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r O G C A O many factories using non-efficient economic a time frame of say five years. Malaysia is a production processes. With diesel and fuel small country and we cannot live in isolation VER the last few months, there has prices controlled, and workers' wages sup- >M n from the rest of the world economy. been much discussion on the issue that pressed, manufacturers choose to use more Petrol subsidies, in particular, should be O Malaysia has been caught in the mid- fuels and labour as inputs - instead of more ntr removed within one to two years; while dle-income trap. In this article, I will discuss machines - resulting in low-quality extensive information campaigns are carried the rationale on why Malaysia has been Malaysian products and, of course, low pro- ht n out to enable motorists to adjust to living caught in this dilemma, and some of the steps ductivity growths. within the context of petrol prices being set we need to take to emerge as a high-income th ddl in accordance with the world crude prices, as economy. S b d is the practice in many other countries. From independence to the 1980s, Malaysia Subsidies began in 1961 under the Control n In conjunction with the phasing out of sub- progressed rapidly. From an agricultural soci- of Supplies Act 1961. Subsidised items include sidies and price controls, the Government ety in the 1950s, it evolved into an Asian Tiger petrol, gas, sugar, rice and other basic items. tr p h v must introduce a transparent system of social Economy by the 1980s, mainly through In the 1970s, when the price of oil was safety net, providing welfare assistance to the labour-intensive industrialisation. under US$12 per barrel, petrol subsidy was a d l b r t l j p needy, the disabled, the aged, the unem- However, subsequent attempts to further bearable cost to the Government. However, ployed and the poor. A coupon-system deepen our industrialisation process met with with the present high oil prices (over US$75 t rt d th r (together with MyKad) can be introduced mixed results; and Malaysia's economic well- per barrel), this has become a disastrous pre- where those in need are given subsidies for being generally remained stagnant, while dicament for the Government to continue n thr h basic necessities and other essentials such as many other countries galloped away under bearing. petrol. the scenario of a rapidly expanding world As Figure 2 shows, the cost of subsidies has h h p l « Of course, this implies the need for the trade. ballooned from 3% of government operating Government to create a nationwide data-base This is because of the following factors: expenditure in 1998 to almost 30% in 2008! O G C A O of those in need, not unlike the registration The high cost of subsidies in turn restrains system for welfare payments, but more com- r ntr l the Government's ability to upgrade infra- prehensive in nature taking into account In 1946, the colonial government enforced structures such as public transport. It also employment status and also proving channels price controls in Malaya to avoid economic retards the Government's ability to provide for verification and counselling. hardships after World War II. This policy competitive incentives for attracting high- Lately, they have also penetrated into retail- h p l holds until this day. income activities into the country. ing, food and beverage, tourism and hotel Price-control items include basic necessi- industries. Malaysian wages have been suppressed by ties such as rice, flour, sugar, fertilisers, milk, A r lt r t r dr The foreign-based Electrical and Electronics market factor distortions for too long. The chicken and even bus and taxi fares. Because The dominance of oil palm and rubber in (E & E) firms have already declared, in their Government should encourage our wages to of controls, these commodities are much the agriculture sector is unfortunately a sig- dialogue sessions with the Government, that be pushed up in line with the rest of the cheaper in Malaysia compared to outside. nificant drag on the nation's ability to leap- they would be forced to move out if foreign world. When the rakyat can take home more For example, as of December last year, a frog into a high-income economy. workers were to be limited or stopped! This pay, they are then better enabled to adjust to kilo of raw sugar in Malaysia was RM1.35, Given the plantation terrain, oil palm har- argument, if accepted, will mean that our the reality of world prices that will be felt while the world price was RM2.20; that of vesting and rubber tapping remained manual economy could remain in the middle income when controls and subsidies are phased out. rice is RM2.75 per kilo compared to world in nature and (unlike grape or wheat harvest- trap for the foreseeable future. Many countries caught in the middle- price of RM6.75. ing) not easily mechanised. Up to this day, income trap have deliberately jump-started Since basic necessities constitute a large they remained as low-wage