Chapter 6 How Do We Get There

8/6/2019 Chapter 6 How Do We Get There

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How do we getthere?


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How do we get

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Malaysia needs urgent transformation. TheMalaysian economy needs to advanceand transform into one that is capable

of delivering high income, of inclusivelysharing the benefits from improved economicperformance, and that is sustainable acrossmultiple dimensions of environment, societyand economic stability.

Malaysias economy must transform sothat it becomes fundamentally capable of achieving these goals and maintaining its

position against other economies through itscapabilities and strengths. We can no longer rely on our wealth from natural resources tomask our economys weaknesses and our inability to generate sustained economicgrowth.

Figure 29 The New Economic Model: Enablers and Strategic Reform Initiatives


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T h e N E M w i l l p o w e r t h i s p r o f o u n dtransformation. Malaysia is in a vicious

circle of underperformance. Breaking thatcircle calls for a big push, not incrementalchange.

For the NEM to succeed, political leadershipmust unite to break the logjam of vestedinterests; it must overcome the scepticismand convince the rakyat that Malaysia isindeed embarking on a path that will improvetheir lives and those of generations to come(Figure 29).

The heart of the NEACs work will centreon the design and implementation of policymeasures and requirements to deliver theobjectives of the NEM. International as wellas Malaysias own experience demonstratethat while it is relatively straightforward toidentify Strategic Reform Initiatives and

develop their associated objectives, suchambitious programmes usually fail becausetheir implementation efforts cannot besustained.

Three factors may explain such failures. Thefirst is insufficient buy-in by stakeholdersaffected by the required reform measuresbecause they were not engaged at thepolicy formation stage. Secondly, reformprogrammes have often met with strongresistance from powerful and vested interests,which subsequently forced their derailment.Lastly, the implementing authorities failedto stay the course, either due to a lackof political will or inherent administrativeweaknesses.

More importantly, experience has shown thatpartial implementation of reform programmes

usually leaves a country in a more vulnerableand unstable situation than if the programmewere not implemented at all. Given whereMalaysia finds itself at this juncture, failureto act or to fully implement the neededreforms is not an option.

For this reason, the NEAC has dwelt longand hard on the processes that would beneeded to make the NEM an effectivemechanism for turning Malaysia into anadvanced nation. The NEM defines theeight SRIs to be undertaken by the ETP.Implementing these initiatives, coupled withclose monitoring and feedback to reviewand adjust policy actions, will deliver thedesired objectives.

6.1 Core enablers for the NEM

The most important enablers of the NEM are political will and leadership needed to break the log-jam of resistance and preparing therakyat to support deep seated changes inpolicy directions. With these enablers in place,a big push in policy actions and initiativesis needed to kick start the transformationprocess. The push must create enoughmomentum to overcome resistance. Oncereforms are started, continuous feedbackis necessary to fine-tune policies and stayon course.


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6.1.1 Unwavering leadership and political will

Political will and leadership requires that therebe an emphasis on a coherent explanationof the vision and agenda of the NEM andtransformation process. This requires the pathof the NEM to be laid out in detail, includingindications of where actions may negativelyaffect different segments of society. The aimis to create an unstoppable wave of supportfrom all segments of society for this vision.But to start this process, the government isaware that it must make extremely toughdecisions in order to meaningfully put inplace a critical mass of bold measures. Thepolitical leadership must be clear about thetrade-offs involved in making some of thesetough decisions, for example:

n Restoring market prices for goods andservices will improve economic efficiency

but may initially raise consumer pricesand costs of doing business

n Practices that promote fair and equalopportunity will inspire market confidenceand create a competitive economy butmay lead to political repercussions

n Reduced dependence on foreign labour encourages firms to move up the valuechain or embrace automation while thosethat cannot will exit, costing some local

jobs

n Flexible hiring and firing reduces entryand exit costs for businesses while wagelevels will better reflect skills; but theperception of less job security will irkunions

n Faster connectivity will facilitate further integration into global markets but requires

greater openness in the telecommunicationmarket

n Greater decentralisation in decision makingwill achieve speedier implementation andeffectiveness but may result in dilutingfederal government power

The government must take prompt actionand stay the course. Resistance is likely tocome from the business community includingprotected industries, employers of foreignlabour, licence holders, beneficiaries of subsidies, and experts at doing businessthe old way. Some segments of the rakyat who no longer qualify for governmentsubsidies and grants might react strongly,and those that have enjoyed secure jobs anda stable lifestyle from protected firms may

feel threatened. Both these groups mightthen turn to their political representativesand politicians may then attempt to lobbyand water down the needed measures. Theresistance from these vested interest groupsmust be dealt with fairly and transparently,following genuine consultation.

Each individual player will be tempted to lookat the NEM from the perspective of winnersor losers. For this reason it is important toclearly communicate the vision of the NEM tobring everyone on board. Through effectivecampaigns and consultations, individualsand firms must be made to appreciate thebenefits that would accrue to them over thecoming period and not just focus on the


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possible negative effects on their immediatewell-being. In this regard, it is important to

explain that the NEM will put in a stronger and more comprehensive social safety netto mitigate the negative effects.

The NEAC assigns a large measure of importance to the governments proper management of the political situation. Peaceand harmony must be preserved in Malaysiain the midst of the likely disruptions fromthe NEM. This might involve not only closeconsultations within the political partners of the government but also conscious efforts toforge bipartisan interaction. Special effortsmust be devoted to explaining the impact of the NEM to the international audience. Thiswill help to portray Malaysia in a favourablelight abroad and generate a positive perceptionof the country among potential investors.

Above all, the government must put inplace a strong team made up of technicalexperts and other professionals who will beempowered to monitor the implementationof the ETP, interact in close consultationswith the rakyat , and manage the fallout fromresistance of vested interests.

6.1.2 Getting the rakyat to drive changetogether

Garnering the support of stakeholders andordinary Malaysians for the NEM is a politicalprocess, one best understood by the politicalleadership. However, the NEAC envisionsa number of critical steps in this nationalengagement to prepare for and to implement

the ETP. The NEAC will be fully involvedin drawing up an execution framework in

collaboration with the respective implementingauthorities.

Political and intellectual leadership mustdemonstrate the necessary commitment tothe NEM. Public communication must becompelling and convincing on why changeis urgently needed. At the same time, theNEM must have both rational and emotionalresonance with the rakyat , and must clearlyarticulate their roles in the transformationprocess.

But even as public communication proceeds,the same team tasked with monitoring theimplementation of the ETP must put inplace a rigorous technical process to gather information for reporting on the progress of the ETP to all stakeholders.

We envision a constant process of feedbackand adaptation to changes in the Malaysianeconomy. We anticipate responses fromthe population. At the same time, it will beimportant to remain steadfast on the goalof transforming Malaysia into an advancednation.

Engagement with all stakeholders is importantfor two reasons: first, to foster buy-in throughclear communication; and second, to seerefinement and improvement in policy actions.At the same time, the political and intellectualleadership must continue to be at the forefrontof this transformation process.


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6.1.3 A big push of synchronised policy measures and initiatives

With the leadership and rakyat on board, abig push of new policies must be announced.This big push would consist of a criticalmass of policy measures supporting theSRIs. Due to the cross-cutting nature of theStrategic Reform Initiatives, the sequencingof policy actions is crucial for achievingimpact and results. Some policy actionscould be immediately implemented. Othersmay be introduced at a later date becausethey require a longer preparation period.However, this preparation must commenceimmediately.

Piecemeal and incoherent introduction of policywould be inconsistent with the cross-cuttingnature of the SRIs. The policy measuressupporting these SRIs must move in tandem

to deliver high income in an inclusive andsustainable manner.

A big push event will leave a lasting impressionand foster buy-in. Without a big push, thetask of monitoring and the benefits of afeedback mechanism run the risks of beingcompromised. This may eventually lead toimplementation fatigue and, ultimately, derailthe NEM.

