Rejoinder to the EPU – Lee Hwok Aun

I thank the Economic Planning Unit (EPU) for issuing a clarifying note on its method for projecting how Malaysia will attain high income status by 2020. Thus, we know that the high income threshold of US15,000 (RM55,377) is based on the World Bank’s threshold of US$12,745, growing annually at about 2% until 2020. Hence, if Gross National Income (GNI) per capita touches US$15,000 by 2020, we join the high income club. These calculations are performed using nominal instead of real terms.

I had raised contentions that the statistics underlying Malaysia’s attainment of high income status were puzzling and misleading.

Here’s the puzzle again. In 2010, the NEM designated 6.5% real GDP growth as the required pace for attaining high income status by 2020. The Tenth Malaysia Plan (10MP), released soon after the NEM, revised that target downward to 6.0% per year for the 2010-2015 interval. But the Malaysian economy registered 5.3% annual growth over this period. Now we are told that 5-6% per annum growth over 2015-2020 is sufficient.

However, having fallen short of the targets, the Malaysian economy should now need to grow in excess of 6.0 – 6.5% to stay on track for high income status as projected in the NEM and 10MP.

To draw a road trip analogy, imagine a destination 100Kms away. The driver tells you that we will follow a speed of 100Km/h and get there in one hour. Later, he tells you we are traveling at 80Km/h – but will still get there in one hour. Either the speedometer has changed, or the destination has moved, or maybe the driver is drugged.

I thought that these discrepancies stemmed from selective usage of nominal terms instead of real terms in handling GNI per capita. Now I see that I was mistaken. No, it is not an issue of real versus nominal; I acknowledge that error on my part.

There are actually two other interventions that permit our development planning documents to report rates of growth below the initial targets, while maintaining that Malaysia is on schedule.

First, GDP has been revised, as also pointed out by the EPU. This is a regular, legitimate and necessary practice; the economy changes its structure, with new sectors, products and services emerging, while others may diminish. How we count also needs to be modified. Every time the method for estimating GDP changes, a new base year is set and GDP can be recomputed backwards in time.

The procedure is fine and well, although the contents and numerical veracity of GDP revisions can be debated. However, this process underlies the strange growth and high income achievement statistics in our recent development documents. With a base year revision, GDP growth rates may stay the same but GDP levels get a lift, as shown in the table. Over 2010-2014, real GDP grew only 5.4% annually, according to both the 2005 base year and the 2010 base year. But after the base 2010 revision, GDP has been bumped from RM821.4 million to RM1,012.5 million. Malaysia becomes officially “richer” – because of a new counting system.

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                                                                   Average annual real

                         GDP in 2010     GDP in 2014   GDP growth 
                          (RM million)       (RM million)   2010-2014

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Base year  2005       676.7               835.0                5.4%

Base year  2010        821.4              1,012.5              5.4%

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We cannot summarily dismiss these revisions without any evidence that they may unduly inflate GDP. But it would have been appropriate for the Malaysia Plan to explain these statistical modifications, instead of feeding us dubious pills and expecting us to blithely swallow them.

It will also be good for the EPU to clarify discrepancies in the nominal GNI per capita figures. The 10MP reported GNI per capita of RM26,400 in 2010, targeted to rise to RM38,800 in 2015. The 11MP has revised these figures to RM27,800 in 2010 and RM36,900 in 2015. Malaysia missed the target. Why is this not acknowledged and explained?

The second intervention is simpler: the target has effectively been reduced.

The NEM set a target of US$17,700 in GNI per capita by 2020. The 10MP indicated that the NEM’s target would stay.

The 11MP has issued a lower income target, from US$17,725 down to US$15,690. The weaker Ringgit per US Dollar partly accounts for the differential. But what happens when we compare the GNI per capita targets in Ringgit terms, cutting out the noise of volatile and unpredictable currency markets?

The target GNI per capita for 2020 drops from RM56,700 in the NEM and the 10MP to RM54,100 in the 11MP.

Yes, we seem to have slashed the target. At the previous target, GNI per capita would need to grow 9.0% per year; at the new one we only need 8.0%. Likewise, we now require a lighter 5.8% real GDP growth instead of 6.8%.

Alas, we were not informed of these numerical manoeuvres – which make for more achievable targets. If so, we could consider and debate their basis and credibility. Being kept in the dark, I cannot help but catch a whiff of statistical doping.

We should not be surprised; development objectives seem to have shifted in line with waning outlook and fading courage to confront our woes. The NEM issued a clarion call: “The economy is caught in a middle income trap – caught between low-wage producers and highly-skilled innovators and caught without a viable high-growth strategy.” A mere five years later, and on the back of modest growth, the Eleventh Malaysia Plan pronounces that “Malaysia’s national per capita income… is well on track to surpass the US$15,000 threshold of a high-income economy by 2020.”

A sense of urgency toward fundamental problems has been overtaken by a sense of destiny and triumphal solutions. – June 3, 2015.

* Dr Lee Hwok Aun is senior lecturer of Universiti Malaya's Department of Development Studies.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.