Written by Carmelo Ferlito, CEO of Center for Market Education and Benedict Weerasena, Research Director of Bait Al Amanah
Since the late 1990s, Malaysia has experienced premature deindustrialization, witnessed by the constantly declining relative weight of manufacturing on the GDP; this has been mirrored by a GDP composition unbalanced toward consumption, while investments have been declining. With an increasing emphasis placed on the services industry at the expense of manufacturing in addition to sluggish advancement in ascending the global value chain amidst intensifying regional competition, Malaysia appears to have lost that first-mover advantage as a former regional manufacturing powerhouse; at the same time, Malaysia is turning into an economy which consumes wealth rather than producing it.
That is why the newly launched New Industrial Master Plan (NIMP) 2030 is a breath of fresh air, giving life once again to revive Malaysia’s manufacturing industry. While we recognize the co-existence of both positive and negative points in the plan, we welcome its spirit: recognizing the central role of manufacturing for the national economy is a crucial turning point in the national economic policy, which pairs well with the Ekonomi Madani orientation toward re-establishing the openness of the Malaysian economy to both foreign and domestic investments.
There has been much debate over the liberalization strategy as a cornerstone of the NIMP 2030. However, when managed effectively, investment liberalization can create a symbiotic relationship where foreign investments stimulate local economic growth by encouraging competition, facilitating job creation, technology transfer and entrepreneurship. This could also be a positive push toward industrial consolidation which is very much needed for the local manufacturing sector to be competitive in the international scenario and to be able to foster social mobility.
In line with the liberalization strategy, there needs to be a greater understanding of the role of the government in ensuring the success of the NIMP 2030. Any form of direct government intervention in market-determined outcomes should be met with caution. Take, for instance, the target for median pay to rise on a cumulative average of 9.6%. Direct intervention by mandating a raise in wages such as compulsory participation in the progressive wage model will be highly detrimental, undermining competitiveness. Economic theory posits that wages are determined by market forces of demand and supply. Thus, artificially elevated wages way above the market equilibrium may result in the replacement of low-skilled manufacturing workers with automation, leaving the latter worse off than before. As Ludwig von Mises accurately pointed out in his magnum opus Human Action: A Treatise on Economics, “Economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics.”
On the contrary, raising wages through a holistic shift of the industry towards higher value-added activities and high-skilled job opportunities is the right strategy. We need to remember that macro-targets can be realized through comprehensive institutional and structural reforms without direct government interference. However, achieving micro-level targets such as a targeted wage level by a certain time period often necessitates more direct intervention, which entails market distortions and unintended consequences.
Next, we applaud the paradigm shift from a sectoral-driven approach employed in previous industrial masterplans towards a mission-based approach in the NIMP 2030. We support the emphasis placed on the government’s role in nurturing a holistic ecosystem through the four enablers of mobilising the financing ecosystem, fostering talent development and attraction, strengthening best-in-class investor journey for ease of doing business and introducing a whole-of-nation governance framework. This horizontal action plan strategy is the right move to ensure balanced and holistic growth across sectors through a bottom-up industry-driven mechanism. This will also reduce the risk of inefficiencies and wastage of resources when the government prioritizes certain sectors in which Malaysia might not have a comparative advantage.
Building the right ecosystem means having clear that high-level targets cannot be achieved without being aware of difficulties on the ground: For example, an ambitious policy will be ineffective if it does not tackle – at the institutional level – practical issues such as labour legislation and banking regulation. Both employees and employers can only benefit from an open job market, which should be built on labour freedom of movement within the ASEAN region.
Similarly, banking regulations need reforms as they are now rendering it exceedingly difficult for large corporations with complex structures to establish bank accounts, thereby increasing the risk of fraudulent appointments of fictitious directors and shareholders. Today, if a Malaysian firm sells overseas, the local bank will require a series of documents every time foreign funds enter Malaysia. How can businesses work smoothly if any operation with foreign clients requires additional paperwork?
At the end of the day, the overall effectiveness of the NIMP 2030 still lies in the effectiveness and efficacy of its implementation. The current implementation mechanism seems to mirror the business-as-usual preferential allocation to middlemen. This inadvertently increases the risk of patronage and rent-seeking. As such, there needs to be independent oversight and greater accountability in implementation. Effective governance of the National NIMP 2030 Council and the Delivery Management Unit (DMU) is of paramount importance for the success of the goals planned. More importantly, political stability and policy continuity even in the event of a change of government post-GE-16 are crucial to ensure that the NIMP 2030 does not remain a great masterplan, only on paper.
Above all, to be effective the industrial plan needs to be implemented through institutional reforms that recognize the primacy of unleashed entrepreneurial spirits within unhampered markets.
*This Article was also published in The Star Newspaper