Of new structures and structural reforms for moving the country forward

I waited for the Budget 2011 announcement on Oct 15, more eagerly than I had been in the past. Weirder still, the enthusiasm was not due to the tight deadline I had to manage to dissect and analytically review the proposals on behalf of the leader of the opposition. I actually hoped that this budget would do what it is supposed to do: change the course of our economic and nationhood journey from certain decline that we have experienced since the Asian financial crisis of 1997 and 1998.

Ever since Prime Minister Datuk Seri Najib Razak took office, the  government has embarked on a series of big economic blueprint announcements. All the abbreviations, labs and public relations exercises have the hallmark of consultants’ work and reminded me of similar steps we used to adopt in the corporate world to cascade strategy blueprints to the shop-floor level. Many times this cascading exercise begins with excitement but does not necessarily end with success.

The New Economic Model (NEM) document that analyses the nation, which is stuck in the middle-income trap, was refreshing and provided a glimmer of hope. An admission that all is not well with our economy at this critical juncture is the biggest step made thus far to begin setting the economy on the right course again.

The government also plans to address the three key constraints in our economy that had prevented us from progressing towards becoming a high-income nation. These are the lack of new capital circulating in our economy due to stagnating private investment over the last decade; low-technology applications and developments in the products/services that our economy produces, and a workforce that is unable to cope with the innovative demands that a developed economy requires.

That we are facing a private-investment crisis is a well-known fact. During the boom years of 1991 to 1997, research by professor K S Jomo showed that private investments were growing at a compound annual growth rate of 16.2%; compared with the post-Asian financial crisis rate (between 2000 to 2005) of 1%. The latest figure show this only increased marginally to 2% over the period of 2006 to 2010.

The severe drop in private investment, both domestic and foreign direct investments (FDI), had caused a disproportionately long reliance on pump priming and landed us where we are today — fighting budget deficits and hitting a wall in our efforts to jump-start the economy. In comparison, the economic performance of our neighbours — even including Thailand and Indonesia (not to mention Singapore) — seems better as they have rebounded stronger than us in the economic recovery.

The government’s response to this predicament is a list of mega-project announcements — some to be carried out by government-linked investment companies (GLIC) and agencies. The announcement of a proposed 100-storey tower is already attracting its fair share of criticism and one wonders how a new office and commercial centre will convince private investors to start spending and expanding business again or ensure economic growth is more sustainable on a long-term basis.

The same argument goes for all the other mega-realty developments announced. Yes, these projects will create billions of ringgit worth of work and contracts; yet the economic cake they create is temporary and will only last during the duration of the construction and early years of commissioning. Most of these work and orders will go to big players (mostly government-linked companies, well-connected conglomerates and foreign contractors) and will not effectively trickle down to the groups that we need to cultivate most if we want to jump-start our private investment — that is the strategic and sustainable growth sectors and small and medium enterprises (SME).

In the end, we will be back where we started — with cash rich GLCs and well-connected conglomerates using their profits to invest abroad to seek new investment opportunities and diversification plans — leaving our economy deprived of the desperately needed capital injections. FDI is already hard to come by as most of it is being absorbed by key emerging markets with huge populations like China, India and now, to a lesser extent, Indonesia.

The budget, as in the past, is still centred on meeting growth targets by pump-priming and building unnecessary structures without fixing the root cause of the problems. The only difference is where the funds come from — initially from the state coffers, then relying on the oil and gas revenue and now on the GLCs, GLICs and the EPF.

What we need is structural reforms to shift the course of our growth. What are these structural reforms? These include a new set of policies that are implemented with focus and discipline to shift the engine of growth to a more sustainable group of enterprises and sectors.

One such group is the SMEs, which make up 99% of enterprises in the country (548,267 out of 552,849 as published by the Department of Statistics) and yet they only contributed 31.2% to our GDP in 2009. Some SMEs are actually quite big — manufacturing companies with annual turnover in between RM10 million to RM25 million.

Growing these SMEs is vital in our quest to create a period of sustainable growth without heavy reliance on pump-priming (no matter where the money comes from). It should not be the only strategy towards achieving a high-income economy, but it should be one of the anchor strategies.

In this context, the government seems to lack the perseverance to pursue what could have been a good policy. It has set up venture-capital entities and institutional investors (including Ekuiti Nasional Bhd) that could have gone a long way to work with identified SMEs in expanding their businesses, looking for new markets, and upgrading skills and technology to change the make-up of these SMEs.

This takes time, but we should not miss the chance to really develop this sector. Creating a sustainable engine made up of well-equipped and well-run businesses that do not rely on state contracts all the time is one of the most important steps that has to be pursued diligently.

It is more worthwhile to divert the bulk of the RM5 billion intended for the new tower to more productive sectors. Permodalan Nasional Bhd, the promoter of the project, for example, could identify and select these enterprises, work out a joint management plan or totally buy out and improve enterprises to inject the new capital and technology needed for a move higher up in the value chain. One hundred SMEs developed, modernised and allowed to grow further this way, is better for our economy than building a 100-storey tower.

Rafizi Ramli is the chief executive of the Selangor Economic Advisory Office. This is the first of a three-part series on the economy and progress towards a becoming high-income nation.

This article appeared in The Edge Financial Daily, October 21, 2010

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