Malaysia’s New Economic Model holds economic/strategic opportunities for India

Malaysia is justifiably regarded among the few countries which have sustained high economic growth over nearly four decades. In the process, it has exhibited substantial structural transformation from an agriculture and resource-based economy to a diversified manufacturing and services economy.

In the process, it has progressed to becoming an upper-middle income country, with a per capita income at current exchange rates of $8,210 in 2008, and a total GDP of $222 billion. In 2008, its international trade to GDP ratio exceeded 200% of GDP. In 2010, it was ranked as the 10 most competitive nations by the World Competitiveness Report of the IMD (www.imd.ch).

The policymakers are, however, not complacent about past achievements. They are concerned that continuing with the existing economic and social practices, based on dominance of the state-led capital accumulation and planning; export dependence on the US, Europe and Japan; and aggressive social and economic engineering favouring the Malay community (called Bumiputera, or sons of the soil), has led the country into a middle income trap, limiting further progress.

They recognise that to realise the goal of becoming a high-income country, with per capita income of $15,000 by 2020, just ten years away, it needs to undertake substantive economic, social and governance reforms.

In their absence, Malaysia cannot escape the middle-income trap. Its competitiveness in low to medium-end manufacturing is being eroded by emergence of competitors, particularly China and Vietnam; in the plantation sector such as in palm oil and coco, by Indonesia and Vietnam; and on the high-end manufacturing and services activities, by China, Singapore and others.

Regional trade arrangements have eroded its ability to protect some of the key industries such as motor vehicles. In retrospect, promotion of motor vehicles industry was arguably one of the most significant misjudgements of the state-led development period.

In March 2010, Malaysia unveiled a New Economic Model (NEM) to facilitate its progress towards becoming a high-income country, with commensurate economic, social and governance structures (full document at www.neac.gov.my )

The main components of the NEM are:
> Growth through economic efficiency enhancement rather than mere increases in labour or capital investments;
> A shift from state-dominated to genuine private sector led growth, both domestic and foreign;
> Greater autonomy to state and local governments, and encouraging competition between them for better public service delivery and innovative growth initiatives;
> More focus on developing globally competitive economic clusters, and less on artificial regional balance in state investment allocation;
> Deepening economic engagement with Asia and the Middle East to reduce dependence on industrial countries for markets, technology, man power and investments;
> To ensure equitable and fair opportunities to all individuals, regardless of ethnicity (Captured in 1Malaysia concept of the Prime Minister Najib Tun Razak) and retaining and attracting talent, including creating conducive environment for Malaysian talent abroad, mainly from the Indian, and Chinese ethnic groups, to return.
> Focusing government assistance to bottom 40% of income groups, regardless of ethnicity or social identity. The assistance will be solely on the basis of 1Malaysia national identity and on need.

Malaysia thus aims to shift away from aggressive affirmative action programmes in favour of Bumiputera, as these are severely constraining future growth and social cohesion. The shift to the NEM will however be gradual, and will be contested by vested interest groups. Nevertheless, articulation of the NEM is a positive development, auguring well for Malaysia.

The NEM also has positive implications for India as it provides opportunities to expand its economic space. These arise due to the following:
i) Broadening Asian and Middle East linkages: Under Prime Minister Najib, Malaysia has given positive signals towards more constructively engaging India in a wide range of areas. Malaysia appears to have concluded that it needs to engage all major economies of Asia, and that overt tilt toward one type of economic growth model or over-dominance of one country in Asia is not in its interest. This explains Malaysia’s keen desire to engage India at this juncture.

Thus, the India-Malaysia economic engagement, to be concluded towards end-2010, is expected to not just include merchandise trade (which is already a part of India’s agreement with the Association of Southeast Asian Nations), but also services, investments and manpower flows, all of which are of vital importance to India.

In 2009, Malaysia had nearly two million foreign workers, about 20% of the labour force, but only around 8% were from India. Among the Indian workers, professionals formed a relatively small proportion of the total. Facilitating greater manpower flows will be helpful in deepening economic engagement, if the experience of Indian Diaspora in other countries, such as the US, Japan and Singapore, is replicated with Malaysia.

ii) Restructuring the economy: Malaysia’s economic restructuring towards higher value added activities provides opportunities for India’s manufacturing and services oriented firms. It also provides potential opportunities for India’s management and technical institutions to collaborate with their Malaysian counterparts, and with Malaysian industry. India could thus be a partner in addressing the relatively weak linkages between industry and universities and research institutions in Malaysia.
iii) 1Malaysia concept: Prime Minister Najib’s concept of 1Malaysia could enable Malaysia’s nearly two million ethnic Indian population (7.3% of the total population) to improve their human capital and economic prospects.

As Indian ethnic group in Malaysia lags substantially behind other groups, improving their status, even in absolute terms, will enable Malaysia to realise its development goals, while enhancing possibilities for business cooperation between Malaysian and Indian businesses. This is likely to be particularly the case with respect to the small and medium enterprises.

The education and health sectors, and creative arts and entertainment also provide good opportunities for business cooperation. The 1Malaysia concept could also encourage latent entrepreneurship and talent of the Malaysian Indians greater scope, with potentially beneficial impact on the self confidence of the Indian community, deepening the engagement between the two countries.

Malaysia’s NEM reflects a mindset, which could expand India’s economic and strategic options. It recognises the need to bring together the talents and interests of all the ethnic groups in the country in a constructive manner, and is consistent with India’s and Asia’s interests in encouraging the growth of moderate and progressive Islamic regimes in Southern Asia.

India must approach opportunities provided by the NEM to expand its economic and strategic space with humility and constructive attitude; and with skillful economic and commercial diplomacy.

The writer is a professor at the Lee Kuan Yew School of Public Policy, National University of Singapore and can be reached at sppasher@nus.edu.sg. Views are personal.