A number of reasons might justify this smugness. First, it is claimed that Malaysia has delinked its exports from Europe’s financial centres. Second, Malaysia’s Economic Transformation Program is being bandied as the knight on the white horse that will save the economy. Third, the Malaysian economy is supposed to be sufficiently internally driven, able to withstand any external pressures emanating from the downgrade and its aftermath.
The reality is different. Malaysia is a small, open economy that is heavily export driven and reliant to a large extent on global demand emanating directly or indirectly from the US and Europe. When one considers that the Eurozone is in shambles that should add to a measure of worry.
Much of Malaysia’s hopes rest on economic growth in the developed world. It would be silly to deny China’s economic power; but it would be sillier to expect China to carry the burden of the global economy on her shoulders. China does not only produce for its domestic market. A lot of the production that takes place is China is driven by demand from the developed world.
And China has problems of her own, the most pertinent being rising inflation pushing up interest rates. With the rise of interest rates in China, production levels in China will ease; and with that so will demand for Malaysian exports.
One hopes the Economic Transformation Program will work. But with the lid being taken off, due to the global stage going soft, such expectations should be tempered with caution.
This, then, is the time for rebalancing strategies. I argued at an Asian Development Bank Institute conference soon after the 2008 crisis that Malaysia should consider implementing its own version of rebalancing. The darkening clouds over the horizon seem to indicate that it is worth reconsidering the usefulness of seeking different strategies than Malaysia is accustomed to.
Perhaps the single most important strategy to pursue is to encourage the growth of small and medium enterprises (SMEs). Korea and Taiwan offer valuable lessons on how the SME sector can contribute to economic development.
Malaysia’s efforts at encouraging domestic investment, especially in the manufacturing sector, have been half-hearted. The national car industry might have been a route that could have provided the required impetus for the SME sector. But the selection and continued protection of the automobile industry was, to start with, based on mistaken assumptions.
And there are innumerable areas begging for investment. Local transportation facilities are deeply inadequate; any office worker who uses public transport will testify to that. The roads in all the major cities, particularly in Kuala Lumpur and Penang, are perpetually congested.
Affordable housing is a burning issue that has almost turned into a festering wound in recent years. The rapidly increasing prices of residential property, the inflow of overseas residents and speculative investment have sharpened the problem.
There are many other issues that should grab the government’s attention. Developing an environmentally-friendly country, proper waste management and social safety nets are some of the questions that have been ignored for too long. Urban poverty and the squatter problem also demand attention.
It is true that some of these concerns are covered by the National Key Economic Areas (NKEAs). But the NKEAs are like paintings being hung on an old, jaded wall. The model of a Malaysia that will be driven by foreign direct investments (FDIs) and the export-oriented manufacturing sector has to be questioned.
This is not to suggest that Malaysia do away with trade and FDIs. It would be wrong to suggest that. But a look at the declining FDI inflows will easily convince even skeptics that there are other things that need to be done even as Malaysia tries to make itself more attractive as an FDI hub.
Present problems in the global and US economies may have a limited impact on the Malaysian economy, for the time being. But the signs are clear: there is a threat lurching in the shadows. The storyline has changed and rebalancing strategies should not be waved away dismissively.
Dr Shankaran Nambiar is an economist who has consulted for national and international agencies. A version of this article appeared in The Edge Financial Daily.