6.1.4 Measuring our performance and adjusting as we go

Most reform efforts have strategies andimplementation plans but often lack arigorous feedback mechanism to assess

implementation effectiveness and allowfor adjustment measures. Often, while a

policy or strategy is being implemented, thecircumstances for achieving the objectivesmay have changed and rendered earlier policy actions less viable. Without a formalfeedback mechanism, policy adjustmentsmay become ad hoc and uncoordinated,resulting in diffused implementation withlittle accountability and limited channelswith which to address public complaints.The result is reform failure, which in turnaffects credibility and gives rise to questionsabout accountability of the implementinginstitution.

Given an ever-changing environment andthe growing bottom-up trend in governance,the ETP must have a rigorous feedbackmechanism to monitor its progress, itsacceptability by the public as well as the

need for adjustment and fine-tuning. Thisview implies that while the goals of a highincome, inclusive and sustainable nationremain unchanged, the means and tools for achieving these goals need to be alignedwith practical realities and changing times.

6.2 Managing adjustments Aligning oldexpectations to the new reality

The NEM paves the way for more opportunitiesfor advancement across the spectrumof society, especially the private sector.Nevertheless, the path forward also requiresmajor adjustments producing both winnersand losers. Losers will be those firms whoseviability depended on subsidised commodities,


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notably energy and those with privilegedaccess to controlled imports or contracts.

These firms and individuals will have tocope with the new market realities. Manycompanies will either have to restructureor be phased out. Workers in these firmsmay need to find other positions and in theprocess retool their skills to become moreemployable. Moreover rapid growth is oftenspatially unbalanced with some regionsbenefiting more than others increasingpressures for social services to rectify

differing regional needs.

Globalisation also has increased the stakesfor each country to have efficient labour markets. Rapid technological progress, tradein goods, mobility of labour, and internationalsourcing of services have combined to createnew openings for economic players and amore integrated global market for labour.The impact is tempered by differences in

skills, technology, and know-how availableto workers. Although globalisation widensthe breadth of export markets and improvesaccess to a wider range of cheaper importedproducts (thereby boosting productivity andaverage living standards), it can also imposeadjustment costs on certain groups withincountries, primarily by influencing wagesand job security, and triggering the needfor retraining.

To cushion these adjustment costs, somephasing of the reforms may be advisable, butexperience has shown that reforms which arecarried out too slowly are often ineffective or even reversed. Thus it is far better to havein place social protection systems which cancushion adjustment costs but in ways which

do not impede requisite reforms. Moreover,by allowing firms and households to seek

higher but often riskier economic returnsand reducing the need for precautionarysavings, such programmes help spur a moredynamic economy. The general objective isto build a more competitive but also morecompassionate society. With a well structuredsocial safety net, economic reforms becomepolitically more acceptable, thus improvingthe chances of effecting real change.

Building a stronger safety net is urgent

Malaysias social protection system, asin many Asian countries, is still evolving.While it is relatively well-developed, thereare major gaps and inefficiencies. Poverty isless widespread but there remain selective,vulnerable groups and pockets of intractablepoverty. Inequality remains a pressing issue.Despite substantial subsidies available to

the population, the disadvantaged are stillnot getting access. Safeguards are neededto protect individuals from catastrophicoutcomes and to soften income shocks for the most vulnerable. Some have suggestedthat a formal minimum wage might be helpfulto cushion workers against such shocks or downturns. The NEAC strongly believesthis would be a wrong approach and in factcould exacerbate the situation by reducingcompetitiveness and reducing employmentopportunities.

Existing weaknesses in the social safety netneed to be addressed. An evaluation of thecurrent social safety net raises a number of these issues:


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n The portion of social spending targetingpoor households is quite limited;

n Targeting criteria should be refined toachieve more equitable and consistentoutcomes; and

n The structure of systems and programmesdiffers across agencies and needs to bemade more consistent.

More generally to overcome obstacles tosubsidy reform, social assistance programmes

will have to be more efficiently structured. Animportant step in the governments reformeffort should be to catalog all existing socialassistance programmes to identify their policy objectives, eligibility criteria, benefitstructure, administrative costs, and targetbeneficiaries. To improve targeting, proxymeasures of a households consumptionper capita could be constructed to createbetter means-test benefits. Other measures

could be implemented to avoid the currentvertical inequity in the system by graduallyphasing out eligibility and reducing horizontalinequity by restructuring certain benefits tomake them less lumpy.

Making labour markets more efficient is part of the solution

Pressures on the social safety net are reduced

if the labour market functions well:

n In an efficient labour market, workersare likely to find jobs quickly that matchtheir skills. At the same time, upwardmovements in wages must not outstriplabour productivity, otherwise no firmcould survive.

n Labour markets also need to minimisethe costs of job loss and associated

risks. The international experience is thateffective unemployment insurance canprovide a short-term solution and usuallydoes a better job than strict reliance onseverance payments.

Training programmes can help but need to belinked to market demand. During adjustmentperiods, revamped training programmes areoften helpful in enhancing employability in

a shifting labour market.

Is a special transformation fund needed?

Financing costs for augmented social safetynets and related needs will be significantin the coming years, especially for newinitiatives, such as unemployment insuranceor revamped welfare programmes. Someoptions can be designed with built-in partial

or full cost recovery mechanisms suchas with firm or employee contributions for insurance or training. But these fundingmechanisms will not be enough.

A special transformation fund may be neededto cover the additional but often temporarycosts involved. Malaysias fiscal situation willbe tight in the coming years as the stimulusprogramme is phased out and budgetarydeficits are scaled back to more sustainablelevels. Within a tighter fiscal envelope, atransformation fund, designed like a specialholding account to support the cushioningof adjustment costs, would provide tangiblerecognition of the governments intent tofoster more inclusive outcomes. This holding


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account or fund would initially be the recipientof the potentially large savings which would

arise from cutting back wasteful subsidies,such as those for energy and food products,and rationalising other public expenditureprogrammes.

6.3 A close look at the Strategic ReformInitiatives

The NEAC believes that it is critical toseek stakeholder buy-in of the detailed

implementation plans for each of the StrategicReform Initiatives (SRIs). At this time, theNEAC only sets forth the broad parametersunder each SRI, which over the coming periodwill be further refined following consultationsand engagement with all stakeholders.

We have identified eight SRIs at the coreof the ETP. The NEAC fully recognisesthat many of the policy measures derived

from the SRIs are either being planned or have been initiated by the government. TheNEAC recommendations aim to add value byaugmenting and supplementing ongoing policywork. These initiatives are as follows:

1. Firing up the private sector . The privatesector needs to step up and assumea heightened profile in the nationstransformation. Throughout recordedhistory, economies have experiencedself-sustained, long-term growth primarilythrough the entrepreneurial initiatives of the private sector, guided by economicincentives which encourage individualsto take the long view and refrain fromshort-term opportunism.

2. Inspiring the workforce to draw out their best . Labour markets must work well: jobs

and workers must be matched efficientlyto increase productivity and thus raisewages for all. Labour market adjustmentmust be smooth: the right workersneed quickly to find the right jobs; theright jobs must rapidly attract the rightworkers, including those from abroad.Simultaneously, Malaysias talent basemust improve. A quality education systemwhich nurtures skilled, inquisitive, and

innovative workers to continuously driveproductivity forward is the foundation of sustained economic growth. High incomeemanates from skilled people applyingtheir talents to successfully meet theeconomic challenges faced by society.Malaysia cannot miss the opportunity toput its most valuable resource to work.Therefore, Malaysia must remove barrierspreventing its brightest people from gaining

skills, while enticing these gifted peopleto remain within its borders.

3. Vibrant markets and greater choices .Many distortions would be removed andthe economy will experience greater competitiveness from the elimination of subsidies, price controls and a myriad of incentives which have lost their originalobjectives. The ETP will help individualsand firms to cushion the impact of sucha bold measure by putting in place anenhanced social safety net and a specialtransformation fund.

4. A lean and customer- focusse d government .Public institutions must be re-engineered.


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Public institutions must not duplicatefunctions better provided by the private

sector but instead should seek toundertake those tasks that the privatesector cannot perform. The delivery of government services must be efficient andeffective, using a whole of governmentapproach to facilitate the operations of the private sector. Fiscal managementmust be strengthened to include greater transparency and to provide the rightincentives. The governments revenuebase must be diversified and expenditurestreamlined to foster better utilisation of revenue.

