (2005), “Building on Penang’s strengths: Going forward”Speech, Seri Penang Chan H C (2007), “Measuring Penang’s Competitiveness”, Lecture, SERI, Penang, Malaysia Penang Economic Monthly, May, Vol 7 Issue 5 Ling O G (2008), “Attracting and keeping talent: Liveability Clemens M (2009), “Skill fl ow: A fundamental and Penang”, mimeo, Khazanah Nasional Berhad reconsideration of skilled-worker mobility and development”, Centre for Global Development Working McCallum J (June 1995), “National boarders matter: Paper, No 180 Canada-US regional trade patterns”, The American Economic Review, Volume 85, No 3, pp615–623 Commission on Growth and Development (2008), The Growth Report: Strategies for sustained growth and inclusive Munro A M (1964), Penang Master Plan, State development, Washington, DC: The World Bank Government of Penang Coulibaly S, Deichmann U and Lall S V (2007), Nathan Associates (1970), Penang Master Plan, State “Urbanisation and productivity: Evidence from Turkish Government of Penang provinces over the period 1980–2000”, Policy Research Working Paper, No 4327, Washington, DC: The World Bank National Economic Advisory Council (NEAC, 2010), “New Economic Model For Malaysia, Part 1”, Putrajaya, Malaysia Eeckhout J and Jovanovic B (2007), “Occupational choice and development”, NBER Working Paper, No 13686 Ng J A (2007), “Technological roadmap for the electrical and electronics industry of Penang — Brief highlights of the Faiez S (2010), “Penang as hub of support services study”, Penang Economic Monthly, November, Vol 9 Issue 11 for aquaculture industries”, mimeo, Khazanah National Berhad Nungsari A R and Zeufack A G (2009), “Escaping the middle-income trap“, chapter in Readings on Development: Fujita M, Krugman P and Venables A J (1999), The Malaysia 2057, Khazanah Nasional Berhad Spatial Economy: Cities, Regions and International Trade, Cambridge, Massachusetts: The MIT Press Penang Skills Development Centre (2007), Technology Roadmap for the Electrical & Electronics Industry of Penang Gill I and Kharas H (2007), An East Asia Renaissance: Ideas for Economic Growth, Washington, DC: The World Bank Rasiah R (1988), “The semiconductor industry in Penang: Implications for the new international division of labour Hausmann R and Klinger B (2007), “The structure of the theories”, Journal of Contemporary Asia, 18(1), pp 44-65 product space and the evolution of comparative advantage”, Working Paper, Kennedy School, Harvard University Rasiah R, Hamdan A M and Gopalan K (2009), “Positioning a catch up in the electronics industry in Helpman E (2006), “Trade, FDI and the organisation of Penang”. mimeo, Khazanah Nasional Berhad fi rms”, The Journal of Economic Literature,Vol 44, No 3, September 2006 Shepherd B and Wilson J S (2008), “Trade facilitation in ASEAN member countries”, Policy Research Working Paper Hidalgo C A, Klinger B, Barabasi A L , and Hausmann R 4615, The World Bank (2007), “The product space conditions the development of nations”, Science, 317 (5837) pp482–487 Socio-Economic and Environmental Research Institute (1999), The Sustainable Penang Initiative — Penang Imm A O C (2000), “Penang’s manufacturing People’s Report competitiveness”, Socio-Economic and Environmental Research Institute (SERI), Penang State Government of Penang (1991), Penang Strategic Development Plan 1991–2000 Intan N (2009), “Malaysia’s corridor development strategy: Lessons from The World Bank’s World State Government of Penang (2001), The 2nd Penang Development Report”, mimeo, Khazanah Nasional Berhad Strategic Development Plan, 2001–2010 Jaffar A and Nadaraja D (2009), Penang Business Survey, Tengku M A (2001), “The agriculture sector in Penang: mimeo, Khazanah Nasional Berhad Trends and future prospects”. 