activities, fossilis- Wh r d fr h r their economy through a high wage policy. component of the Malaysian CPI, the cumula- ing our dependence on foreign labour (about South Korea's GDP per capita is US$16,450, Singapore is a good example; in the 1980s, its tive effect of price controls for over 60 years 300,000) for the continued "vibrancy" of the Singapore US$34,346, Hong Kong US$29,559, economic progress stagnated and the has been a gross suppression of our CPI com- plantation sector. while Malaysia is still at US$7,469. It must be Singapore Government deliberately com- pared to world CPI (see Figure 1). The unavoidable presence of these foreign remembered that in the early 1970s, we were pelled companies to increase their wages by Workers' annual pay raises are linked to workers in plantations also meant that many at parity with these countries. In five years' 50% or more. Though painful at first, this the nation's CPI. The gross divergence labour-intensive manufacturing operations time they would be even further ahead. What ignited "a second industrial revolution" in between the (suppressed) Malaysian CPI and could still continue to exist in the countryside are the bold steps we need to undertake to Singapore when companies became much that of the world has also led to a corres- (even in face of local worker shortage) enable us to leap out of this middle income more capital-intensive and focused on high- ponding significant divergence of Malaysian because of the easy "mobility" of these for- trap? end manufacturing and financial activities. wage rates compared to that of the world. eign workers from estates to factories. This I will attempt to elaborate on some of these Today, it is a vibrant economic hub of Asia. This, in reality, is the major reason why also means that it is very difficult for the steps: We could introduce a similar high wage policy by initially requiring vulnerable sec- since the 1980s, Malaysian wages have fallen Government to disallow or curtail foreign h n t b d nd pr n behind wages of the rest of the world (see workers in non-plantation sectors, when it tors such as plantation and agriculture, chart on Page 28). As an example, a graduate sanctions such a large presence of foreign tr l labour-intensive manufacturing, construction teacher starts at RM2,500 per month in workers in plantations. Price controls and subsidies have created and services (such as restaurants and hotels) Malaysia, compared to RM6,196 in Singapore, The cumulative effect is that there are now artificial market prices that distort the to have decent minimum wages. and RM15,661 in Hong Kong. about 2.3 million low-skill foreign workers in domestic factor proportions and impede eco- The plantation companies, in particular, Besides restraining Malaysian wages, price Malaysia, making up about 20% of the work- nomic efficiencies. The Government has to be should be required to pay higher wages to controls also severely distort the domestic force. They are in the manufacturing, petrole- bold to find ways to phase out price controls economic factor proportions, resulting in um, construction and domestic-help sectors. and subsidies; maybe not all at once but over > U O AGE 28 SU AY S A , br r 20 0 r tr n th n b t n
> OM AGE 26 This engagement should be done Singapore, London and Dublin. More discreetly so that their individual importantly, they are highly attract more Malaysians to work in requirements can be assessed and respected in their fields. They could this sector. met, and their problems resolved. If and should be encouraged to set up As an example, the 2008 Annual their foreign spouses want to work, base here and transform Malaysia Return of the Asiatic Group - a typ- if their children need special educa- into a world-class international ical mature plantation company - tion, if they need R & D grants, etc, medical centre. The big advantage is shows that its total wage payment all these we should be able to that our cost is half that of (RM83mil) constituted only 18% of resolve. Then and only then can we Singapore, and one-third of that of its before tax profits (RM456mi1); gain leverage on the large pool of Hong Kong, the United States and and it can certainly even double its brainpower that we already have. London. wage bills and still remain We should act quickly in this If we reorganise ourselves, we can extremely profitable! respect, for such talents are being be among the top in this area. The Employers would then have to aggressively headhunted by other urgent necessity is for the use more equipment in the new governments. The Government Government to reconsider compul- scenario; many of our skilled work- should do all it can to ensure that sory government service for recog- ers who are now in Singapore can our professionals, with their wide nised Malaysian medical experts. then be enticed to return to these international exposure, will end up Isn't it better to allow them, already higher skill positions, and in the on our shores and not become other in their late 30s, back to create process