Malaysian Economy: Slow and Dangerous Descent

The latest Morgan Stanley Global Economic Forum entry has a piece on the Malaysian economy by their in-house analysts, Deyi Tan and Chetan Ahya. Its concluding paragraphs nicely summarise the deep concern of most of us who understand the macroeconomic situations of Malaysia:

Long-term Risks − Economy Outside of Commodity and Construction Pump-priming Losing Shine

Beyond the cyclical short term, we are also less sanguine about Malaysia’s structural prospects. Its natural resource endowment and the leverage of that to finance investment and subsidizing growth have allowed the economy to grow with reasonable momentum. This has likely lessened the urgency to improve the competitiveness of the economy outside of commodity and construction pump-priming. Indeed, we note that Malaysia’s export sector likely suffered, not only from cyclical pressures but also structural pressures. Export growth has been dragged down by weak electronics performance and, at 2.7%Y, export momentum is one of the lowest in the region for 2007. Malaysia has been losing market shares in key export segments. Integrated circuits and telecommunications equipment have seen their global market share decline from 8.0% and 4.5%, respectively, in early 2000 to 6.5% and 2.6%, respectively, in 2006 − at a time when Singapore has improved its global share in higher value-added production such as integrated circuits from 11.2% to 17.3%.

Additionally, the government’s efforts to move further up the value-added chain have been hampered by its lopsided focus on infrastructure hardware – which contributes relatively little to long-run competitiveness – rather than human-capital software. Its standards of the education system have fallen behind the government’s policy aspiration of economy upgrading. Policies such as the National Economic Policy (NEP), which give privileges to the bumiputras, have also led to a brain drain, compounding the problem of talent-pool shortage.

Malaysia has 13 years before its oil runs dry in 2021. Concerted government efforts to improve overall competitiveness would be essential to grow the economy beyond the medium term, in our view.

Just want to add on to the bit on oil: in a longer perspective, I believe that the oil that we have is a curse. It has muted much of the urgency that the economy needs in reforming itself structurally. Ironically, it is somewhat analogous to the subsidy curse that the Malaysian society is suffering from, perpetuated by misguided policy emphasis motivated by short-sighted political expediency. When these 'protections' are lifted, Malaysia will be very ill-equipped to face the challenges of the world.

If you want to protect your children from the uncertainties of the world, you do not lock them up and make them weak. You should educate and make them stronger, so that they could rise to the challenge the world has to offer and turn adversities into opportunities.

Elanor

PS: "Concerted government efforts to improve overall competitiveness would be essential...". It is difficult to imagine how, the current government, being the source of much of the problem, can also be the solution to the same problem. Especially given the state of complacency, institutional corruption and lack of political competition that it is currently afflicting the country.