NEM – a steep hill to climb

COMMENT BY STEWART FORBES

WITH the publication of Part 1 of the National Economic Advisory Council’s New Economic Model (NEM) For Malaysia report on March 30, the Prime Minister has committed the country to a fundamental process of change.

Much of the NEM report’s findings are already known and have been debated extensively by both the Government and the private sector.

The falling levels of foreign direct investment (FDI), the relatively poor levels of productivity, the over-dependance on foreign labour and the low levels of expenditure on research and innovation have all been identified. Similarly, the distortions emanating from a low-cost, subsidy-rife economy and some poor perceptions of Malaysia externally are not newly discovered.

Where the NEM report scores, however, is in its bringing together all the disparate elements in our current economic situation and setting out in stark detail the implications for Malaysia if no change is made.

While growth continues, it is fragile, and if the country is to continue to be locked into the so-called “middle-income trap” then not only will we see many nations increase the economic distance between themselves and Malaysia but other, more aggressive developing nations, will overtake us, pushing Malaysia to lower and lower world rankings.

Ultimately, instead of Malaysia gaining “promotion” to the champions league of nations, we could find ourselves “relegated” to division two or even lower.

And here is our dilemma: If Malaysia’s attractiveness as an investment destination deteriorates, then economic activities will decline since we do not have the population base to drive growth solely through domestic consumption. And if economic growth declines then the country cannot afford the incentives and fiscal policies that are necessary to sustain investment attractiveness. Thus, a vicious downward spiral is generated.

Accordingly, as the Government knows well, and has articulated both verbally and now through the comprehensive NEM report, there is no status quo solution – we cannot stand still. Malaysia either accelerates upwards economically or risks a downward spiral and possible stagnation.

Much to applaud

This might seem a dismal picture but just as the issues are identifiable, so too are many of the solutions. From a private sector perspective there is much to be applauded in the honest appraisal presented by the NEAC’s NEM report and many of the solutions proposed will materially improve economic performance. But only if there is a concerted effort to implement change and the will exists to take what in some cases will be difficult decisions.

There is no one “silver bullet” that will fix everything; a range of actions is necessary, some palatable and some less so. But seeking to implement only the popular measures and ignore the unpopular ones is a sure recipe for failure.

From a private sector point of view, therefore, are the outline proposals in the NEM report likely to stimulate business and allow the NEM to emerge? At the core of any success must be business growth, new sources of income generation and increased investment.

While it is not the purpose of these short comments to examine the socio-economic aspects of the NEM, it should be apparent that the laudable goals of poverty eradication, affirmative action programmes in favour of under-privileged groups and a more equitable distribution of wealth cannot take place if there is no wealth to be distributed.

Thus, a move towards a high-income economy with higher value-added business contributing to a significantly stronger gross domestic product (GDP) growth is a mandatory success factor for the NEM and its associated objectives.

The NEM calls for a reinvigoration of the private sector and a return to private sector-led investment levels of the 70s and 80s rather than the Government-led investment scenario that now appears to be the norm.
This is a difficult challenge and a steep climb. Fundamentally, when the details of the implementation of the NEM are revealed over the next few months following consultation with stakeholders, investors will want to see a number of clear indications of commitment to a more conducive business environment. Some of these would include:

● First and foremost evidence that the Government will take the difficult decisions necessary without backtracking. It is inevitable that some reforms not favour certain groups who benefit today from special protected positions. These groups are always the most vociferous in defending their positions.

If the Government allows itself to be browbeaten into reversing reform policies once agreed upon, then the entire structure of NEM will be compromised and sceptical investors will run for cover to business regimes that offer greater certainty;

● Foreign investors must be assured of ownership and management of their business operations. This is more relevant in the context of new high-value industries and services where intellectual capital and IP form a larger element of the business capital than bricks and mortar and machinery.