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Washington, DC: The World Bank The World Bank (2009b), Malaysia: Productivity and Investment Climate Assessment Update, Report No 49137- MY, Washington, DC, August: The World Bank The World Bank (2010), Malaysia Economic Monitor: Repositioning For Growth, April, Washington, DC: The World Bank Udomsaph C C and Zeufack A G (2009), “Skill shortages and the middle-income trap: Microeconometric evidence from Malaysian manufacturing”, mimeo, Khazanah Nasional Berhad UNIDO (2009), “Breaking in and moving up: New industrial challenges for the bottom billion and the middle-income countries”, Industrial Development Report Venables A J, Overman H G and Rice P (2007), “Economic linkages across space”, CEP Discussion Paper 805, London: Centre for Economic Performance, LSE Venables A J, Patacchini E and Rice P (2006), “Spatial determinants of productivity: Analysis for the regions of Great Britain”, Regional Science and Urban Economics 36(5): pp727-752 Yusuf S and Nabeshima K (2008), “Knowledge deepening and industrial change in Malaysia”, Washington, DC: The World Bank Yusuf S and Nabeshima K (2009), “Can Malaysia escape the middle-income trap? A strategy for Penang”, The World Bank Policy Research Working Paper, WPS4971, Washington, DC: The World Bank Yusuf S (2008), “Can clusters be made to order?” in Shahid Yusuf, Kaoru Nabeshima and Shoichi Yamashita (eds), Growing Industrial Clusters in Asia, Serendipity and Science, Washington, DC: The World Bank Yusuf S and Nabeshima K (eds) (2007), How Universities Promote Economic Growth, Washington, DC: The World Bank Zeufack A G (2009), “Positioning Penang — The economy”, mimeo, Khazanah Nasional Berhad Zeufack A G and Gopalan K (2009), “Can manufacturing still drive Penang’s next transition?”, mimeo, Khazanah Nasional Berhad 92 REFERENCES & ANNEXES ANNEX 1: THE CONCEPT Acknowledgments NOTE TEAM • AT Kearney • Economic Planning Unit (EPU) Core team • Ernst & Young (E&Y) • Geographia • Dr Homi Kharas is a Senior Fellow at the • Penang Skills Development Centre (PSDC) Wolfensohn Centre for Development at the • Socio-Economic & Environmental Research Brookings Institution Institute (SERI) • Dr Albert G Zeufack is a Director at Khazanah • The Boston Consulting Group (BCG) Nasional Berhad. • Hamdan Abdul Majeed is a Senior Vice President at Khazanah Nasional Berhad • Azlina Jaffar is an Associate at Khazanah ANNEX 2: LIST OF Nasional Berhad BACKGROUND PAPERS, TECHNICAL Supporting team AND RESEARCH REPORTS • Charles Landry is the Director of COMEDIA, UK Background papers • Christopher Choong is an Associate at Khazanah Nasional Berhad • Albert Zeufack (December 2009), “Positioning • Dato’ Dr Leong Yueh Kwong is Director of the Penang: The economy” Socio-Economic and Environmental Research • Albert Zeufack and K Gopalan (December Institute (SERI) 2009), “Can manufacturing still drive Penang’s • Devendran a/l Nadaraja and Aziz Kevin Lee are next transition?” Associates at Khazanah Nasional Berhad • Andrew Sheng (January 2009), “Penang as an • Dr Shahid Yusuf is an Economic Adviser with the example of economic geography” Development Economics Research Group at The • Charles Landry (February 2009), “A pocket sized World Bank metropolis: The prospects for Penang” • Dr Kaoru Nabeshima is a Consultant with the • Hiau Looi Kee (February 2009), “Performance of Development Economics Research Group at The the services sector in Penang” World Bank • John E Lamb, Julian Velez and Vedini • Dr Ooi Giok Ling was a Professor at the National Harischandra (March 2009), “Agriculture as a Institute of Education, Nanyang Technological source of growth for the Penang region and the University, Singapore Northern Corridor” • Dr Hiau Looi Kee is a Senior Economist with the • Kim Tan (December 2008), “Promoting life Development Research Group at The World Bank sciences as a key growth engine” • Dr Shahridan Faeiz is Chief Executive Offi cer of • Leong Yueh Kwong (October 2009), Blue Archipelago “Environmental issues in Penang” • Dr Julian Velez and Vedini Harischandra are • Muhammad Ali Pate and Ai Gek Beh (July 2009), Consultants at The World Bank “Opportunities and challenges for expanding • Dato’ Dr Kim Tan is the Chairman of Springhill medical tourism services