5. Escaping low income . A key componentof inclusiveness is the fostering of equaland fair economic opportunities. Existingaffirmative action programmes andinstitutions will continue in the NEM but, in

line with views of the main stakeholders,will be revamped to remove the rentseeking and market distorting featureswhich have blemished the effectivenessof the programme. Affirmative actionwill consider all ethnic groups fairly andequally as long as they are in the lowincome 40% of households. Affirmativeaction programmes would be based onmarket-friendly and market-based criteriatogether taking into consideration theneeds and merits of the applicants. AnEqual Opportunities Commission willbe established to ensure fairness andaddress undue discrimination whenoccasional abuses by dominant groupsare encountered.

6. Innovating today for a better tomorrow .Economic transformation in the industrial,

agricultural and services sectors is aprocess requiring continuous innovationand productivity growth with significantt e c h n o l o g i c a l a d v a n c e m e n t a n dentrepreneurial drive. The adoption of processes in line with best practices andinternational standards will improve thechances for Malaysian firms to succeedin the global market place.

7. Finding the economic sweet spots .Malaysia must build on its strategiclocation together with the comparativeadvantages arising from its naturalresource endowment to es tabl ishproduction platforms which drive highvalue added growth with spillover effects.There must be a focus on economies of scale through growth corridors to energise

promising expansions into new marketssuch as downstream agricultural outputs,eco-tourism, alternative energy generationand climate change mitigation.

8. The future is bright. The future isMalaysia . Preserving our natural resourcesand safeguarding the interest of futuregenerations must be facilitated by applyingappropriate pricing, regulatory andstrategic policies to manage non-renewableresources efficiently. Sustainability of public finances through stringent fiscaldiscipline, which necessitates reductionof wastage and cost overruns, is thecornerstone to maintaining macroeconomicbalance and financial stability.


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Active management of policies supportingthe SRIs is essential through a continuous

feedback mechanism that allows for thetimely adoption of corrective actions asrequired. Many additional benefits flow fromthis confluence of changes. Investment, from

both domestic and foreign sources, wouldexperience a revival because investors would

be confident that they will benefit from astable, productive environment supportedby efficient public institutions and highly-capable workers.

6.3.1 SRI 1: Re-energising the private sector to drive growth

Table 13 Firing up the private sector

Policy Purpose Possible Policy Measures

Target high valueadded productand services

n Align incentives to foster investment in high value added activitieswhich generate spill-over effects

n Tailor incentives to meet the needs of each rm

n Facilitate FDI and DDI in emerging industries/sectors Remove barriersand cost to doingbusiness

n Remove distortions in regulation and licensing, including replacementof Approved Permit system with a negative list of imports

n Introduce a Single-Window licensing process through e-Governmentportals to include local and state governments

Create eco-

system for entrepreneurshipand innovation

n Reduce direct state participation in the economy

n Divest GLCs in industries where the private sector is operatingeffectively

n Economy-wide broadband roll-out

n Ensure GLCs operate on a strict commercial basis free of governmentinterference

Encourageef ciencythrough healthycompetition

n Implement ef cient and transparent process for governmentprocurement at all levels

n Level the playing eld for the private sector through transparentstandard settings

n Support a stronger competitive environment with competition lawPromote SMEgrowth

n Provide support for SMEs in innovative and technologically advancedareas

n Facilitate timely access to funding for business activitiesCreating regionalchampions

n Encourage GLC partnerships with private-sector companies

n Pursue aggressive regional networking ASEAN, China, India,Middle East

n Improve leverage of FTAs


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Raising the private sector profile is a boldattempt to redefine the relationship between

the government and the private sector.The government will encourage the privatesector to take the lead in identifying areasof future growth. The government will nolonger compensate the private sector for allthe risks it takes or provide incentives simplyfor doing normal business. Instead it willtry to reduce the level of risk by providingthe private sector with a stable, rules-basedbusiness-friendly environment.

The thrust of the proposals under the NEMserves to address several realities of thecurrent situation:

n Distortions and other barriers in theeconomy have resulted in an elevatedcost for doing business in Malaysia, andthis is reflected in the very low levels of

private investment.n A recognition that vested interests in the

private sector have become powerfulforces seeking to maintain the statusquo of concentration in low value addedoutput.

n A need for a big push to reinvigorate aprivate sector that appears to be losingits dynamism and willingness to invest,innovate and take risk.

n A desire to encourage labour to realisetheir full potential to add value to society,not to divert efforts to protect jobs inoutmoded businesses or in the publicsector.

The NEM calls for several actions to raisethe profile of the private sector and to make

Malaysia globally competitive for investors.These actions seek to: (i) reform the complexarray of incentives made available to theprivate sector; (ii) boost private investmentthrough improving the business environmentby removing distortions and the high costsof doing business; and (iii) rebalance theroles of the public and private sectors, givinggreater prominence to private firms.

Rationalising business incentives

The old business model used tax incentivesto spur private investment, which over timehas grown in variety. Government proactivelysought to affect the level and direction of domestic and foreign private investmentby the use of tax incentives, special zonesand other preferences. These strategies

worked well in the past but they are nowineffective and insufficient for generatinghigher income.

Private investors have become dependent onincentives as a major driver of profitability.This is not sustainable. Under the NEM,these incentives will be consolidated andrationalised to focus more on the newpriorities of the economy. Fiscal and other incentives for low value added industry andservices will be phased out and not renewed.The Approved Permit (AP) system will bereplaced by a negative list of imports. Adynamic ecosystem for entrepreneurship andinnovation will be created, where prioritiesfor incentives will focus on firms developing


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high-value activities with spill-over benefitsto the rest of the economy. They rely on

attracting innovative firms that introduce newbusiness products, processes and techniquesto Malaysia in a transparent way. Often thesefirms are new start-ups. They require grantsand matching funds for specific start-up costs,unlike traditional investors who exclusivelysought tax incentives.

Creating a conducive environment for privateinvestment

The logic of providing good infrastructureand logistics in industrial zones in order to attract multinational export activities hasbrought many international firms to Malaysia,including major players in the E&E industry.But this approach is not enough to encouragesuch firms to move to higher value addedactivities within Malaysia. At the same time,many firms, especially those engaged in

assembly operations, are gradually movingoffshore to cheaper regional competitors,as distortions and barriers in Malaysia driveup costs. Malaysian industry is otherwise atrisk of becoming hollowed out.

Many manufacturing firms in Malaysia havethe potential for moving to higher value addedproducts and services in R&D, design, testing,global procurement and other areas. As achief executive of a Malaysia-based foreignfirm has remarked, We came for low costlabour, we stayed for talent. Such firmsshould be encouraged to stay and moveup the value chain into new activities. TheNEM approach is to form clusters of firmsthat find opportunities in collaborating and

competing with each other within the samelocation. Firms in such clusters are less

prone to move to new locations abroad.

The NEM focus will be on new firms, whichwill likely be SMEs. Those firms investingin innovative and technologically advancedproduction and services with spill-over effectsacross economic sectors will be supportedby the government. Such new start-upswill need help with specific problems,especially distortions and restrictions in the

licensing and regulatory environment. Toease such problems, the Malaysian IndustrialDevelopment Authority (MIDA) should beempowered to take decisions and coordinateamong the many government departmentsto facilitate start-ups and licensing. It mustbecome a real and effective one-stop agency,not only one in name and aspiration.

Rebalancing public-private sector role

Malaysias economic development has beenheavily influenced by the government. Thegovernment, through GLCs, has directlychampioned growth of some sectors. Thesectors in which government companiesdominate have shown the lowest rates of growth of productivity in recent years. Publicinvestment has become larger than privateinvestment. The private sectors role hasreceded. This trend must be reversed if theprivate sector is to be the engine of growthto high income status.

GLCs dominate many sectors in Malaysia.The government as both business owner and regulator of industries faces conflicts of


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interest that can result in decisions whichgive GLCs an unfair advantage over private

firms. This effect discourages new privateinvestment in market segments where GLCsare strong. Such market segments couldwell be the ones which could attract privateinvestment in high value added productsand services.