Growth from tech transfer

While positive steps have already been taken in this direction, all government ministries need to embrace an open, liberalisation agenda so that growth is derived more from technological transfer and the multiplier effects of clustering and new cutting-edge industries, rather than demanding a minority slice out of every pie.

The proposed corporatisation of Malaysian Industrial Development Authority, and its enhanced role in investment promotion, is an important component in a better integrated process of investment identification, negotiation and finalisation;

● The NEM must deliver on the human capital needs of a new economy. This is perhaps the single biggest problem confronting us today and is a real barrier to developing new business, especially in the high-tech arena.

A reduction in over-dependance on foreign labour will spur a greater emphasis on productivity in support of a higher income model.

At the same time, the new technologies and processes associated with the desired new investments demand skills that are in limited supply today. This is ultimately unacceptable to investors; and

● Finally, the total environment surrounding business will need attention under the NEM, the fiscal environment must encourage risk taking and innovation through appropriate incentives and low corporate taxation. Corruption must be a zero tolerance feature of society and personal security must be an automatic assumption of residents’ rights.

The NEM report is a positive and honest appraisal of the current national dilemma and points clearly to desired reforms to advance the nation, both economically and socially. It has raised considerable expectation in the minds of both the people and business. If it fails to deliver through a lack of political will, excessive compromise or prevarication, then the negative impact may be severe.

The private sector has concerns that previous experience suggest deliverables rarely match rhetoric and both domestic and foreign investors will find it difficult to re-energise in terms of expansion or new investment if uncertainty prevails.

The clarity and forthrightness of the NEM report Part 1 make it an exemplary document. It must now be matched with equal clarity and decisiveness in setting out and implementing the action agenda.

We have a steep hill to climb, but the ultimate goal justifies the effort and support by all Malaysians.

● The writer is executive director of the Malaysian International Chambers of Commerce and Industry.

Moving up the value chain

The economic policies are no longer enough to keep Malaysia competitive. The NEAC has drafted the New Economic Model to outline a drastic transformation plan.

THE list of what ails the Malaysian economy is no state secret. Opinions on the matter, both verbally and in print, are long and detailed.

A tally of what is wrong would point to a poor education system, corruption, and policies that encourage patronage and rent-seeking, among others. Those grouses, along with a litany of other issues, highlight what has been counterproductive for the Malaysian economy and its people in general.

That has put the authorities in a quandary. Do they upset the status quo or should something be done to shake the cobwebs from Malaysia’s social and economic structure?

The answer, even before reading the outline proposals contained in the New Economic Model (NEM) drafted by the National Economic Advisory Council (NEAC), suggests that radical action is needed immediately. And the draft spells out just why radical changes are needed.

“Malaysia has reached a defining moment in its development path. It risks being left behind or worse still, suffering a reversal in living standards, unless it implements far reaching and comprehensive reforms,’’ says the NEAC in presenting its initial blueprint for changes that need to take place within the country.

The report adds that the economic policies to date are no longer keeping Malaysia competitive enough, regionally and globally, to generate sufficient growth.

“Fundamental reform is long overdue and decisive actions are needed to speed up economic transformation. The NEM report provided a critical review of the deficiencies that preventing Malaysia from moving forward, which we concur,’’ says CIMB Research in its note on the NEM.

“Malaysia is in urgent need of an overhaul as it runs the risk of a downward spiral and also the painful possibility of stagnation if it fails to reinvent itself.’’

The proposals contained in the NEM are the seeds of government policies that will be needed to lift GNP (gross national product) per capita from the current US$7,600 to US$17,700 by increasing growth rates to an average of 6.5% per annum until 2020.

Those bold measures seeks unlock investment, drive labour productivity and boost efficiency while changing the way business has been done over the past decades.

Private sector back to the fore

“Anything that makes Malaysia more competitive is good. More opportunities to grow businesses are deemed good. Otherwise more businesses will leave Malaysia,’’ says Top Glove Corp Bhd executive director Lim Cheong Guan.

