Revitalising our private sector and SMEs

 

From Ramesh Chander and Lim Teck Ghee

Malaysia has lost its competitive edge in attracting multinational corporations. The exodus of many established corporations to Bangladesh, Indonesia, Vietnam, the Philippines, and other countries is indicative of this trend.

New FDI flows into the country have slowed even in terms of feel-good dubious figures touted by the ministry of international trade and industry.

According to the latest data, FDI in Malaysia registered a net inflow of RM14.6 billion in 2020 as compared to RM32.4 billion the previous year. This contraction by 54.8% is only partly a result of global economic uncertainties due to the pandemic. Corporations and local businesses have experienced a hike in the price of doing business given the negative impact of the regulatory environment.

The regulatory regime in place has grown, is stifling and subject to uncertainties generated by frequent policy changes as has happened, for example, with the Malaysia My Second Home programme.

Meanwhile there is a likelihood that a significant proportion of the present number of 900,000 plus SMEs – if stronger corrective measures are not taken by the government – will close shop or cut back on operations due to the pandemic, which the 12MP has failed to adequately address.

That this prospect will considerably worsen the poverty and unemployment problems for the country is clear from this profile data:

SMEs

• make up one million or 98.5% of all business establishments
• provide two-thirds of all employment
• contribute 40% to the national GDP, and
• exist in all states, all sectors and range in size from micro-enterprises to small and medium.

SMEs are not just a pillar of the economy. They also play a key role in social stability and social cohesion. This vital contribution of SMEs to national unity and harmony has either been ignored or has not been properly acknowledged in the 12MP documents.

It is necessary to remind policy makers and legislators that SMEs are the main source of multiracial partnerships and inter-ethnic linkages, relationships and interaction at many levels, including ownership, labour force and in other spheres. Also not generally known is that 20% of SMEs are owned by women, thus contributing to gender equality.

Together with a GLC reform programme, there needs to be revitalisation of the private sector directed at small and medium-sized enterprises.

Reviving the SME segment of the economy in the short and medium-term future should be amongst the highest policy priorities of the government in the 12MP.

The above difficulties facing the private sector, together with the monopolistic policies favoring the GLCs and the GLICs, and the resultant rising price of doing business needs to be addressed in any clear-sighted and pragmatic plan.

Unfortunately, despite these stark past and new policy failures, the 12MP is largely silent or evasive. Should the government fail to take corrective measures in the new Plan, we fear this heavy baggage will be carried forward.

Urgent game changer reforms

The third backward step we have discerned applies not just to a single sector. It relates to a wide range of sectors in which earlier policy reform measures were clearly identified and agreed to by a previous government and where these reform measures have either been ignored, stalled, or discontinued.

To recall, thirty years ago at the National Economic Consultative Council deliberations to propose the successor to the NEP, no quantitative targets were set in the final report as it was the consensus of the 150 members drawn from political, economic and social sectors from all communities that the necessary capacity building to build and sustain businesses was more important than the contentious numerical targets.

The 9th Malaysia Plan from 1991 to 1995 in fact did not specify such ownership targets.

Likewise, the New Economic Model (NEM) drawn up for the 10th Malaysia Plan by one of the most credible and qualified economic teams recruited, eschewed the continuation of a regressive NEP policy which was originally intended to be discontinued after 1990.

Further, it identified the following urgent policy imperatives to ensure the nation’s ability to meet the multiple challenges from internal and external factors. These included:

• Refocusing from quantity to quality-driven growth. Mere accumulation of capital and labour quantities in the past has been insufficient for sustained long-term growth. To boost productivity, Malaysia needed to refocus on quality investment in physical and human capital.
• Relying more on private sector initiative as the primary engine of growth. This involves rolling back the government’s role in some areas, promoting competition and exposing all commercial entities and activities (including GLCs) without exception to the same rules of the game.
• Making decisions bottom-up rather than top-down. Bottom-up approaches involving decentralised and participative processes that rest on local autonomy and accountability would lead to more accountable and less rent-seeking and crony-driven outcomes.
• Redressing unbalanced regional growth. Growth accelerates if economic activity is geographically concentrated rather than spread out. Ripple effects would also come from more effective poverty alleviation and equitable income distribution outcomes and more inclusive with sustainable growth.
• Welcoming foreign talent including from the Malaysian diaspora whilst retaining local talent. As Malaysia improves the pool of talent domestically, foreign skilled labour can fill the gap in the meantime and can generate positive spillover effects.
• Prioritising the education sector which is a key laggard in the economic transformation of the country. The public higher education sector has not been able to produce skilled human capital despite being provided with consistently large budget allocations in the past 20 years.
• Rightsizing the bloated public sector and rectifying its siloed and ineffective sectors that have impeded investment and productivity.

What was unprecedented about the NEM is not only its acknowledgement that falling FDIs and competitiveness, compounded by the brain drain and decline in standards of governance as evidenced by pervasive corruption, rent seeking and patronage, have put Malaysia behind many of our neighbours in the region.

It was also the recognition that the NEP had become a time warp and millstone holding back the development of the country. Hence the need to not simply shift to a higher skilled, more competitive and private sector-driven economic ideology but also of the necessity and urgency of deep structural reforms for the country to move out of the middle income trap and reach its true potential.

When drawn up and approved by the former prime minister Najib Razak’s government, the NEM with its paradigm- changing principles and strategies had the strong support of not only business and professional elites and the country’s movers and shakers, but also legislators in Parliament. However, it needed to be accompanied by actionable policies and a multi-year commitment to implement them. This has not happened.

Today, as the current Parliament sits to deliberate and fine-tune the 12MP, we urge legislators from both sides of the policy divide – including those from the time of the NEM – not to return to a NEP clone mindset but to use the NEM instead as a reference text to select, support and not marginalise the real game changers that the nation needs, or we will risk a further falling back in our economic prosperity and standing among nations.

Conclusion

We believe that the 12MP, if implemented as currently presented, is likely to act as a self-inflicted wound that will adversely alter the trajectory for Malaysia’s socio-economic growth and heighten the likelihood of our country becoming further entrapped as a middle-income economy, with a clear risk of going backward in our development and prosperity.

Ramesh Chander is a former chief statistician of Malaysia and a senior statistical adviser at the World Bank in Washington D.C. - FMT

Lim Teck Ghee is a former senior official with the United Nations and World Bank.

The views expressed are those of the writers’ and do not necessarily reflect those of MMKtT.