in Penang” Management Ltd • Ooi Giok Ling (in memoriam), (February 2009), • Intan Nadia Jalil is the Vice President at “Attracting and keeping talent, liveability Khazanah Nasional Berhad and Penang” • John E Lamb is the Senior Adviser for the • Rajah Rasiah, Hamdan Abdul Majeed and K Agriculture and Rural Development Department, Gopalan (September 2009), “Positioning for a The World Bank catch up in the electronics industry in Penang” • K Gopalan Govinda Pathiyar and Lim Su San are • Shahid Yusuf and Kaoru Nabeshima (July 2009), Vice Presidents at Khazanah Nasional Berhad “Can Malaysia escape the middle-income trap? • Laurence Loh is the Vice President of Badan A strategy for Penang” Warisan Malaysia and one of Asia’s top • Shahridan Faiez (May 2010), “Penang as a hub of conservation architects support services for aquaculture industries” • Muhammad Ali Pate and Beh Ai Gek are • Yoon Chon Leong (December 2008), “Emerging Consultants at The World Bank niches in the electrical & electronics sector” • Professor Dr Rajah Rasiah is with Universiti Malaya • Professors Suresh Narayanan, Dr Lai Yew Wah and Dr Muhamad Jantan are with Universiti Sains Technical and research reports Malaysia • Tan Sri Andrew Sheng is a Board Member of • A T Kearney (September 2007), “Strategic Khazanah Nasional Berhad roadmap for Penang logistics hub” • Yoon Chon Leong is the Director of BizWise • Ernst & Young (E&Y) (September 2008), Consulting Sdn Bhd “Concept paper on the set-up of a allied • Yusminov Ahmad is the Assistant Vice President healthcare professionals ‘centre of excellence’ at Khazanah Nasional Berhad in Penang” • GTTP Team (November 2008), “George Town REFERENCES & ANNEXES 93 Transformation Project (GTTP) concept note & technical report: Envisioning change” • Kim Tan (January 2008), “Strategic roadmap for the development of Life Sciences Industry in Penang” • Penang Skills Development Centre (PSDC) (November 2007), “Technology roadmap for the electrical and electronics industry of Penang” • Socio-Economic & Environmental Research Institute (SERI), (December 2002 and May 2005), “Penang quality of life report” • The Boston Consulting Group (BCG) (February 2008), “Medical tourism strategy for Malaysia” ANNEX 3: LIST OF CONSULTATION PROCESSES “Positioning Penang” policy study • 30 July 2008: “Positioning Penang” review workshop • 17 & 18 December 2008: “Positioning Penang for sustainable growth: A dialogue on Penang’s future growth strategy” conference • 14 January 2009: Launching of the World Development Report • 6–8 May 2009: Brainstorming session with The World Bank and Economic Planning Unit experts: “Strategies towards higher growth & income” • June & December 2009: Workshop with Dr Shahid Yusuf, Economic Planning Unit and the Penang State Government • 1 September 2009: Discussion on “Positioning Penang” policy study with the Penang State Government and industry leaders, for the 10th Malaysian Plan • 3 September 2009: Presentation of “Positioning Penang” fi ndings to the Economic Planning Unit • 6 February 2010: Review meeting for the “Positioning Penang” policy study • 29 March 2010: Presentation to the Economic Council: “Policy lessons from a study on Penang” • 26 April 2009: Presentation of fi ndings at “Penang blueprint roundtable” • April–May 2010: Presentation of fi ndings for the 10th Malaysian Plan • 2 July 2010: Workshop on “Agriculture and agribusiness as a source of growth for the Northern Region” with key stakeholders 94 REFERENCES & ANNEXES ANNEX 4: NAVIGATING THE PRODUCT SPACE — A TECHNICAL APPENDIX The concept of proximity is used to capture this intuitive basket. The denominator of the weight is the idea that the ability of a country to produce a product value-share of product x in global exports. Together depends on its ability to produce other ones. Unfortunately, this intuitive defi nition of proximity is diffi cult to measure. It requires quantifying the overlap between the set of markets related to each product. Proximity is therefore