“In the past, we used to say that Malaysia would be able to compete with Taiwan or Singapore to be among the best. Right now, we are behind them and we are talking about competing with Thailand or Indonesia. If we don’t start something new in the future we may have to compete with Cambodia or the Philippines.”

The proposals from the NEAC are numerous but essentially they seek to have the private sector take over the driver’s seat of the economy.

That change is crucial as the Government is painfully aware that the decline in private investments in the country needs to be halted and reversed should Malaysia stand any chance of moving up the economic ladder.

The drop in total investments for much of the decade after the Asian financial crisis was cushioned by increased government spending, but no matter how much money the Government was pumping into the economy, it could not make up for the money that the private sector is not investing.

Total investments in the economy has about halved since the crisis and growth has been supported by consumption.

That increase in public investment was done by using Malaysia’s bountiful natural resources but that is unsustainable, given that these are depleting resources, particularly oil. Furthermore, pump-priming the economy has come at the expense of the Government’s own finances.

“It’s timely as we move towards that change. It’s important for Malaysia to move into the new phase to retain and attract talent. And to do that, we need that change,’’ says Spirit AeroSystems Malaysia Sdn Bhd managing director Francis Hiew.

The NEM wants to see the private sector regain its role as the driver of growth and to accomplish that, sweeping liberalisation and pro-market policy changes will be implemented to drive productivity and efficiency.

The NEAC has forecast the services sector to drive growth, followed by the manufacturing sector.

Skilled workers

The report points out that apart from setting the right market-centric policies and incentives, human capital development is of great importance to get the country up towards high income status.

It’s not to say the country does not have the building blocks to pull that off.

The problem of the migration of skilled workers, which has been increasing to an alarming rate, is an indication that the country does possess the necessary skill levels for higher valued added industries. It is just that greener pastures lie outside the country.

More private investments in higher technology and value-added industries is one crucial way of keeping those valuable employees in the country. To achieve that, policies stressing inclusiveness will be championed.

One example of the latent potential of the economy and its people, and the Government’s ability to attract higher value added industries is the decision by Spirit AeroSystems to set up shop in the country more than a year ago.

Spirit AeroSystems is one of the largest tier-1 suppliers to Boeing and Airbus. Malaysia was picked mainly because of its trainable people. Only 8% of its employees are high school graduates; the rest have at least diplomas.

“You talk about growing with the rest of the world. Yes, we are, as we are doing something (as in designing components for the A350) that is not there yet,’’ he says.

Still, there are constraints in Hiew’s operation. For one, he employs 21 engineers but would like to have 60. To overcome that, the company is bringing a training programme to universities in order to get their skill requirement.

Having such programmes is a cost to Spirit AeroSystems and other companies too, and businesses are going straight to the source to get their labour needs.

“Quantity is there but it is not easy to get them. We are also going to the universities directly. The Government should also do things to keep our brightest in Malaysia,’’ says Lim of Top Glove.

He adds that because there is demand for such skilled people from other companies, competition for top students in universities has intensified.

In the process of moving up the value chain, companies too are envisaged to increasingly move away from hiring unskilled or low-wage labour in favour of automation.

Top Glove hires about 5,000 foreign workers and Lim says their presence in the economy is not as bad as it is made out to be.

Such workers create demand for other products and services, and by having them to do more menial work in factories, it allows companies in Malaysia to hire Malaysians to fill managerial or skilled positions.

“If we cannot operate from Malaysia, then those jobs will go elsewhere,’’ Lim points out.

He also counters that it would be unwise for companies to differentiate pay scales between Malaysian and foreign workers, saying that the decisive factor in any of such argument is productivity.

Nonetheless, the shift in processes towards more automation is a gradual and inevitable progression.

“A decade ago, our production line may require 10 workers but today it is 3.5 workers per production line. Every expansion, we need more engineers and chemists and that means we need more graduates every year. And we do hire more than a 100 of them every year,’’ he says.