A more competitive environment can befacilitated by legislation. The proposed Fair Trade Practices Act will be the first step

in establishing an explicit competition law.This Act is the culmination of five yearsof consultation on state ownership, on thetreatment of GLCs and on other competitionissues. This change would demonstratethe governments commitment to raise theprofile of the private sector. A CompetitionCommission to be established thereafter will be able to uphold a level playing fieldand fair business environment. In addition,

government will review all regulatory andlicensing requirements with the objectiveof allowing greater flexibility and removingbarriers resulting in additional financial andtime costs. Regulation must be streamlinedand proportionate while being transparent.Regulatory bodies charged with oversight mustbe supportive of industry and contribute to

nurturing healthy private sector competition. A dynamic ecosystem for entrepreneurship

and innovation will be created.

In sectors where the private sector isoperating effectively, GLCs will be privatised.Remaining GLCs will be required to operateon a commercial basis free of governmentinterference and wi thout governmentpreferential treatment. The government willnot seek to use its regulatory powers toprotect GLCs from competition by the private

sector. Instead, it will encourage competitionfrom all quarters, secure in its belief thatcompetition will only encourage firms in boththe public and private sectors to improvetheir efficiency and provide new value addedservices. Reduced direct participation of government in the economy would minimisethe crowding out of the private sector.

Competition aside, there is room for GLCs

to partner more effectively with the privatesector. In particular, collaboration betweenGLCs and domestic companies could takeadvantage of scale economies and symbioticnetworking, and could be especially worthwhilewhen they venture abroad. This outcome wouldbe positive for turning Malaysian companiesinto regional and global champions.


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Box 2: Targeted actions needed for micro-enterprises and SMEs

Actions to re-energise the private sector must be accompanied by programmes which are based on needsand merit, and which build up the bottom segments of the domestic private sector. Some common problemsfaced by these segments, and the possible approaches to tackling the problems, can be found in Appendix3.

Both informal businesses and micro-enterprises are at the bottom of the economic pyramid and likelyconstitute enterprises, existing and potential, that reside among the bottom 40% of income earners. Thesesegments include the rural population and also those who migrate from the rural to the urban environmentseeking to better their lives. It also includes the wide range of women in the rural and urban areas who seekwork opportunities. These are motivated individuals who, but for the lack of knowing how, wish to better their lot in life.

While there are some 30 government programmes to help the micro-enterprises and SME segments, theeffectiveness of the outreach for the bottom 40% of the economic pyramid is wanting. It requires greater awareness of their needs and facilitation to bring them to the table of opportunities.

While not exactly at the bottom of the economic pyramid, SMEs accounting for 35% of GDP, 57% of total employment, and 20% of exports should be given more support and assistance as well. Many SMEoperations remain low-tech and exhibit low growth rates due to lack of capital, lack of entrepreneurial skillsand management capacity, and high illiteracy rates.


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6.3.2 SRI 2: Developing a quality workforce and reducing dependency on foreignlabour

Table 14 - Inspiring the workforce to draw out their best


Increase localtalent over time

Review the education system shift educational approach fromrote learning to creative and critical thinking

Increase emphasis on reintroducing technical and vocational trainingcolleges

Identify and nurture talent through a demand-driven process

Improve autonomy and accountability of educational institutions

Encourage R&D collaboration between institutes of higher learningand industry

Enhance English language pro ciency

Deliver high quality education, within reach of all localities

Re-skill theexisting the labour force

Upgrade skills of the bottom segment of the Malaysian labour forcethrough continuing education and training

Establish a labour safety-net for displaced workersIndustry to partner with government in encouraging ContinuousEmployment Training (CET)

Formalise international quality standards and certi cation of skills

Allow wage levels to be re ective of the skill level

Retain and Accessglobal talent

Review existing programmes to attract highly-skilled Malaysiansoverseas to return home

Offer permanent residence for ex-Malaysians and their families

Centralise oversight of foreign labour and expatriates to enablecoherent practice

Build up critical mass of skilled professionals through simpler workpermit and immigration procedures

Liberalise professional services through mutual recognitionarrangements


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Education driven by growth priorities

Malaysias future education system mustbe driven by national growth priorities tonurture the talent needed for an advancednation, while at the same time, serve as theplatform to imbue national unity. The nationalschools should become the schools of choicewhere students of all races can interactfreely. The education system should focuson achieving international quality standardsby adopting best practices. A creative andcritical thinking pedagogical approach shouldreplaced ingrained outmoded practices of rotelearning processes. Students should havestrong language competencies especiallyin English. The education system shouldtake into consideration industry needs andproduce students with the requisite skills.Building the national talent base will need tocover the entire education system involvingprimary, secondary, vocational and technicalas well as tertiary education.

A more flexible and autonomous environment,backed by a strong research culture andfunding at all levels of education, is conduciveto innovation and creativity. This environmentmust be supported by a sustainable, criticalmass of talent. Many universities in developedeconomies have engaged entrepreneursthrough setting up incubator laboratories andtechnology transfer offices. In this regard,although Malaysias allocation for educationhas been large, its R&D spending is wellbelow that of our neighbouring countries.Promoting the growth of knowledge andinnovation parks with links to local universitiesis one way to boost R&D investment.

A key indicator of success of the concentratedefforts to strengthen education will be whenfirms no longer cite shortages of skilledworkers as a key adverse feature of theinvestment cl imate. Today we have the worstof both worlds, as the education systemhas been unable to produce the requisitetalent and the labour market is ineffective inconveying information on the type, quantityand quality of skills needed for employers.


Remove labour market distortionsconstraining wagegrowth

Protect workers, not jobs, through a stronger safety net, whileencouraging labour market exibility

Revise legal and institutional framework to facilitate hiring andring

Raise pay through productivity gains, not regulation of wages

Reduce reliance onforeign labour

Enforce equal labour standards for local and foreign labour

Use a levy system to achieve targets for unskilled foreign labour inline with sectoral needs


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Training and reskilling the labour force

Besides the provision of education, trainingand the reskilling of workers to take onhigher value jobs are an integral part of expanding the national talent base. Inparticular, the skills of the lower segment of the Malaysian working population must beupgraded through life-long learning. Whenthis goal is achieved, Malaysia can reach itsfull potential as a high income and advancedcountry. It is estimated that some 60% of the Malaysian population or about 80% of the Malaysian workforce have educationonly up to SPM level or equivalent. Thisrelatively low level of educational attainmentis a major barrier to leveraging on humancapital as the key factor to spur growth.Therefore, it is imperative to improve accessto quality training and reskilling courses,especially in rural areas and marginalised

urban centres, with the objective of meetingthe needs of industry. More technical andvocational schools should be built to cater for the non-academically inclined students.

Training and skills development is key toexpanding the talent base as it allows workersto undergo a continuous improvement,particularly those that may be displacedfrom low value added jobs in the course of the economic transformation. By supportingtraining programmes undertaken jointly withthe private sector, the government will ensurethat the skills mix meets industry needs.

Employees should be provided with incentivesincluding those from the government to

upgrade themselves through continuingeducation and training (life-long learning).

The government should facil i tate theestablishment of a joint council betweenemployer and employee representatives toexpand continuing education and training. Atthe same time all stakeholders should agreeon the standardisation of competency levelsso that skilled workers can become moreproductive. Upon completion of training, thenew skills acquired should be recognisedby employers in the form of better wages,which would help with staff retention. Inaddition, wage increases should be basedon productivity gains reflecting skill levels,not on the regulation of wages.

Retaining and attracting global talent

The government and private sector mustwork together to improve the conditions

that are driving Malaysian and expatriatetalent to locate abroad. This effort shouldbe complemented by a review of existingprogrammes to attract high skilled Malaysiansoverseas to return home and to attractforeign talent. A key consideration drawnfrom lessons of other high income countriesis the offer of permanent residence to theseworkers and their families, including ex-Malaysians. Better management of talentswill require a centralisation of oversight over foreign labour and expatriates to enable acoherent practice. To facilitate a move upthe value chain there needs to be a build-up of a critical mass of skilled professionalsthrough simpler work permit and immigrationprocedures.


