Thursday 07 Dec 2023
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This article first appeared in Forum, The Edge Malaysia Weekly on December 28, 2020 - January 3, 2021

There was much excitement in Malaysia when Vision 2020 was unveiled some 30 years ago. Vision 2020 was heralded as the game changer that would hugely transform the Malaysian economy. There was much hope — not to mention the hype — that Malaysia could finally take off on a long ambitious journey towards the coveted developed-country status.

It even seemed easily doable in the early 1990s when the Malaysian economy was flying high at near-double-digit GDP growth rates. Calculations showed that it would take annual GDP growth of only 7%, on average, for the country to reach the high-income goal. The benchmark for a high-income economy was then set at US$10,000 per capita by the World Bank. The assumption then was that this was within striking distance, as Malaysia’s potential growth rate was high enough to reach this target.

However, subsequent regional and global happenings revealed how wrong our visionaries were in their assumptions. The China factor was not adequately factored in. When China woke up from its slumber and entered the global arena with an open economy, it became a completely new ball game. The old equations were no longer tenable or relevant. China became a gigantic black hole that could suck in foreign investments, diverting foreign direct investment (FDI) flows away from Southeast Asian countries.

With FDI drying up, huge balance of payments deficits were financed largely by portfolio investments that were footloose. This was indeed the case not only in Malaysia but also its neighbours, especially Thailand and Indonesia. Thailand was the first to tumble in July 1997 with massive capital outflows, triggering the Asian financial crisis (AFC), which spread like wildfire across the region. AFC took a huge toll on the regional economies and their domestic currencies, and the rest is history.

The impact of AFC on Malaysia was mercifully less severe than it was on Thailand and Indonesia, thanks mainly to its relatively smaller external debt and less uncomfortable international reserves, so much so that it could handle the situation on its own without external help from the International Monetary Fund (IMF).

Nonetheless, the ringgit took a severe beating, its value melting down from RM2.50 per US dollar to RM4.88, exhibiting much volatility, before it was pegged at RM3.80 in September 1998. The sharp ringgit depreciation made the Vision 2020 per capita income threshold of US$10,000 much harder to reach.

Worse, post-crisis, the economy was also underperforming with sedated GDP growth, hovering way below the perceived potential growth rate. Meanwhile, the World Bank had raised the bar to be a high-income country to US$15,000 per capita income, making it even more difficult for Malaysia to climb up the ladder to the new benchmark. Then came the global financial crisis (GFC) in 2008, emanating from the US subprime debacle, inflicting yet another dent on the Malaysian economy, though it thankfully paled in comparison with the AFC.

Thus, it is really not difficult to blame the rest of the world for the failure of Vision 2020. While there is no denying that the external environment has not been conducive for Malaysia’s aspirations, the fact remains that there is much more to it than meets the eye. No doubt, Vision 2020 in itself was a laudable idea. For any idea to fly, however, one needs to put in place policies and strategies that will propel it to greater heights.

Hindsight tells us that there was a disconnect between the vision and the strategy. Vision 2020 was akin to a marathon, which the overzealous authorities had turned into a sprint, forcing the economy to grow too fast for its own good at a double-digit pace, trying to reach the finish line even sooner. Little did they realise that such “over-drive” growth would only cause the economy to overheat.

The economy was able to grow so fast in the late 1980s and early 1990s, not because of productivity or innovation, but thanks only to more and more imported capital and imported labour. This input-driven growth strategy was flawed, as there were limits to such expansion. In the first half of the 1990s, in the run-up to the AFC, total factor productivity growth was persistently negative. The economy was also rapidly losing its competitiveness as the ringgit remained overvalued, with no corrections being made in the face of rising inflation. This was clearly a recipe for disaster. The writing on the wall was conveniently ignored.

Contrary to the impression created by the pro-government media, the AFC was not handled tactfully, with the notable exception of the creation of a special-purpose vehicle that took over the bad loans and other toxic assets of financial institutions. Arguably, the other key measures, including capital controls and currency controls, turned out to be either “too much” or “too late”, for they have apparently done more harm than good.

For instance, capital controls were imposed 15 months after the crisis broke out, which was tantamount to closing the gates after the horses had fled. Likewise, it took 15 months for the government to initiate the currency peg, which arguably was unnecessary, as all other regional currencies had already begun to stabilise by then. Malaysia, well-known for its policy consistency and predictability among international investors, had suddenly become somewhat unreliable. Reputation that took decades to build was meaninglessly tarnished. The country has not fully regained the international investor confidence till now.