“Direction-wise, we will be heading towards automation as foreign workers are becoming an issue.’’

Benefits of a high income economy

Moving up the economic value chain calls for more investments into more productive way of doing things.
Investing in new technologies and automation helps open up new avenues of business opportunity while presenting companies with new streams of revenue and profit.

One industry that somewhat encapsulates such a progress may well be the telecommunications industry.
From providing basic call services, telecommunication companies have evolved and grown their scope and influence almost exponentially, whereby new devices and delivery channels such as the Internet have seen hundreds of smaller companies hiring skilled workers churn out the services and packages that would utilise such diverse channels.

Maxis Communications Bhd chief operating officer Jean-Pascal van Overbeke said Maxis, which started out as a cellular company, is today seeing 40% of its revenue from the data business.

“This requires all our people to grow with the industry and learn a new business and changing the business at the same time. This is about learning a new skill,’’ he says.

One of the drivers of growth in the NEM is broadband penetration. As more households and businesses start adopting broadband services, it would be valuable to just not the economy where such services are known to increase economic activity but also for the companies that provide and support such services.

“Part of our business and future is not only to provide ways to allow people to speak with each other. The phone is not a phone anymore but a device which allows us to access a lot of things,’’ he says.

The evolution of the phone and its applications is also creating demand for new skills within companies.
Companies that have a workforce that are used to doing things the old way would have to find the means to adapt.

“In a few years more than 50% of our revenue will be from the Internet and in some ways we will become an Internet company. But 90% of the people employed today have been employed to do the mobile business,’’ says van Overbeke.

Implementation is key

The next step in getting acceptance for the NEAC proposals would come from the public. And to secure the mandate for such a game-changing policy might be a difficult and tedious process.

Revamps to affirmative action policies could strike a nerve with some quarters, and changes that would nudge people off their comfort zones could be viewed with suspicion.

“A lot of it will, however, depend on implementation. The important thing is for everyone to have the opportunity to compete and do away with inefficiency and corruption, and make the government machinery more efficient so as to encourage people to stay here,’’ says Top Glove’s Lim.

To meet the short timeframe to achieve high income status, a lot of the proposals have to be accepted quickly by the public and adopted immediately by the Government.

But for businesses that will be called on for their money and patience, time is a luxury most entrepreneurs will not have.

“If the Malaysian government makes the conditions as competitive as those of other countries, there is no reason why Malaysian businessmen would leave,’’ Lim argues. “Businessmen are not static. They will go to where the best opportunities are offered.”

By JAGDEV SINGH SIDHU jagdev@thestar.com.my 

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Looking for growth

NEM needs political will and mindset change

THINK ASIAN
By ANDREW SHENG

 SOME of you may have wondered why I have not written about the New Economic Model (NEM) that has been in the Malaysian news this week. My colleagues at the National Economic Advisory Council (NEAC) have been working hard in the last few months to make the NEM as robust as possible, and now Part I has been rolled out to be “beta” tested. Part II will come out in the second half of the year.

Just like the iPad, which comes out this week, there is lots of anticipation, but the proof of the pudding is in the eating.

So I was not surprised that there was a lot of scepticism about what’s new and whether there is will to implement the NEM. Even the iPad as an electronic book reader is not new – Sony got there first. But, after the success of iPod and iPhone, people start believing that Apple will launch another killer product.

Development is a process and like any product, the NEM will have to go through the process of conceptualisation, strategy, prioritisation, execution, feedback, review the outcomes and then refine and move ahead.

This week, I had the privilege of listening to legendary Harvard Business School professor Ram Charan talking about execution. He rightly pointed out that the Vision thing is the easy part. The hardest part is to translate a vision into action.

Generals see Vision as Strategy and Execution as Tactics. Ram Charan says this is completely wrong. “Execution is not just tactics – it is a discipline and a system. It has to be built into a company’s strategy, its goals, and its culture.”