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Greater use of foreign talent will increasedemand fo r Malays ians wi th s imi la r

qualifications and send strong signals for nationals to upgrade their skills. The endresult of an aggressive policy to tap globaland domestic talent coupled with better managed inflows of the semi-skilled wouldbe a virtuous cycle that would maintainprofits, encourage higher productivity activitiesand pave the way for more robust futureincreases in wages.

Another barrier that has to be addressed isthe regulation of professional associationswhich prohibit domestic employment of foreignprofessionals. This is a critical issue sinceMalaysias policies are unusually restrictivecompared with other East Asian countries.Without substantial inflows of foreign talent,firms do not have the incentive to move upthe value chain but still have to cope withwage cost pressures.

Removing labour market distortions

The labour market does not perform wellin Malaysia. There are insufficient highwage jobs and skilled labour is not wellremunerated. Use of low wage foreign labour has become excessive, contributing to lowwage levels. Rigid labour laws inflate dismissal

costs, reducing incentives to invest in newbusinesses and pay higher wages.

Due to outdated regulatory burdens on thehiring and firing of local workers (Figure30), firms become overstaffed because it iscostly to shed labour or they seek to avoidsuch burdens by using contractual staff

usually foreign labour. There are also seriousproblems with the mix of skills available.

In some sectors, workers are performingtasks that do not match their training. Inothers, many positions remain vacant dueto lack of qualified candidates. When facedwith a skill shortage, a firm should be ableto either hire expatriates or retrain existingworkers. However, retraining workers canbe costly. At the same time, Malaysia haslost its attractiveness to expatriates dueto cumbersome immigration policies. Evenprogrammes to encourage skilled Malaysiansto return home have failed to meet their targets.

Excessive use of foreign labour undermineshigh income objective

Up to the late 1990s, inflows of foreignworkers served the country well in movingfrom low to middle income status. Since then,Malaysias policies on foreign workers havebecome incoherent and run counter to thenational objective of achieving high incomestatus. Firms obsession with the pursuit of short-term profits makes them focus solely onkeeping costs down. This obsession makesthem prefer to tap into the large pool of low cost workers available in neighbouringcountries, leading to excessive use of foreignlabour in Malaysia (Figure 31).

Government policies should work to correctthe excessive use of foreign labour in wayswhich would enhance Malaysias longer-term growth objectives rather than feedinto the short-term cost considerations of firms. Existing policies, however, are doingthe exact opposite. Foreign workers arenot subject to the same labour standards


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as nationals. Foreign workers have accessto social services like health but the costis borne by the government. Thus, they areless costly to hire than nationals givingforeign workers an unintended advantagein the domestic labour market.

Moreover, the large differential in wages

between Malaysia and labour-originatingcountries has created a recruitment andoutsourcing industry that thrives on rent-seeking. Recruitment fees now generatehuge profits for private agencies, which inturn spawns a range of abusive practices.

Reports of firms recruiting foreign workersfor jobs which do not exist is one glaringexample.

Reforms should begin with rationalisingthe use of the levy mechanism, subjectingforeign workers to the same labour standards,granting them access to a comparable social

service as nationals. It would also addressinternational concerns about Malaysias poor treatment of foreign workers. A more rationalsystem of levies and the utilisation of theproceeds to fund social services for migrantworkers would address equity concerns. In

Figure 30 Hiring and firing index (1=Rigid, 7=Flexible)

Source: World Bank

Figure 31 Inflows of low skilled foreign workers and outflows of expatriates

Source: World Bank


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addition, funds could be used to financeprogrammes that drive innovative practices

among Malaysian firms, thus reinforcingpressure to move up the value chain.

Stronger safety net for the unemployed needed

Before hiring and firing is made more flexibleacross the board, the safety net for theunemployed must be strengthened. The currentsystem does not protect workers from therisks associated with unemployment, illnesses,

6.3.3 SRI 3: Creating a competitive domestic economy

Table 15 - Vibrant markets and greater choices


Improve economicef ciency throughcompetition

n Strengthen the competitive environment by introducing fair tradelegislation

n Improve competition law to safeguard the interest of domestic rmsbefore liberalisation of sectors to foreign rms

n Set up an Equal Opportunity Commission to cover discriminatoryand unfair practices

n Review remaining entry restrictions in products and servicessectors

n Adoption of international best practices and standards for localindustries to become highly competitive

Buildentrepreneurship

n Revamp the seed and venture capital funds to support buddingentrepreneurs

n Simplify bankruptcy laws pertaining to companies and individuals topromote vibrant entrepreneurship

n Provide nancial and technical support for SMEs and microbusinesses, to move them up the value chain

Remove marketdistortions leadingto misallocation of resources

n Phase out price controls and subsidies that distort markets for goodsand services

n Apply government savings to a wider social safety net for the bottom40% of households, prior to subsidy removal

n Create a Transformation Fund to assist distressed rms during thereform period

disability and old age. A stronger safetynet would provide support to cushion the

adjustment costs for employees and facilitatethe restructuring of firms. Current weaknessesinclude the absence of unemploymentinsurance, limitations in the eligibility andadequacy of the EPF, as well as the narrowreach of health insurance programmes for the poor. While strengthening such servicescould be costly, the problem can be easedthrough improved targeting and reducedfragmentation of services across multipleagencies and levels of government.


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Substantial financial resources are beingallocated to subsidies the bulk of whichgoes to petroleum products representinga considerable burden to the government.Subsidies for fuel and various price-controlleditems account for a large part of the

governments operating expenditure andcontribute to rising fiscal deficit. The largegovernment outlay on subsidies mostlyfunded by petroleum proceeds is notsustainable. The pricing of essential goodsand services in Malaysia does not reflectmarket prices. Price controls and subsidiesdistort price signals, often resulting inoverconsumption and waste.

Globally, prices are constantly rising, makingsubsidies and price-controlled items morecostly. The subsidies were meant to supportthe vulnerable groups but it has benefiteda wider group, including the well off. It istime for a more targeted approach of directfinancial assistance for the poor rather thanbroad based subsidies which often are of most benefit to the well-off, who consume

more of the subsidised goods.

At the same time, the private sector isbecoming ever more reliant on governmentsubsidies which are numerous, complex

and expensive to administer. Such supportby the public sector to the private sector is not leading to innovation and high levelsof private investment. As a result, domesticand foreign investors have a vested interestin maintaining low value added production.

Adding to that burden are the numeroustax incentives granted by the government.While tax incentives are necessary measuresto encourage private investment, theycontribute to foregone tax revenue if usedindiscriminately.

The NEM recommends a steady removalof subsidies and price controls, with arationalisation of tax incentives. Removingsubsidies and price controls can reduceoperating expenditures over time and restorea better balance to fiscal deficits. Furthermore,savings from the removal of subsidies willbe used to fund a social safety net schemetargeted at beneficiaries from poor householdsand vulnerable groups. This savings canalso be applied to a Transformation Fund tohelp firms displaced by the reforms to adjust

to the new market environment. With thissolution, price distortions will be removed,allowing for the restoration of market signalsto regularise the demand and supply of products previously controlled.