measured by using an outcome based method founded on the assumption that similar products are more likely is the formula for revealed comparative advantage to be exported in tandem. Following Hidalgo et al (2007), (RCA) of product x, often used to measure export the product space of relatedness among products is competitiveness of a particular product. is GDP per computed from the pattern of revealed comparative capita. advantage in world trade. EXPY is the weighted average of PRODY, weighted The fi rst step is the computation of revealed by the value-share of product x in a country’s overall comparative advantage (RCA). The RCA is then used export basket or . to compute proximity between products. If two goods are related because they require similar institutions, infrastructure, resources, technology, or some combination thereof, they will likely be produced in tandem, whereas EXPY is therefore a proxy measurement for the dissimilar goods are less likely to be produced together. average sophistication of a country’s export basket. Formally, the proximity between products i and j is the The difference between EXPY and PRODY gives minimum of the pair-wise conditional probabilities of a the degree of a product’s sophistication from the average country exporting a good given that it exports another. sophistication of a country’s export basket. Hence, the The matrix of these proximities characterises values of the vertical axis are derived from PRODY -EXPY . the product space. These matrices can be compared The horizontal axis, on the other hand, captures to understand how the product space has evolved over the amount of related products that a country exports, time. The proximity matrix can be considered a complex used here to proxy “capabilities” developed for particular network, where each product represents a node in products. Products that are located closer to the origin the network while the edges between them and their indicate higher capabilities. intensities are denoted by the proximities between the This is based on the following premise: the more products. Given the symmetry of the proximity matrix, number of countries exporting both goods A & B (related the network resulting from it can be characterised as a products), the higher the capability of a country exporting weighted, undirected network. This perspective then only good A to also export good B. The underlying allows us to analyse the product space and its evolution assumption is that certain capabilities are shared for in terms of the properties of the network. different products. In a product space chart, the vertical axis is basically DENSITY is thus defi ned as the number of related a measure of a particular product’s sophistication from products that a country exports. Higher density means the average sophistication of a country’s export basket. that a country exports a high amount of related products, This index is obtained from using two variables PRODY which then implies more capabilities developed. and EXPY. INVDENSITY as shown in the product space PRODY is the RCA-weighted average of income of analysis is the inverse of density. Therefore, for horizontal country j.The underlying assumption is that a product is more axis, the closer the product is to the origin, the more sophisticated if wealthier countries export them more. capabilities have been developed. Source: Hausmann, R and Klinger, B (2007) where the numerator of the weight is the value-share of product in a country’s overall export REFERENCES & ANNEXES 95 ANNEX 5: THE PRODUCT SPACE Thailand FOR PENANG, MALAYSIA, SINGAPORE AND THAILAND (&&&& Electronics and electricals Automotive Engineering '&&&& Other, resource-based Other, low-technology Other, high-technology Process & Textile, garment & footwear Agro-based Primary products #'&&&& &+'& Invdensity Singapore Penang (&&&& (&&&& '&&&& '&&&& & & #'&&&& #'&&&& #(&&&& &+'& +'&'+(& Invdensity Invdensity Malaysia (&&&& '&&&& & #'&&&& + Invdensity '& 96 REFERENCES & ANNEXES