uplift the productivity of societies' assets. employment and build up our medi- our economy. The multiplier effects cal base, as opposed to rigidly of this would be translated into Str t l t n requiring them to work for three higher wages for the supervisors, Kuala Lumpur's location at the years in government service at great managers and other professionals heart of Asean and its multi-cultural personal and family sacrifice to as well. environment enhance its attraction themselves? for many emergent high-income Malaysia, with our multi-ethnic Inn v t v n nt v f r activities. We have often forgotten population and extensive bio-diver- h h t h t v t that KL is only 300km away from sity, is an ideal place for R & D in The traditional incentives offered r r l : tr n n pl more n f nt p rt b h lp n t Singapore and it also has access to pharmaceutical products, particular- by Malaysia in the form of pioneer d v l p d n tr l nd b t r. deep seaports and airports. ly in the conduct of trials for new status and capital investment Fortunately, AirAsia did not forget drugs, before their formal accept- allowances are not attractive any- S l r p r n this and, riding on the wave of budg- ance by the authorities. This can be more. High-tech start-ups are risky et air travel, has developed KL as the in the area of cancer, Alzheimer's, ventures; they need large capital, O p t n t n UK n K n S n p r M l low-cost air hub of Asia-Australia. osteoporosis, bone conditioning, and and hence access to venture capital l n (h h h l d pl With our current lost-cost structures, heart diseases. The Health Ministry and government assistance. They M KL could similarly be developed into and Mida should quickly formulate also need speedy Internet access 0,6 , 0 , 88 ,48 the low-cost shipping and logistic a new strategy to attract pharma- and rapid logistics. £ , K$2 .44 , hub of Asia. ceutical companies to seriously con- They cannot work in an environ- h r ( r d t The Government should also sider Malaysia as their new destina- ment where restrictions are placed M ,864 ,68 , 6, 6 2, 00 aggressively promote KL as the focal tion for R & D and trials. in terms of equity ownership or centre for business transactions £2, 6 t K$ ,6 2, 0 O l nd t v t employment of expatriates. They, A nt nt between East (China, Korea and most of all, expect rapid decision- Petronas is known worldwide for M Japan) and West (India and Middle making by us in processing their 22,8 ,A 6, 6 2, 0 East) Asia. being a successful national petrole- applications. In early 2000, the f4, 6 K 2 , 4 S$2, 00 A few enterprising Taiwanese um company. Petronas has done Indian information giant Infosys Cl r (h h h l d pl direct-sale companies have already really well for the country in terms wanted to invest in Malaysia and , , 4 2, 6 ,000 established processing centres and of generating oil and gas revenue sought approval for their expatri- £ ,4 ,200 warehouses in Malaysia for export of from both Malaysian and non- ates to work here; our hesitancy their products to the Middle East Malaysian fields. Unfortunately, and delay in decision-making d n 2 0 20 0 x h n r t because Malaysian-labelled products unlike the E & E sector, up-stream caused them to relocate to are more easily accepted in these oil and gas production has not Mauritius! more importantly does not allow among the young, and the germina- markets. This is only the beginning of resulted in the emergence of a cor- We should follow the world the functioning of many of the new tion of new ideas for products and a new wave of opportunities, as East responding vibrant downstream oil trend, and be rapid, decisive and IT applications. services. and West Asia get better connected. and gas sub-sector. We are still very agile in our engagement with high- The Government needs to quickly dependent on foreign oil and gas tech entrepreneurs. We have to bring the state of our IT infrastruc- v r n M l n pr Gr n n r ancillary suppliers for many of the introduce innovative incentives to ture up to parity with the global f n l nd xp rt v r Flooded with sunshine, strong specialised downstream services, attract them to come here. This standard as a precondition for push- winds and free from natural disas- such as rig and platform mainte- includes the offer of cash grants (as ing Malaysia towards a high-income According to an estimate by MEF, ters, Malaysia is an ideal location for nance and repairs, safety training, a form of venture capital), and R & economy. there are at present more than green renewable energy R & D and search and rescue, and other related D research grants to companies to Further, one of the most effective 500,000 Malaysian professionals manufacturing. Renewable green R and D activities. set up their bases here. methods for rapid societal debuts of working abroad; and they are in energy has to be promoted to be Kemaman, Miri and Bintulu are In keeping with the common new scientific ideas and innovations major cities such as New York, Malaysia's new strength. The now vibrant oil-related towns. practice