Wednesday 17 Apr 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on March 18, 2024 - March 24, 2024

Following the latest positive note that the country’s economy showed resilience in the fourth quarter of 2023, it is now a crucial time for Malaysia to take a multi-pronged and systemic approach to transit the country into a decade of greener and sustainable economic growth. In a series of short articles, we will articulate the importance of breaking out of a deep-rooted mentality in relation to subsidies and handouts, and propose policy interventions relevant to households and industries that will help us achieve a second take-off that our country desperately seeks.

The current administration’s intention to roll out a fuel subsidy programme has been brewing since late-2023. The phasing out of fuel subsidies is a welcome move in Malaysia. As more advanced economies transition to a low carbon growth model, Malaysia is right to look at ways to capitalise on this shift away from fossil fuels. The phasing out of fuel subsidies should be seen as a natural consequence of the necessary transition to better, cleaner technologies. But the fuel subsidy is just one part of the story; it should not form the main narrative of Malaysia’s economic policy. The path towards a more just, sustainable, green and trusting society will be laden with inconvenient and sometimes painful adjustments. Such shifts in behaviour are typically successful when delivered through a systems approach.

As any life coach or change management guru can attest to, changes in behaviour that require efforts and sacrifices need to be reframed into a more palatable offering, broken down into smaller, more easily digestible steps. They also require the right enabling conditions for change to be sustained. All the moving parts of policies and efforts towards realising the objectives of the government’s Madani development policy are not just intertwined but are also mutually dependent, that is, they are part of the socio-political-economic system. As an example, the corresponding increases in inflation from the removal of fuel subsidies will have wider ramifications throughout the economy — from companies operating in price-competitive industries, as well as every other industry and consumer decision that involves transport and commutes. However other (hypothetical) efforts such as: (1) a marked improvement in public transport; or (2) provision of subsidised childcare that unlocks the full potential of a second income for many households; or (3) a concerted effort to transition away from a low-cost manufacturing model, together can go a long way not only towards mitigating higher costs, but also set the economy on a more productive and inclusive trajectory.

Hence, just changing one part of the system may not be enough, or even effective, without a holistic approach and consideration of the enabling environment. This requires ministries working together to solve issues, rather than in silos. It calls for shared accountability and responsibility over public and private, state and federal jurisdictions. Participatory planning underpinned by a collective effort towards achieving shared goals and coordination across the many spheres spanning the physical, economic, social and environmental dimensions is paramount. While it is common sense, in practice it is certainly easier said than done. It has to be facilitated through thoughtful crafting of the planning and implementation processes, informed by behavioural insights to mitigate cognitive errors in policy-making and implementation.

The importance of the phasing out of fuel subsidies should not be underestimated. Countries worldwide are trying to repair their balance sheets after the difficult period of Covid-19. Furthermore, in light of the precarity of the global situation — weak global economic conditions coupled with geopolitical unrest and uncertainty — having sound public finances is important for resiliency. Add to this the impending gargantuan costs of climate adaptation should the world not transition quickly to a low carbon economy (increasingly the more likely scenario), and one can appreciate why the move away from fossil fuels is really a necessary step in our economic evolution. It follows therefore that the removal of its subsidies is one of the most economically sensible ways of bolstering the public purse.

However, it cannot be stressed enough that removal of fuel subsidies is, in itself, highly contractionary to the economy. It would not be prudent to time such a move in tandem with other austerity measures, for example the goods and services tax (GST) or sales and service tax (SST), especially without corresponding efforts to boost economic growth and incomes. However, incremental measures on all fronts is an attractive alternative and it would be useful to study in tandem how the economic system reacts and as well as its potential future responses. Malaysia’s delicate multiparty and racial balancing act needs little fodder to spark divisive sentiments to destabilise the political environment. The forefront of Madani should consist of visionary yet “grounded on reality” plans to drive our economic growth. Growing its gross domestic product (GDP) is also one of the best opportunities that Malaysia has to strengthen its finances. There are at least two reasons why this is so.

One is the golden opportunity that is currently surfacing from the geopolitical tensions playing out between the US and China. With companies producing for US and its allies needing to find alternatives to production in China, Malaysia is well-placed to take advantage of this. But the advantages that have so far placed Malaysia above its neighbours in certain parts of the global supply chain are narrowing fast. Staying ahead of the game requires a whole-of-government approach and the coordination of many sectors of the economy, running the gamut from education and urban planning to industrial policy and international diplomacy. We have done it before in the 1980s with industrial policy. It seems now to be back in fashion again and we should not let this opportunity slip.

Second, Malaysia still has pockets of untapped potential, where the right planning and investments have the potential to yield higher multiplier effects. It has been shown that lower-income households will tend to consume more out of every dollar earned, compared with higher-income households. Our investment development corridors, which are aligned geographically on the northern, eastern and southern regions of Peninsular Malaysia as well as in Sabah and Sarawak have got this right. These areas are relatively underdeveloped and have a higher concentration of poverty. Focusing on these areas for investments and economic growth will aid in achieving more balanced regional growth. Sustained increases in incomes of the poorest households will give a much larger consumption boost to the economy and build better economic resilience through a bigger middle class. Improvements in infrastructure and human capital development, especially in areas such as Borneo, Perlis and Kelantan, can really move the needle of growth. Here, Malaysia should also learn from lessons of the past and develop in a more sustainable manner, utilising latest technologies and best practices to move up the value chain and ensure gains are more evenly distributed. It also goes without saying that governance on all fronts from procurement, right up to delivery and management needs to be strengthened in order to bring about meaningful lasting changes and build social and political capital.

In short, the path to achieving Malaysia Madani requires a systems approach to look at not only restoring the health of our budget but also to grow our GDP in a manner that is inclusive and cohesive. Difficult policies should be framed as part of the process of achieving concrete objectives and can be undertaken as a series of incremental nudges. The narrative should be one of Madani or the flourishing of society, and that it requires a reorganisation of the economy that will inevitably include austerity in certain areas, creative destruction in others — as a means to an end, not the end in itself. As difficult as the environment is that we find ourselves in today, this too shall pass. How and where we emerge from this depends on how we approach and play the cards and opportunities that we are dealt with today.

Lim Li Lian is deputy director of Research for Social Advancement (Refsa), a progressive think-tank promoting social advancement in Malaysia

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