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Improve decision-making processes

n Use whole-of-government approach to provide integrated servicesn Empower state and local entities to perform their tasks locallyn Encourage greater local input and authority in economic development

to support regional differences and needsn Develop a process for effective implementation, monitoring and

evaluation of policy measuresn Empower MIDA to become an effective one-stop-agency to facilitate

foreign investmentn Revamp MPC to be more effective in driving productivity and ef ciency

improvements

Improve servicedelivery

n Reform the government to be lean, consultative, and delivery-focussed

n Upgrade skills of staff to enable them to multitaskn Modernise human resource management to match quali cations

with jobs

Reduce friction

costs

n Have zero tolerance for corruption

n Address underlying weak governance structuresn Codify best practicesn Implement an open, ef cient and transparent process of government

procurement at all levels

Provide a safetynet to facilitate asmooth transition

n Retain a residual role for safety nets to stabilise and correct periodsand instances of market failure

n Apply government savings to a wider social safety net for the bottom40% of households prior to subsidy removal


Strengthenpublic nancemanagement

n Widen the tax base (e.g. GST)n Lower personal and corporate income tax ratesn Implement standardised criteria for state revenue receiptsn Use results-based budgetingn Implement programme-based, medium-term budgetingn Adopt international standards for scal transparencyn Use technology for ef cient collection of duties and taxes

6.3.4 SRI 4: Strengthening the public sector

Table 16 - A lean and customer-focussed government


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Improve the decision making process

National governance worldwide is becomingless top-down and more decentralised asthe complexities of business and societyexceed the capability and effectivenessof traditional top-down management. Civilsociety is playing an increasingly importantand influential role in public policy matters.Communication technology and the internetare used widely to promote transparency anddiscourse. Effective partnerships between the

state, market and society are gaining ground.Various measures have been implementedto integrate and improve public servicedelivery. One such measure was theestablishment of e-government portals, butall measures in general have producedlimited results . Government agenciesare still perceived to be bureaucratic,operating in silos and very much patronage-based.

Re-engineering of public institutions requiresa revamp of the administrative system andthe governance structure with greater effortsto combat corruption. Urgent initiatives torestructure the key agencies are critical for the success of ETP implementation. Theduplication of agencies undertaking similar functions needs to be eliminated. In thisregard, immediate attention is needed for strengthening oversight on policy developmentand implementation, in particular for theservices sector due to its increasing importancefor generating growth.

The government should become leaner,delivery-focussed and more consultative.

Work in this area has started with thelaunch of the Government Transformation

Programme (GTP). Cumbersome regulations,processes and procedures must be simplifiedto improve their effectiveness and reducerent-seeking.

Achieving the outcomes of the NEMcritically depends upon the ability of publicinstitutions to effectively implement thepolicies underlying the SRIs. Quality publicinstitutions staffed with committed civil servants

are needed to create the big push of policymeasures to boost growth and acceleratetransformation. Strengthen public finance management

The central issues in reform of fiscalmanagement are diversification of revenuesources as well as improved expendituremanagement. Better accountability for

government outlays should target reducingwaste and preventing cost-overruns. Thespecific areas of concern that need to beaddressed are: 1) diversifying governmentrevenue base; 2) strengthening revenuecollection; 3) rationalising subsidies, pricedistortions and tax incentives; 4) improvingbudget management; and 5) greater fiscaltransparency.

Diversifying government revenue

His to r i ca l ly, Malays ia s deve lopmentexpenditure has depended greatly on revenuefrom natural resources. Export duties on tin,palm oil and rubber, for example, substantiallyfinanced the early five-year plans. From the


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mid-1970s, the contribution from oil and gasrose and now accounts for about 40% of total government revenue.

The NEM recommends a number of reformsin the sources and distribution of revenue.A wider tax base is an important part of reforms, where the introduction of the Goodsand Services Tax (GST) is a key component.A more diversified tax base is needed tocompensate for an expected future reductionin the share of revenue from oil and gas.Overall, another aim of the fiscal reform is

to lower the rates of personal and corporatetaxes, which will incentivise individuals andfirms to increase their income and profits.

Under the fiscal reform, distribution of revenuein the forms of loans and grants to statesshould be reviewed to align them better with state requirements. At the same time,the criteria for revenue sharing with statesshould be standardised. In particular, royaltiesfrom exploitation of natural resources suchas oil should be transferred as establishedby clear criteria to the producing states.

Strengthening revenue collection

Revenue leakage is a pervasive problem andhas an impact on overall revenue collection.The current, largely manual approach torevenue collection is archaic, difficult to controland open to abuses. The development and

implementation of effective technology-basedrevenue collection and management systemis a high priority of the NEM.

Improving budget management

The current government budgeting processneeds to be reviewed and re-designed to meetthe demands of a high income economy. The

NEM advocates a shift away from line itembudgeting to results-based and programmebudgeting. In addition, a medium-termbudget framework should be introduced. Thisframework should incorporate the resultsfrom debt management analysis.

The annual budgeting process should alsobe improved to accelerate programmeimplementation. Consultations with theprivate sector should be more focussedon the implementation of tax measures toensure sufficient understanding and more

rapid implementation.

Greater fiscal transparency

Public finance management must be mademore transparent. The current culture of confidentiality must be replaced by timelydissemination and disclosure of assessmentsof fiscal outturn. There should be greater openness in government expenditureprogrammes. A special focus will be there-establishment of an open tender systemfor all government procurements. This systemshould be transparent at all stages and theresults of tenders should be made public,taking into account confidentiality. The findingsof external audits of public finances should bedisclosed. Where it is feasible, this solutionshould be supplemented by greater use of independent external audits.

Sanctions for poor budgetary managementand failure to observe accepted procedureson expenditures should be balanced byrecognition of prudent fiscal managementamong agencies. Decentralisation of budgetsand its managements with proper accountabilityand transparency will improve efficiencyand responsiveness among governmentagencies.


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R e v i e w o f f e d e r a l - s t a t e f i s c a l arrangements

A review of the allocation of funds tostates by the federal government should beundertaken. Allocation based solely on a per capita criterion should be supplemented bythe use of more varied indicators such aspoverty levels in the respective states. Inthis exercise, state governments should beallowed to provide inputs into how federalfunds are allocated to states. This willcontribute to improvements in the efficiency

and effectiveness of state expenditureprogrammes. Assessment of the impact andresults of expenditure programmes must beprovided by states in return.

A whole-of-government and accountableapproach

The whole of government approach isessential to provide more integrated publicservice delivery. The existing top-downapproach should be rebalanced to empower state and local entities to decide and manageresources more effectively. Greater localinput and authority in economic developmentare needed to support regional differencesand needs. With regard to this objective,proper mechanisms should be put in placeto enhance collaboration between thedifferent levels of government. Greater inter-governmental collaboration will result in faster

decision-making and better coordinationamong government agencies, especially inresolving complex cross-jurisdictional issues.Government agencies will be the major contributors to an effective implementation,monitoring and evaluation process.

An integrated public service delivery systemhas the elements of a networked government.

In a networked government, the designand delivery of public policies, programmesand services will not only involve multiplegovernment agencies, but also include non-governmental stakeholders such as privatefirms, NGOs and other civil society groups. TheNEAC believes that an effective mechanismthat holds government agencies accountablewould lead to eradication of corruption andwastage. The quantification of the economiccosts of corruption and wastage will raisepublic awareness about their debilitatingeffects on society. The Auditor-Generals

Office is performing part of that role but theperception is that its main task is to producean annual report, with limited powers to takeremedial actions. This calls for significantacceleration in enforcement and prosecution.In this regard, the Auditor-Generals authorityshould be expanded to deal more effectivelywith misappropriation and mismanagementof resources within the government.

Developing processes and redesigning organisation structures

The role of central agencies in Malaysiashould be reviewed and restructured toidentify areas where line agencies can befurther empowered to improve effectivenessand efficiency in decision making. Further enlargement of agencies must be avoided andany restructuring must focus on streamliningand mergers. Distinctive organisational

processes are required for governanceto be effective. There is a need to better align intermediate results with overall policyoutcomes. The right processes and reportingrequirements should be established for thispurpose. This approach will help to explainthe inter-relationships between results andoutcomes.


