This article first appeared in The Edge Malaysia Weekly on January 1, 2018 - January 7, 2018

TO an optometrist, 20/20 vision is perfect eyesight. But to many Malaysians, Vision 2020 could not be blurrier. Are we headed towards developed nation status by 2020 or are we just aiming to become a high-income nation?

In 1991, about six years after the creation of Perusahaan Otomobil Nasional Sdn Bhd (Proton) under the First Industrial Master Plan, the government, led by Tun Dr Mahathir Mohamad, formulated a long-term national development blueprint under which Malaysia aspired to be a developed nation in 30 years’ time. Vision 2020 envisioned a country that was fully developed economically, politically, socially, spiritually, psychologically and culturally.

“We must be fully developed in terms of national unity and social cohesion, in terms of our economy, in terms of social justice, political stability, system of government, quality of life, social and spiritual values, national pride and confidence,” Dr Mahathir said at the time.

Fast forward to 2018, and with just two years to go before 2020, the talk is all about achieving high-income nation status. Whatever happened to developed nation status?

The more pertinent question is, should we still be dreaming of a developed, or even high-income, nation status by 2020? Are there other targets we should strive for to make life better for all Malaysians?

Looking back to when it was formulated, Vision 2020 outlined nine challenges that Malaysia had to overcome before becoming a developed country. These challenges did not just encompass the material aspect or mere economic growth but rather every aspect of life.

This included becoming a truly united and integrated Bangsa Malaysia with a sense of common and shared destiny, living in harmony and in full and fair partnership. We would also be a society with faith and confidence in ourselves, and be respected by the peoples of other nations.

Malaysians would be a mature democratic society, practising a form of mature, consensual and community-oriented democracy. It would be a society of high morals, one that was ethical, liberal, tolerant, scientific, progressive, economically just and prosperous.

These were the principles of Vision 2020 that Malaysia aspired to achieve. It was not merely to be a high-income nation with a gross national income of at least US$12,235 per capita as defined by the World Bank’s gross national income per capita operational guidelines and analytical classifications as at July 2018.

“The idea of becoming a developed nation has largely been dropped,” says Prof Dr Jomo Kwame Sundaram, a prominent economist and the holder of the Tun Hussein Onn chair of International Studies at the Institute of Strategic and International Studies.

Even by its most basic definition — a nation with an industrialised economy — Malaysia’s economic development over the past two decades has not met the requirements to qualify as a global industrial powerhouse.

“Since the start of the century, Malaysia has de-industrialised due to over-reliance on the service sector as well as a dependence on foreign investments while domestic investors are investing abroad,” Jomo tells The Edge.

While some of these outward investments have created a desirable outcome, whereby Malaysian investors and companies have become technology-owners, much of the funds was pumped into real estate in, for example, the UK and Australia.

This has created an illusion of a prosperous Malaysia but which is dropping off the global economic radar because instead of becoming a technology-owner or producer, it is merely a user of the innovative prowess of others.

While propped up by the growth of its service sector, Malaysia has been largely left behind in terms of industrial development compared with China, Taiwan and South Korea. It does not boast high-value industries that are world leaders. A high value-added industry would support the development of a high-value service sector — a prerequisite that Malaysia lacks, says Jomo.

To be sure, the manufacturing sector is still a pillar of the Malaysian economy. In the third quarter of 2018 (3Q2018), manufacturing accounted for 22.8% of the country’s GDP. However, this was lower than 29.1% in 1996 and 31.4% in 2005.

Indeed, the growth of the manufacturing industry has slowed over the last two decades. It grew 18.2% year on year in 1996, and a similar 18.3% in 2000. However, in 2005, growth was only 4.9% while in 3Q2018, it was 7%.

The country failed to achieve its growth target for the manufacturing industry as stipulated by the Second Industrial Master Plan (1996-2005) — the sector only grew an average of 6.2% during the period, far off the target of 9.5% per year.

Under the Third Industrial Master Plan (2006-2020), the manufacturing industry, including the agro-based sector, is expected to grow an average of 5.6% per year. It is also expected to contribute 28.5% to GDP by 2020.

While the manufacturing industry is chugging along at a decent rate, there is hardly any Malaysian industrial group that can be touted as a world leader. Malaysia does not have the equivalent of a Samsung, Foxconn or Huawei.