Sadly, it also appears that Malaysia had failed to learn lessons from the AFC, quite unlike other crisis-hit countries. It is praiseworthy that, post-crisis, South Korea, Thailand and Indonesia were able to undertake serious institutional reforms, albeit under IMF pressure. Malaysia is conspicuously an outlier insofar as reforms are concerned.

The political will for reforms is totally absent. It is not an exaggeration to say that the word “reform” has become a taboo. The political mantra still is “transform, not reform, the economy”, never mind even if it rings hollow or sounds like an oxymoron. It is inexplicable how there could be any transformation in the absence of reforms in the first place.

The key problem with Malaysian policymakers is their sordid obsession with the New Economic Policy (NEP), which was initiated in the early 1970s in the aftermath of the infamous May 1969 racial riots. The NEP mindset is still deep-rooted even after five decades of unsuccessful experimentation. The general perception is that the NEP has been hijacked by cronyism and nepotism at the top, and marred by rent-seeking activities by people with strong political connections, thereby impairing its ability to improve the lives of the people at the bottom.

Fifty years on, the fact remains that affirmative action a à la the NEP has yet to eliminate poverty, notably among the Malays, with Malay households still accounting for roughly 80% of the bottom 40% (B40), earning RM2,000 or less.

NEP has become a convenient political tool for the ruling regimes to stay in power, creating a dependency syndrome, banking on the “fixed deposits” of rural voters, who would remain loyal to the government for the handouts. Consequently, NEP has been reincarnating or mutating itself beyond the original 1990 deadline, in the guise of NDP (National Development Policy), NVP (National Vision Policy), NEM (New Economic Model) and, more recently, SPV (Shared Prosperity Vision) 2030.

NEP stays as the cornerstone of all such plans, like a spanner in the works. This is not to deny, however, the importance of affirmative action plans, but to assert the need for “pro-poor” affirmative actions across racial boundaries.

Vision 2020 and SPV 2030 — which are meant to empower Malaysia so that it can join the league of developed countries — will be able to take off only if these are unshackled from the NEP constraints. To be sure, there is much more to developed-country status than being just a high-income economy.

Equally important are other salient attributes, which include world-class institutions, equitable income distribution, good governance, transparency, accountability, integrity, zero tolerance for corruption, strong commitments to human rights, clean environment and freedom of the press, as well as equal opportunities for all without discrimination. It is impossible to transform Malaysia into a full-fledged developed nation, so long as there is no political appetite for serious reforms that can pave the way for these attributes to manifest themselves.

Malaysia, once seen as an East Asian “tiger economy” and a high flyer, is now lagging behind the rest of the flying geese. In the 1960s, Malaysia was economically ahead of South Korea. In the early 1970s, South Korea was on a par with Malaysia after some catching-up, thereafter overtaking Malaysia and successfully winning the race with membership in the OECD (Organisation for Economic Co-operation and Development), the club of developed nations.

Malaysia, once a favoured destination for FDI, is now lagging behind Indonesia, Thailand, the Philippines and Vietnam in terms of FDI inflows. The Philippines, which was once described as the “sick man” of Southeast Asia, is now outperforming Malaysia. Vietnam, which was way behind Malaysia in the 1980s, is now steaming ahead on a growth trajectory that would enable it to overtake Malaysia sooner than one can imagine.

The prognosis for the Malaysian economy, to say the least, is not very encouraging, given the present parameters. In recent times, the country has been sliding down in terms of ranking on some key international indices. With the rest of the world forging ahead, Malaysia risks being overtaken by others.

Malaysia’s potential growth rate — estimated at 7.5% in the early 1990s — has shrunk to 5.5% now. Thus, there is an urgent need for the politicians to focus on reinventing the economy with serious reforms, instead of quarrelling among themselves on trivial matters in the name of politicking.

No one in the corridors of power seems to have the gumption to bell the cat and boldly declare that the NEP — which stands in the way of necessary institutional reforms ranging from education to judiciary — has outlived its usefulness. As Albert Einstein had astutely remarked, it is madness to repeat the same thing again and again while expecting a different result.

Malaysia is a multi-racial country with a colourful diversity, which represents its unique strength and competitive advantage. It is a pity that this source of strength remains grossly underutilised, if not unharnessed. It is unsurprising that “Bangsa Malaysia”, mentioned as one of the goals of Vision 2020, still remains a pipe dream 30 years on, amid ethno-populist or ethno-centric political manoeuvrings.

Datuk Dr Mohamed Ariff is emeritus professor at the International Centre for Education in Islamic Finance

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