Wither the Malaysian economy?

AUG 6 — Granted, a heated policy debate is abuzz about Malaysia’s foreign direct investment (FDI) performance and her economic policies. The recent of release of the UNCTAD World Investment Report (WIR) 2010 showed that while global FDI dipped by 37 per cent, Malaysia’s FDI plunged by a whopping 81 per cent from US$7.32 billion (RM23.47 billion) in 2008 to just US$1.38 billion (RM4.43 billion) last year.

As if that wasn’t grim enough, the report also highlighted that only Malaysia suffered a net outflow of FDI in the entire southeast Asia region in 2009.  A massive amount of US$8.04 billion (RM25.77billion) flowed out last year as opposed to the FDI inflow of US$1.38 billion (RM4.43 bilion). Again, all the other countries in the region had a net positive FDI flow in 2009. Dismal and depressing, you may surmise.

Admittedly, we have clearly fallen off investors’ radar for whatever reasons. Indonesia, Philippines and Vietnam have overtaken us. In 2008 we accounted for 15.5 per cent of FDI flows into SE Asia; in 2009 it was down to 3.7 per cent.

While FDI arguably fluctuates, our net FDI flows, unfortunately have consistently declined — US$2.56 billion in 2004 and US$1.09 billion (2005), to a net negative US$0.02 billion (2006), negative US$2.7 billion (2007), negative US$7.67 billion in 2008 and negative US$6.66 in 2009.

To paraphrase an adage in investment, ‘investors are the worst cowards as they will only go to where they can return’. Going by this maxim, as an investment destination, Malaysia no longer looks as attractive and rewarding. What are these indicative of? Well, our own local investors as well as foreign investors who are already in our country have diminished confidence in our economy’s ability to generate an attractive return to their investments. In other words, investors now see greener pastures in the region — better opportunities outside Malaysia.

Should we be concerned? Yes, of course. Why? Well, the PM places all his macroeconomic targets of high growth and an high income economy premised strongly on private investment! That’s why we must be concerned. In plain terms, if things don’t improve we are derailed from the word go. That’s what it means. Period.

With a current gearing at 52 per cent of GDP (ie RM405.1bil), government spending is already stifled by public debt. A penchant to award massive mega-projects on a direct negotiation basis is surely very irresponsible as it diminishes further our capacity to spend and grow.

We now rely on global demands for our exports to drive growth. Although we may escape the scourge of a double-dip recession, Malaysian exports rose at the slowest pace in seven months as risks to the global economic recovery emerge with Europe’s sovereign-debt crisis and slowing growth in the US.

Growth has slowed in the US and China, amongst Malaysia’s biggest markets, and Europe are in fact implementing austerity measures to reduce budget deficits subsequently threatening to reduce demands for Asian goods.

We have identified that the ‘openness’ of the Malaysian economy and its heavy reliance on external trade and especially with advanced economies, had subjected the nation to the vulgarities of external shocks.

But quite unfortunately, consumers’ sentiment index is not that inspiring either as to improve consumption numbers and subsequently drive growth. Reducing subsidies and now the talk of implementing the GST will have a further knock-on effect on consumers’ sentiment and confidence to spend. Whatever be the rationale of ‘normalisation’, the Bank Negara hiking interest rate doesn’t help in sustaining consumer’s sentiment and may arguably affect cost of funds and borrowing, hence private investment.

So where do we move from here?

The sooner we are able to come to terms with the fact that global FDI environment will remain challenging, the better it is for us. As advanced economies wrestle with their own survival — growth, debt and deficits — it is pertinent for PM Najib to understand, if he is in denial still, that expecting FDI growth of 12.1 per cent per annum for the next 5 years as spelt out in his 10-MP, is rather unrealistic much as it is uncalled for.

In this regard, the government may have correctly identified that the important strategy will be to spur and promote domestic demand by promoting the private sector and private investment. The usual key enabling factors would be to encourage productivity, competitiveness and creativity-innovation.

These are however the oft-repeated mantras that have outlived its once-upon-a-time magical charms. Clear policy frameworks and action plan need to be put in place as to provide enabling investment climate.

But what this BN government doesn’t quite understand and has constantly failed to understand is the fact that there are other factors beyond economics – beyond just tax-free pioneer status; investment tax allowances; reinvestment allowances etc that are critical in providing the comfort and confidence to investors – both local and foreign.

While the proposed “New Economic Model” (NEM) by the premier has correctly identified some of the fundamental problems with our economy he has repeatedly flip-flopped from the NEM. He has equally exhibited lukewarm commitment to the implementation of critical policies which will lead to improvements and greater competitiveness in our economy.

Quite evidently of late, Najib’s policies of ‘liberalisation’ and ‘inclusiveness’ were in apparent collision course with his own party’s Malay-Centric ideology’’ or perhaps bluntly put the ‘Malay-Supremacy’ of Umno’s ideological conviction.

This habit of the BN’s government die hard, despite Najib’s constant rhetoric on transparency and competitiveness continues unabated.  Recent spates of awarding huge government’s mega projects without tenders are clear testimony — 3,300 acres of Sungai Buloh, Sungai Besi and the already much-talked-about RM43 b MRT to Gamuda and MMC.

When it comes to a more substantive assessment, the NEM is seen as shallow and illusionary. The excitement on “market friendly”, “merit-based”, “transparent” and “needs-based” policies seemed to have dissipated so quickly. Without these all, our chances of enticing investors both foreign and locals are greatly diminished.

Pakatan Governments are more than willing to propose our model and solution. In our little ways we are putting it in place in our Pakatan-led states. More specifically and at the federal level policy advocacy, international experiences suggest that getting out of the middle-income trap, for example would require that the government to:

–        get the microeconomic prices right

–        get the infrastructural institutions right

–        get the macroeconomic balances right.

These are seriously policy framework matters, crafted in a ‘worldview’ of ‘sustainable-green’ growth, wealth creation and its redistribution to finally achieve total well-being, distributive justice and quality of life for all. We have to move beyond seeking growth numbers.

Other critical economic and non-economic institutions that need urgent reforms include the judiciary system, the law enforcement bodies, the education institutions, and the public finance system. These failing institutions as a whole have equally weakened Malaysia as an investment destination, in the eyes of investors.

The debate on the economy shall be unending. But an imperative now is to implement basic reforms immediately. But if Najib is unwilling to dismantle the old order of patronage, rent-seeking behaviours and endemic corruption, we shall be stuck in economic stagnation for another decade.

* The views expressed here are the personal opinion of the columnist.