The Malaysian economy: A misplaced optimism?

AUG 21 – Given the recent enormous drop in the nation’s FDI to a whooping 81 per cent (World Investment Report, WIR 2010), the announcement of 8.9 per cent GDP growth in the Q2 compared with -3.9 per cent YoY in 2009, came as a great relief to many.

It is the third consecutive quarter of growth. Though it’s slightly lower than the 10.1 per cent of the Q1, it nonetheless brings the much needed comfort and assurance. Overall, the economy grew by 9.5 per cent for the first half of 2010.

More substantively, the growth has been essentially driven by stronger domestic demand due mainly to higher private consumption and continued improvements in both private and public spending. So it was claimed. Additionally robust growth in external demand and trade similarly spurred the supply-side of our domestic manufacturing and services sectors.

Just as we are about to be back on our bullish view of the economy, this writer unfortunately will gently remind us that not all is well, over and done with. Quite on the contrary, we are in fact dangerously treading a precarious path of recovery with the pending double dip always lurking devilishly ahead.

More importantly and on a longer timeline, some fundamental and structural problems need serious addressing. These are economic malaises that have entrapped us in a decade of stagnation with a negligible increase in real wages hence stuck in the prolonged middle-income trap, a low value-added activities and low productivity.

Global Economy is Slowing Down

Firstly, back to the issue of relying on a robust external demand to drive growth and domestic production. A robust growth in the second half of this year is not as promising. The global economy after receiving massive fiscal and monetary stimulus is now heading for a sharp slowdown as the multiplier effect of those measures wanes.

Worse still is the scenario where governments and consumers of the advanced economies – US, UK and Europe – will be spending less and are now concerned with de-leveraging their debts.

Meanwhile nations saving too much – China, Asia, Germany and Japan – are not willing to spend and produce more for obvious reason to compensate for the fall in demand by the de-leveraging countries earlier. Hence you have a “double-whammy” situation of diminishing global aggregate demand in the recovery exacerbating the softer and lower economic growth.

Even if the global economy is to escape a W-shaped double-dip recession, the likely scenario for advanced economies, is at best a U-shaped not a V-shaped recovery. In the Euro-zone meanwhile, the outlook will be even worse as governments’ austerity drives set in and stock market falls.

If we are to rely on China to drive our growth, we may be in for a disappointment as China is already slowing their growth for fear of economic overheating. With the other advanced economies and Euro taking a continued beating, it will have a further knock-on effect on China’s growth. This will be bad news for all other Asian economies shifting expectation to piggy-back on China’s imports for sustaining their growth.

With the scenario of US growth decelerating to 1.5 per cent, the Euro zone stagnating, while Japan’s economy continues to be in an L-shape recovery, even if the global economy were to escape a double-dip, the extreme downsides of these all acting in concert could similarly  trigger a recession-like shock.

Our Growth Curve is on a Downward Path

Besides, a closer look at the claim of the Bank Negara may not after all be that assuring. Bank Negara noted that the manufacturing sector registered the highest growth of 15.9 per cent followed by the service sector at 7.3 per cent.

However, the first quarter performance revealed that manufacturing registered a growth of 17 per cent, while achieving 8.5 per cent for the service sector. The growth for the construction sector has similarly dwindled from 8.7 per cent to 4.1 per cent in the second quarter. In other words these indicators are all on a downward path.

For the year-end outlook, Bank Negara said that the domestic demand was expected to increase and support growth in the second half of the year. If this writer recalls correctly, the consumer’s sentiment as recently reported by MIER is not as bullish as the government painted it to be, as to support domestic demand.

In anticipation of further withdrawal of subsidies and the introduction of a new consumption tax, the GST, the government doesn’t seem to be getting their fiscal policy right – subsidy and taxation – it seems to this writer, anyway. There is a clear mismatch of encouraging domestic spending with both the fiscal and monetary policy of the BN government going in the opposite direction.

Recent spate of OPR increases, though described as “normalization” may affect cost of funding and eventually affect domestic investment and spending. However, burdened with increasing debt and fiscal deficit, the degree of freedom in using such stabilizing measures is much stifled and limited.

Hence, it pays if the BN government is to be honest and truthful about the very cautious optimism, lest it has to eat humble-pie for the second half of the year.

Addressing Structural and Fundamental Economic Malaises

On a more substantive approach and on a longer timeline, there are clear “mismatches” both structurally and fundamentally that need to be addressed, dismantled and reconstructed. Najib’s policies of “liberalization” and “inclusiveness” that generated an immediate appeal, were in apparent collision course with his own party’s ethnic-based ideology. So far it doesn’t move beyond his rhetoric. His flip-flop is ever more pronounced of late.

Talks of moving into a higher income economy and spurring growth through private investment, both domestic and foreign have already hit a snag with the WIR report. Concrete measures to attract and increase appetite for both local and foreign investors absent over and above doing “more of the same” are not identified.

Excuses of failures abound. We seem not to understand that Fiscal Reform has to be a part of a wider programme of macroeconomic and political reform.

Besides, a higher income economy is premised on higher productivity hence pre-supposing a fundamental shift from labour-intensive to capital-intensive and finally to knowledge-based industries and enterprises. However, willingness to address serious labour and industrial policy are evidently missing. Evidently, we are not ready to bite the bullet.

Let’s get real and see what is on the ground.

A recent survey of conducted by the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) on their members who were mainly wholesalers, retailers, manufacturers, professionals, service providers and construction entrepreneurs, revealed that 63 per cent of the respondents are heavily dependent on foreign workers.

To all intents and purposes, until and unless we address the over-reliance on foreign workers, not only to man our construction and plantation industries but as well our manufacturing and service sectors, rest assured that we will be stuck to this “low-income” trap to doomsday.

The question to ask is how possible is that? Or perhaps a blunt way of putting it is do we want to go that way? Are we prepared for that shift?

Much as we know that this is the bottle-neck of it all, we still need them to rack up decent growth numbers yearly and the vicious cycle continues unending. To answer the above question of whether it is possible after all, the answer is yes. We have simply to break the vicious cycle if we seriously want to move in that direction. Perhaps it is best not to view the “foreign labour” issue as mutually exclusive to a “higher income and performing economy”. We need to think out of the box.

To do that it presupposes that we must be prepared to re-skill and retool our workforce to be at least semi-skilled and to focus on greater specialization of production. Meanwhile a more concerted programme at the tertiary level of education must be put in place to prepare a greater pool of skilled and knowledge workers.

With 77 per cent of secondary school leavers entering the workforce armed with merely SPM qualification, we are in for a major overhaul. It challenges our earnestness and commitment to put money where the skill and talent are to be produced.

But with the news of big ticket infrastructural projects back in the pipeline, the like of the multi-billion Greater KL development, alongside the jaw-dropping RM43billion MRT mega-project, 3,300 acres of Sungai Buloh, Sungai Besi, etc, it doesn’t take a professor of economics to tell us that we are back to square one.

Yes, we may be back on Growth Trajectory albeit driven again by huge government spending (G-factor) and already many dubious direct-nego dealings in the 2nd wave privatisation (PFIs) with a concomitant enlarging circle of billionaires club of old and new rent-seekers. Even if we were to achieve the income target per capita of RM38,850 in 2015 with an annual growth of six per cent, will it bother us then to witness the yawning income-disparity, malignant corruption and leakages to continue unchecked?

So what are we in for? It’s back to the old paradigm of development and growth model. So what is new of the NEM?

That spells doom for the already ailing Malaysian economy. Will it be a case of a Misplaced Optimism? – drdzul.wordpress.com