Quite right. I also learnt the hard way that it is easy to talk but tough to deliver. Hence, it’s all about discipline, feedback and follow through. You learn to adjust by making mistakes, but you follow through. You cannot make omelettes without breaking eggs.

So the first thing is to admit that we will make mistakes, which is why we have to have consultation and feedback. This column is about inviting the consultation from anyone interested in the NEM to give their views about specific sectors, issues and problems.

The second thing is that we have to be practical – we cannot do everything at once and we do not have the resources to do everything. Tough choices will have to be made. Part I of the NEM is to set the framework to think about what needs to changes and our goals.

We want to be an advanced nation that is high income, inclusive and sustainable. To do this by 2020, we need real growth averaging at least 6.5% per year.

Can we achieve that? Not if there is a massive global crisis in between. But, if the Asian region, and especially India and China, continue to power ahead at more than 8% per year, given our strategic geographic location, our natural resource base and pretty advanced infrastructure, there is every reason for us to be able to achieve that target.

If we don’t, then it would mean that we have failed to remove the bottlenecks to growth and did not execute at the right place at the right time.

When people ask about the political will, they forget what President Kennedy posed: Ask not what your country can do for you, but what you can do for your country.

The NEM is a result of reforms – reforms that need political will and a mindset change of the rakyat. Political will cannot come without the rakyat being willing and able to change their mindset. If the grassroots are convinced of change, the politics will change. If the people will not change, the Government will in turn not change.

This column will not dwell on how we got into the middle income trap but on how we will get out of it. Another of my favourite Harvard professors, Malcolm Sparrow, said we should “pick important problems, fix them and tell everyone.”

There are so many problems to fix, that we will not be able to tackle everything. Indeed, we would be lucky to fix three or four major problems in each specific area or sector. The NEAC has identified eight strategic reform initiatives. If we were to pinpoint at least three key problems to fix in each initiative, we are already dealing with 24 issues.

But the public is expecting us to identify issues and solutions to a whole range of economic sectors. If you run down the list of sectors alone, you can count the education sector, manufacturing, agriculture, services and cutting across these are energy policies, telecommunications policy, housing policy, transport, environment, tourism, health et cetera, et cetera.

I learnt from the power of the Web that none of us is smarter than all of us. Many of you are experts or have first-hand experience in the sectors I have mentioned. Over the next few months, my colleagues and I will be drilling down to build up a concrete implementation plan that not only has bones, but meat.

To give you an illustration, the appendices in the Part I report on the palm oil and E&E (electrical and electronics) sectors show how we worked with market experts to identify the key issues and put forth some suggestions for reform. We are inviting you the readers to give us your views on what we should do to realise the full potential in Malaysia.

The reason why we need your advice and insight is obvious. It is unrealistic to expect the eight members of the NEAC and the secretariat to be experts in all the complex economic sectors and to be able to pick the winners or identify the losers.

For this, feedback from those of you who have direct understanding of the issues in diverse sectors would be invaluable. What we specifically look for is not just problem identification, but concrete and practical solutions on what needs to change and what we can do about it.

Please help us prioritise by picking out the most important issues and give alternative solutions. Over the next few months, the NEAC members and the secretariat will be meeting many stakeholders to map out a detailed implementation plan so as to reduce the margin of error of implementation.

We accept that the mindset change will not be easy, because as Capra and Henderson shrewdly identified, “unlimited quantitative economic growth on a finite planet cannot be sustainable”. “Qualitative economic growth, by contrast, can be sustainable if it involves a dynamic balance between growth, decline, and recycling, and if it also includes development in terms of learning and maturing,” they say.

We look forward to receiving your feedback and ideas, and you are welcome to email us your suggestions to
as@pmo.gov.my or my colleague at the secretariat:
yassif@pmo.gov.my. Please also log on to the NEAC website and take part in the poll at
www.neac.gov.my.
 
● Apart from being a member of the NEAC, Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission. He is the author of the book “From Asian to Global Financial Crisis”.