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6.3.5 SRI 5: Transparent and market-friendly affirmative action

Table 17 - Escaping low income


Reduce incomedisparity

n Continue support programmes for disadvantaged groups

n Focus on the bottom 40% of households and business owners

n Shift focus towards relative poverty

Continue growth as a means of poverty reduction

Growth Elasticity of Poverty inequality can reduce impactof growth on poverty

Create market-friendlyaf rmative action

n Use transparent procedures and criteria

n Use af rmative action as a means to promote building of capacity andcapability

n Phase out approaches that contributed to rent seeking andpatronage

Narrow regionaldifferences

n Leverage scale with effective development of economic clusters asa means of reducing regional inequalities, especially in Sabah andSarawak

n Enhance measures to raise income levels through better access andprovision of quality social services in education and health, especiallyin Sabah and Sarawak

Encourage rewardon the basis of performance

n Encourage greater competition in the economy by removing excessiveprotection and accelerating sectoral liberalisation

n Redesign af rmative action to take into account merit and needs

n Phase out approaches that contributed to rent seeking andpatronage

Promote equaland fair access toopportunities

n Emphasise equitable and fair opportunities for employment, healthand education and access to business opportunities

n Apply government savings to wider social safety net for the bottom40% of households prior to subsidy removal


n Set up an Equal Opportunities Commission to deal with possiblecases of unfair treatment and discrimination


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The main purposes of this Strategic ReformInitiative are to reduce income disparities,

continue with market friendly affirmative actionprogrammes, narrow regional differencesespecially in Sabah and Sarawak, encouragereward on the basis of performance andpromote equitable and fair access toopportunities.

Affirmative action and equitable and fair opportunities

Progress has been made on the affirmativeaction front. The reduction of absolute povertyhas been exemplary and commendable,and inter-ethnic economic imbalanceswere substantially addressed. But theimplementation of past approaches toaffirmative action has serious shortcomingsand has produced some undesirable outcomes,practices and attitudes.

Although there have been some progressthese successes have been achieved atconsiderable costs. It is now accepted thatthe past affirmative action programmes havealso inevitably propagated and embeddeda distributive and entitlement culture andrentier behaviour. Shortages of qualifiedbumiputera and capital have encouraged thesetting up of spurious fronts. Excessive useof ethnic quotas has encouraged the use of less qualified recipients and bred inefficiency.Ethnic-based quotas have been imposedextensively throughout the economy in thepast and currently some still exist. The quotasfor limited companies in certain industries stillrequire at least 30% bumiputera ownershipof share capital. Preferential pricing andquotas have led to distortions.

Rent-seeking behaviour is market distortingand has been a serious, undesirable outcome

of the past approach to affirmative action.Rent-seekers do not really create wealth, or add to economic growth. Rent-seekers areengaged in unproductive activities and canadd sizably to the cost of doing business. Thegrowth of bribery and corruption is closelyassociated with the growth of rent-seekingin the economy.

Affirmative action would still be desirable inthe light of persistent inequalities. Affirmativeaction policy expressly considers that therelatively economically disadvantaged shouldbe given the opportunities to overcome their disadvantaged position. The New EconomicPolicy (NEP) was an affirmative actionpolicy. Affirmative action is part of inclusivegrowth. But the approach to affirmativeaction must be revised and reformed totake into account the effectiveness of pastpractices, and make adjustments for theflaws and abuses while drawing lessons for strengthening future programmes. Challengesthat have arisen with the new forces of change also make it imperative to reformthe past approach to affirmative action. For example, because wealth means more thanmere equity ownership, having a 30% targetfor bumiputera equity ownership may not beas meaningful as previously thought.

The principle of the new affirmative actionpolicy that will be part of inclusive growthunder the NEM is that it must be marketfriendly, or it must be an affirmative actionpolicy that is market-based. A market friendlyaffirmative action would ensure that it doesnot violate, or negate, the workings of the


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market. Market friendly affirmative actionshould not cause, contribute or perpetuate

distortions in the economy. The efficientfunctioning of the market should not behindered by distortions so that scarceresources are misallocated.

Growth can be maximised if resources areused efficiently. Prices play a role as signalsto where and how resources should beutilised to maximise profits. Entry into andexit from markets should not be constrained.

Unsuccessful enterprises must be allowedto fold, if they are no longer competitiveand the resources are freed for other economic activities. Land, labour, capital andentrepreneurship should be allowed to flowin and out of the economy with minimumrestrictions.

Markets, however, can malfunction evenwithout any form of intervention throughaffirmative action. Monopolies and collusionscan hinder the efficient functioning of markets.Excessive risk taking can lead to crises.Markets can fail when it is manipulated byinterest groups that seek to maximise their own interest at the expense of society. Insuch cases of market failure governmentintervention would be necessary to regulateand correct the failures of the market. But

government intervention itself can also worsenmarket failure and thus has to be kept under vigilant review. Excessive protection, for reasons other than affirmative action, caninevitably introduce market distortions.

The NEM proposes that the revised affirmativeaction policy should be based on the bottom

40% of households. An affirmative actionpolicy based on the low income group i.e.

giving preferential treatment to the relativelydisadvantaged group would be in the interestof distributive justice. It will treat equallythose who are in the low income group.Affirmative action will consider all ethnic groupsequally as long as they qualify for accessto resources under affirmative action.

Affirmative action should be seen as a meansof equalising opportunities but applicable

to the low income group. A market-friendlyor market-based affirmative action will beimplemented progressively. Liberalisation andthe opening up of sectors to market forceswill be implemented in stages. Whenever and wherever possible, sectors should beliberalised as speedily as possible.

Policy measures and instruments

The section above on inclusiveness hasoutlined the strategic thrusts of the NEM onwealth distribution and social justice. For thisSRI, the NEAC has some suggestions onspecific measures and instruments. Theseproposals are made on the basis that thebroad strategic thrusts are acceptable sothat the specific measures and instrumentscomplement, or supplement, the strategic

thrusts. In considering policy instruments itshould be mentioned that the most contentiousof the strategic thrusts have to do with theproposal for greater liberalisation, competition,the shift towards the bottom 40% low incomegroup for distributive purposes, as well asemphasis on opportunities. In reviewing the


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existing measures and instruments, theycan be retained, modified or removed. New

measures and instruments can be introducedto replace or supplement the instrumentsthat are in place. The policy measures or instruments can be divided into the followingcategories:

n Macro-economic

n Affirmative action programmes andQuotas

n Prices

n Subsidies

n Government procurement and tenders

Macro-economic. Macro-economic policiesdo have an impact on income distribution.In less developed countries, inequality tendsto rise during recession because wages areflexible downwards, social safety nets areless developed and there is less labour

hoarding. In developed countries, recessionstend to have a greater impact on profitsthan wages.

Overall, monetary, fiscal and exchangerate policies should continue to aim for stabilising the economy and to sustaingrowth. Inflation has more adverse effectson the low income groups and the poor and cross-country evidence shows thatinflation can worsen inequality. The poor have not been able to index their incomewith inflation. Fiscal policy, on the revenueside apart from expenditure, can impact ondistribution. Maintaining a progressive taxregime could check a widening in inequality.Tax exemptions for low income groups will

increase their income. A value added tax whichstarts at a low level could be a progressive

tax on consumption and less inimical to thelow income groups. Exchange rate policyshould aim at maintaining an orderly andstable exchange rate. Households dependenton the export sector for employment andincome would be favoured with a depreciatingexchange rate which could boost exports.

Affirmative action programme s and quotas.Quotas have been used extensively in thepast. The streamlining of quotas will requirea re-examination of how quotas have beenapplied, their transparency and effectiveness.The NEM recommends the shifting of affirmative action programmes to emphasiseopportunities rather than outcomes. Theremaining quotas should be progressivelyphased out. As for the enrolment quota, ahybrid approach may be workable and worth

considering i.e. using the ethnic quota buttaking into account the need and merit of theapplicants. If quotas are to be progressivelyphased out, their continued use in the interimshould be targeted at the bottom 40% lowincome group.

Subsidies . The subsidy bill of the FederalGovernment is sizable and has beenincreasing. A large part of the subsidy goesto suppressing the impact of internationalprices for fuel and petroleum products onMalaysian consumers. It has been estimatedthat subsidies have accounted for morethan a fifth of operating expenditure. Thesubsidy regime needs to be re-assessedto ensure that it is broadly consistent with


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the financial resources of the governmentand that it is fairly distributed to benefit the

neediest. There are serious leakages in thesubsidy schemes and subsidies should beredirected to ensure that the poor are reallythe beneficiaries of the subsidies. Someestimates indicate that more than 70% of thebeneficiary of the subsidies for fuel productshas been enjoyed by the higher incomegroups. Subsidies should be reformed tobenefit the poor.