of many other countries, is the availability of public R & D London, Paris, Tokyo, Beijing, Hong world's top three solar companies Petronas can play a more significant the Government must also be will- centres for niche areas, where high Kong, and Singapore working and have now located themselves in nurturing role and spin off more of ing to offer work permits and per- school and university students can doing research in areas like medi- Malaysia. One of them (Sun Power) these related activities (which are manent resident status to highly be encouraged to experiment with cine, financial services, engineering, is building the world's largest solar now sub-contracted to foreign sup- qualified scientists and other highly their ideas. accountancy, logistics, construction, power manufacturing plant in pliers) to independent Malaysian educated individuals to entice them This was how Steve Jobs was venture capital and other services. Rumbia, in my constituency in entrepreneurs of all races, so that to work in Malaysia not only as a stimulated to design the first Apple In my interaction with many of Malacca. we can begin to transform these second base but also as a second personal computer in the 1980s in them, they said that they very much The Malaysian Industrial towns into mini Houstons. Besides home. Silicon Valley. And a major reason want to contribute to Malaysia's Development Authority (Mida) must its economic benefits to the country, for the success of the present progress. Given the right conditions, work hand in hand with the solar this would also greatly endear I nfr tr t r nd p bl Petronas to the hearts of the average & ntr Korean film industry is the Seoul I feel that they could be persuaded companies to come up with incen- Animation Center; a centre where to set up base here. Unfortunately, tives and a strategic policy to match Malaysians. Malaysia was among the first to Koreans who have interest in ani- often times, we have not engaged that of China, which is currently the In this article, I have argued that recognise the importance of IT by mation for movies, computer them sufficiently. world leader in solar power. We Malaysia has been inhibited from ful- the establishment of our Multi- games, or digital advertising could As an example, the renowned UK must seize this opportunity to nur- filling its true potential by distortions Media Super Corridor in 2001. But drop in, play around with their liver transplant surgeon Datuk Dr ture a cluster group of ancillary sup- (in the domestic economy) caused by other countries have since super- scripts and hopefully end up with Tan Kai Chah wanted to set up base pliers to provide materials and sup- various policies since independence; seded us in IT infrastructure. viable commercial products. in Malaysia but could not do so porting services to the solar compa- by phasing out these distortions and Consider this: our Internet down- The Government should follow because, as a Malaysian, he was nies, just as we did when we started focusing on our strengths in new load speed is only 2.2 Mbps, com- this trend by setting up R & D cen- required to do a compulsory three- with E & E in 1972. We must not areas, we can and would emerge as a pared to South Korea's 23.6 Mbps tres in 3-D Animation, Computer year government service. Singapore, miss this boat to build a "Solar-con" high-income economy in the not too and Singapore's 8.0 Mbps; our Accessory Inter-face, Micro and having gotten wind of this, head- manufacturing base to equal that of distant future. broadband penetration rate is only Nano-Technology, Horticulture, hunted him. His liver centre in the silicon hub of Penang. 30% compared to South Korea's Aquaculture and others deemed Singapore is now very much sought Datuk Seri Dr Fong Chan Onn was 97%! suitable to our resource endow- after by patients near and far. M d l r nd ph r t Prof of Applied Economics and Dean of Entrepreneurs now expect to be ment. With the proper involvement Learning from this, we should l tr l Faculty of Economics and able to work through their note- of schools and colleges, this could attract our Malaysian professionals With an aging population all over Administration, Universiti Malaya. He books while commuting in rapid lead to the formation of interest to return to Malaysia, by the the world, high quality medical care served in the Government as Deputy trains and cars. They expect to be groups focusing around the availa- Government setting up a Special has become an emergent high-value Minister of Education (1990-1999) able to do video-conferencing while bility of facilities at the centres. Group to identify them and then economic sector. Highly-trained and as Minister of Human Resources on the move. Our current download Ultimately, this will lead to more engaging those who are interested Malaysian medical specialists are (1999-2008). Currently, he is the MP speed does not allow for these, and passion for science and technology to return or at least set up base here. working by the hundreds in for Alor Gajah.