The lack of a global industrial powerhouse in Malaysia is not due to lack of trying as we did embark on heavy industries back in the 1980s and 1990s with projects such as the national automotive industry and steel and steel product manufacturing.

However, after more than 30 years, these are the industries that require government protection as they cannot compete in an open market. The failure of Proton and Perwaja Steel to make a mark on the international market says it all.

So, what went wrong?

“A key weakness of the Malaysian economy is the low R&D level and inadequate pool of scientists, engineers, researchers and technologists at the cutting edge of innovation and scientific development,” says Prof Dr Yeah Kim Leng, who is a senior fellow of development economics, monetary economics, capital markets and industry studies at the Jeffrey Sachs Center on Sustainable Development at Sunway University. He is also a member of Bank Negara Malaysia’s monetary policy committee.

“While the Fourth Industrial Revolution will reshape the global economy, Malaysia still lacks the deep innovation capacity, research talents and technological capability to be a global leader,” Yeah adds.

Countries that are classified as developed by world organisations such as the International Monetary Fund, the Central Intelligence Agency and the Organisation for Economic Cooperation and Development often spend a substantial amount of money on R&D.

For example, Israel and South Korea typically spend more than 4% of their GDP on R&D while Japan, Finland, Austria, Sweden, Switzerland and Denmark spend more than 3%. Europe’s economic powerhouse, Germany, spends 2.9% of its GDP on R&D.

Developing nations — whether high or middle-income — spend much less. Malaysia, for example, spends only about 1.3% of its GDP annually on R&D while Saudi Arabia spends 0.8%, according to the Unesco Institute for Statistics.

At the same time, says Jomo, there is a lack of concerted effort by the government to promote industries in which Malaysia had a significant head-start compared with other players in the market.

“The palm oil refining industry is one in which Malaysia excels. However, it faces a lot of challenges from the West, which only wants to buy crude palm oil from us. The industry is also facing competition from Indonesia,” he explains.

In this regard, the intensification of R&D in palm oil and its applications should be a priority for the Malaysian government in order to keep the country ahead in the global palm oil industry, he says.

Yeah agrees that Malaysia can develop global leadership in resource-based industries such as palm oil, rubber gloves and halal products. The country can also become a competitive and innovative part of the global supply and production chains, he adds.

Forget about developed nation, is high-income achievable?

It is widely accepted that Malaysia will not become a developed nation by 2020. In fact, right from the start, the Economic Transformation Programme (ETP) has been skewed towards becoming a high-income rather than a fully developed nation.

However, even the target of achieving high-income status by 2020 through the ETP has somehow changed over the years. When it was formulated, the ETP targeted a GNI per capita of US$15,000 by 2020. Now, the aim seems to be to achieve high-income status as set out by the World Bank, which changes every year.

When the ETP was launched in 2010, the World Bank’s classification of high-income status was a GNI per capita of more than US$12,275 per year. In 2014, this was set at more than US$12,745 per year and as at July last year, the level had dropped to US$12,235 per year.

Indeed, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie says Malaysia would find it very difficult to achieve the original GNI per capita target of US$15,000 by 2020. “Last year’s estimated GNI per capita of US$10,075 puts the US$15,000 target well out of our reach. This is based on the projected GDP growth of between 5% and 5.5% from this year to 2020 and a ringgit to US dollar exchange rate assumption of 3.80 to 3.90.”

The GNI per capita target has become so obscure that economists and analysts alike find it futile to discuss whether Malaysia will achieve high-income nation status by 2020. To them, what is more important is to keep growth at a sustainable rate and reduce the income gap in the country.

Yeah opines that the longer-term challenge is to grow faster so that Malaysia can catch up with other high-income nations while keeping ahead of new graduates, and intensifying the effort to further reduce poverty and income inequality in the country.

“There has been notable progress in poverty reduction and the narrowing of income inequality between the ethnic groups since the launch of Vision 2020, but the pace has stagnated in recent years.

“The persistence of income inequality, especially in each ethnic group and in Sabah and Sarawak, suggests the trickle-down effects have not percolated to the low-income group, which remains relatively large,” he says.

To sum it up, the well-being of a nation cannot be captured by GDP alone. Other metrics such as healthcare, education, freedom and environmentally sustainable development should be taken into account as well in developing a country, says SERC’s Lee.

“Besides the provision of adequate and better basic needs, there should be continued investment in human capital and the quality of education to raise labour productivity and income, support higher sustainable growth and foster a more inclusive society,” he says.

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