Government procurement and tenders .Government procurement and tendersare the two broad policy instruments thathave and will continue to have distributiveimplications. A review, therefore, is requiredto take into account the shift in approachwith the adoption of the NEM. Suppliesand services are the key items and areasfor government procurement and they

account for about 17% of the total operatingexpenditure of the Federal Government. Thekey items for supplies and services includerepair and maintenance, professional andother services, communication and utilities,supplies and rentals. The thrust of thetender system should be towards a muchmore open system without direct negotiatedtenders. Some schemes for tilting tenderstowards the bottom 40% will have to beconsidered.

I n s t i t u t i o n s f o r e q u i t a b l e a n d f a i r opportunities

Competition and liberalisation of the economyunder the NEM will reduce the extent of controls over the functioning of the economy.Private enterprise will become less fettered.Abuses clearly may continue to flourish andmust be stemmed. Discrimination in manyforms will appear and must be explicitlymanaged. Checks and balances need to beintroduced in anticipation of a possible rise inabuses and discrimination. The NEM proposesthat an institution, or agency, be establishedto counteract and check these unwelcometendencies in abuses, discrimination andunfair treatment. An Equal OpportunityCommission (EEC) is proposed with theresponsibility of monitoring and consideringcases of discrimination and unfair treatmentin the economy to cover both the public and

private sectors. The Commission will focuson the implementation of the measures thathave been proposed under the NEM.

Inclusive growth will require a new institutionalregime. The present ins t i tu t ions andapproaches were designed more than 30years ago to support and administer theaffirmative action programmes but conditionsand ideas have changed. It is timely that aserious review of the key institutions thathave been entrusted with affirmative action isundertaken, for the purpose of re-engineeringand re-designing these institutions to supportinclusive growth under the NEM.


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6.3.6 SRI 6: Building the knowledge base and infrastructure

Table 18 - Innovating today for a better tomorrow


Create anecosystem for entrepreneurship

n Easing entry and exit of rms as well as high skilled workers

n Revamp the seed and venture capital funds to support buddingentrepreneurs

n Simplify bankruptcy laws pertaining to companies and individuals topromote vibrant entrepreneurship

n

Harness Web-based expertise and industry networksPromote anenvironment for innovation

n Improve access to specialised skills

n Ensure protection of intellectual property rights

n Incentivise rms to embrace technology and move up the valuechain

n Enforce strict adherence to global standards and benchmarks

n Fostering R&D links between the institutions of higher learning andthe private sector

n Immediately roll out nationwide fast broadband connectivity

n Review and consolidate all present government R&D funding

n Align R&D to national growth objectives particularly in innovative andhi-tech elds

n Open access to funding to competition among researchers

n Ensure public procurement supports local innovation

n Establish KPIs for universities based on commercialisation

Establishstronger enablinginstitutions

n Set up a technology research powerhouse and centre of excellencerun on a commercial basis e.g. ITRI Taiwan cluster model

n Operationalise the National Innovation Model announced by thegovernment in 2007

n Balance the technology-driven innovation approach with market-led policies such as global procurement through technologyintermediaries


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Malaysia has benefited from globalisation,especially through integration into production

processes and networks at the global andregional levels. However, in the currenteconomic environment, firms are continuouslyrefining their strategies and restructuring their supply chains through relocation, outsourcingand in-sourcing. Against this changinglandscape, Malaysia can no longer rely onglobal firms which will constantly seek andrelocate their investment to more attractivemarkets. Through entrepreneurship, localfirms will increasingly have to drive industrialupgrading by developing their capabilities andinnovation infrastructure. There is nothingautomatic about this process. Governmentsupport can facilitate such upgrading.

Moving up the value chain implies a continuousprocess of change, innovation and productivitygrowth. Under the NEM, Malaysias economywill grow by developing new technology,innovating products and processes, anddesigning new management methods.

Infrastructure critical to high value addedactivities, such as high-speed broadband,must be rapidly put in place to facilitatethe new production processes that rely onnetworking to create scale and efficientlyconnect supply chains.

Still, technology alone is not enough. Other soft innovative capabilities covering thesocial, organisational and cultural aspects aremore difficult to attain but are also critical.Malaysia must respond to market trendsand tap into the global pool of knowledge,supported by education and training policiesembedded in the other SRIs.

Upgrade institutions of higher learning

To enhance the knowledge base, educationinstitutions should be allowed to compete for the best students, government grants and other academic resources. The present system of closely controlled operations by the Ministryof Education (MOE) and Ministry of Higher Education (MOHE) should be changed to asystem with autonomy and accountability.The views of the local community shouldbe sought and given due consideration toimprove the quality of schools.

Autonomy and accountability are alsovery important for universities. Publicuniversities should have the authority todecide on matters pertaining to courseofferings, student enrolment, staff emolument,financial management and daily operations.Similarly, students should be free to pursueeducation at a university of their choice.Accountability would focus on compliancewith uniform performance indicators set bythe government. Development of curriculum tomeet market needs as well as collaborationwith industries in R&D should feature amongthe performance indicators. However, R&Dmust be aligned to national growth objectivesparticularly in innovative and hi-tech fields.Access to R&D funding must be open freelyto competition and not be monopolised byestablished research providers. Also, priorityshould be given to research with potentialfor commercialisation.


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6.3.7 SRI 7: Enhancing the sources of growth

Table 19 - Finding the economic sweet spots


Create value fromrst mover and

other comparativeadvantages

n Identify E&E subsectors to build depth and foster new nicheindustries, and to capture a greater share as a distributional hub asintra-regional trade expands

n Focus on palm oil-related downstream industries to developindigenous technology and innovation or acquire technology to meetnew market demands

n Encourage upstream technology innovation to develop higher yieldingfresh fruit bunches

n Capture a greater share of the education, medical tourism andecotourism markets through domestic and regional partnerships

n Promote climate change mitigating products and services e.g.recyclables

n Promote products and services that comply with Islamic tenets e.g.nance, pharmaceutical

Develop greater integrationbetween products

n Integrate education services with industrial development, for examplea centre of engineering excellence in the E&E cluster

n Further prioritise the logistics industry, leveraging on roads, portsand ICT infrastructure readily available in Malaysia

n Improve seamless tourism services by ensuring quality servicesalong the value chain (examples such as the revamp of poor qualitytaxi services and improving personal safety for travelers)

Create newmarkets

n Capture greater share as a distributional hub as intra-regional tradeexpands

n Improve maritime and port services, leveraging on technology

n Move into alternative energy generation as well as energy savingproducts and services

n Expand service-oriented industries to regional markets based onMalaysias inherent biodiversity


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Build scale of industries andproductionnetworks for specialisation

n Promote corridor-based development around spatially dense polesand adjacent hinterland, especially for electronics

n Encourage competition between localities

n Cluster industries to leverage on integration, scale and connectivity

n Exploit economies of scale through networking of production andsupply chains leveraging on location - Speed to market

n Establish global presence through international acquisitions of companies in the same eld to

Harnessinnovationpotential

n Adopt an open innovation system to acquire technology and expandnetworks

n Support rapid transformation of SMEs with potential for innovation

n Develop industries that support sustainable development such asuse of traditional plants and herbs for modern applications

Integrate realsector industrieswith nancial

services

n Develop the commodities trading platforms and products for domesticproducers to bene t from nancial innovation and expansion

n

Offer Malaysia as a regional hub for both futures and spot markets for commodities

n Develop Islamic-based nancial products to support domesticproduction and risk management of prices and production

The old emphasis has been for Governmentto identify the sources of growth, usuallythrough the 5-year Malaysia Plans and theIndustrial Master Plans which then provide

the incentives to drive the growth sectors/industries. This was the case in developingthe commodities and later the manufacturingsectors, in particular the electronics sub-sector.In the late 1980s and over the followingtwo decades, selected services sectorswere identified as having export potentialand again, government introduced incentive

schemes (e.g. financial and tax breaks) topromote their growth (e.g. education, tourismand shipping)

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Chapter 6 How Do We Get There

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