Although the recovery is well underway, it is unlikely that business will be as usual with the United States limping towards regaining its pre-crisis economic glory. Events in Europe do not contribute a great deal of confidence either. Both the United States and Europe are important contributors to the demand for Malaysia’s exports. This poses a tremendous challenge to Malaysia: if export-driven growth is not the answer, then what is?
Malaysia has a population of about 27 million, which is insufficient to develop a deep domestic market. The argument, then, is that Malaysia still needs to pursue its export-dependent strategy to drive growth. Perhaps there is some truth to that; one cannot expect Malaysia to depend entirely on its own markets to create sufficient demand to sustain its own industries.
Yet, there is much that can be done to develop domestically generated demand. Aggregate savings are very high in Malaysia, which is typical of economies where uncertainties are high. Households have to save to fund unexpected health eventualities and the cost of tertiary education. Health care has been increasingly privatised and that is also the case for tertiary education. Little has been done to provide for a well-planned system of public transport, perhaps a consequence of the effort to develop a national automobile industry. Buying and maintaining a car can eat into a household’s budget.
The NEM grapples with some of these issues. It acknowledges that advances in the eradication of absolute poverty have been effective. However, improvements in the Gini coefficient have been lukewarm, indicating unsatisfactory decreases in income inequality. The NEM admits that 40 per cent of households, particularly those in rural areas, have very low income levels. In addition income growth seems to have benefited only the top 20 per cent of income earners.
Affirmative action policies, which cut across ethnic groups, are crucial for a more inclusive and equitable economy. Class-based policies that target needs rather than ethnicity will help generate a middle class with greater purchasing power. This will increase domestically generated demand.
In the last 25 years the government has been heavily involved in business, with some remarkably embarrassing failures. The NEM should refocus the government on traditional concerns such as health and education. It is necessary to reduce uncertainties for households arising from these areas; appropriate public investment in these areas will free up household savings for consumption.
Environmental concerns are another area that demand urgent attention. Creating a green economy will generate business opportunities for the country. By emphasising renewable energy, environmental standards and green technology, the economy will attract foreign direct investments; multinational corporations will identify Malaysia as a market for their goods. The government must also attend to less glamorous activities: the level of carbon emissions in the cities must be controlled; public transport sorely needs to be improved; and the quality of drinking water that the average citizen consumes must be raised.
The NEM, if handled with due consideration, has the potential to act as a rebalancing strategy. It can reduce household risks, free household income for consumption, and provide for a better quality of life, all without reducing growth. The rebalancing aspect of the NEM has not enjoyed the limelight it deserves; this position has been claimed by the search for high income status. Both aspects are not mutually exclusive and it is time policy makers recognise the importance of rebalancing growth.
Shankaran Nambiar is Senior Research Fellow and Head, Policy Studies Division at the Malaysian Institute of Economic Research. The views expressed in this article are his own and not those of MIER.
It seems that rebalancing has been very fashionable and now become a buzz word.
Despite that, I would like to go against the fashionable trend and focus on the other point the author of the post did not discuss much.
I note that Shankaran Nambiar stated that “Malaysia’s New Economic Model (NEM) serves to address two crucial issues that confront the nation. First, Malaysia for some time now has had its feet caught in the ‘middle income’ trap. It is now keen to graduate to a high income status, joining the likes of Singapore, Taiwan and Korea.”
Shankaran Nambiar seems to argue that high aggregate savings in Malaysia in the past or at present are abnormal and are only normal in economies where uncertainties are high. High savings, of course, are seen by some as sins that caused global imbalances that need to be rebalanced.
Shankaran Nambiar somewhat appeared to be caught in a difficulty that the GFC seems to imply the death of export driven growth model and yet Malaysia is too small in terms of population to become a sufficient market for it to grow.
I somehow seem also being caught by Shankaran Nambiar’s difficulty, but for different reasons.
I was wondering if Malaysia’s NEM has duel aims to both catch up with Korean, Hong Kong and Singapore and rebalance, then whether the paths of the latter’s growth where high savings and export driven growth may have played an important role have any relevance to the NEM.
It seems to me that Malaysia needs to be much more creative to create a new growth model that is supposed to be better than the models of the other three.
That is my difficulty with Shankaran Nambiar’s ambitions duel aims that implies a high degree of uncertainties, perhaps even much higher than that implied by the high savings.
Exceptional blog and certainly can assist with comprehending the topic better.