What's the Real Economy in Malaysia?

The real economy

September 27, 2010

SEPT 27 — There seems to be so many programmes these days that I am a little confused by all the jargon, slogans and overlapping priorities, and it is difficult for me to see the big picture.

There is the 10th Malaysia Plan, the New Economic Model (NEM), the New Key Results Area (NKRA), the Government Transformation Project (GTP), the 1 Malaysia ideals, the latest Economic Transformation Program (ETP) driven by the Performance Management and Delivery Unit (Pemandu) together with the “labs” and a host of other industry specific programmes that I am sure have slipped my mind. I suppose that it is to be expected when the Prime Minister’s department employs 40,000 people.

At least when Tun Dr Mahathir Mohamad tells us to be wary of the US$4 trillion (RM12.4 trillion) daily world currency trade that contributes nothing to the real economy, it is easy to comprehend and in this particular case, agree with. The focus has to be on the real economy that generates jobs and goods.

To join the developed world, we basically want to achieve a GDP per capita of US$15,000 by 2020 from about US$7,500 currently. The question really is whether we need to invest RM1.4 trillion (60 per cent private sector) over the next 10 years as advocated by Pemandu to achieve this?

Our GDP for 2009 was RM680 billion as per Statistics Department records. At the current USD/RM exchange of 3.10, our GDP by 2020 should be around RM1.5 trillion to achieve our target. Bear in mind that based on global Purchasing Power Parity, our GDP per capita is already at about US$15,000.

So to be clear, we want to have a GDP per capita of US$15,000 in nominal terms by 2020.

While I accept that scenario-planning is extremely difficult, our focus should be on our core as an economy. As an extreme and no doubt ludicrous example, we could achieve our developed status simply by maintaining our current RM700 billion GDP level, while the USD/RM exchange rate goes to 1.50. Voila! We are now developed. Our export industries though will be totally destroyed at this exchange rate.

To understand the core, we need to distinguish those activities that generate sustainable income and those that do not. As an analogy, try equating your house to all those wonderful buildings and constructions in Malaysia. While we would all like to have nicer houses, we are all limited by our own finances. At the same time, our own residence generates no income and is basically for our own pleasure.

Building more wonderful constructions which do not generate any income may be nice on the eye but painful on the pocket. I think we have superb buildings in Putrajaya for the government and civil service that generate no revenue but are costly to the country. Perhaps we could afford it in the past but going forward, in an uncertain global economic environment we need to be more careful.

The core of the economy has to be the private sector for our GDP to be sustainable and growing. At the same time, we need to have an educated workforce trained for the needs of the private sector. This requires a total reform of our education system to make it commercially valuable.

At the same time, corruption needs to be eradicated and inefficiencies rectified. This will give our economy a strong core from which we can grow our GDP to RM1.5 trillion in 2020, though I am pretty sure that we will not need RM1.4 trillion to do it.

The government can play a pivotal role by balancing its operating and development budget now. Having balanced its budget, the government could then say that it will only borrow to finance its investments in projects that give it a positive return. In this way it acts an investor where its function is to maximise returns. So long as it maintains a debt to GDP ratio of 50 per cent, it could potentially borrow another RM400 billion for investments over the next 10 years on the assumption that our GDP will be RM 1.5 trillion in 2020.

If our core is strengthened as proposed above, I am confident that we can meet our development goals by 2020. But if we focus on prestige projects like the MRT for Kuala Lumpur which will cost north of RM40 billion, take 10 years to complete, most likely causing traffic chaos in the meantime, we will have lost the plot. We should instead have congestion charging for cars which cross subsidises a free bus service for Kuala Lumpur which can be fully implemented in months, not years and solve the traffic problem in a very short space of time.

In my company, we have about RM100 million in capital and our annual turnover is around RM250 million. If someone tells me that to increase my turnover to RM500 million in 2020, I need to invest RM500 million, I will tell him that for RM100 million, I could buy another similar company with a RM250 million turnover today and not wait 10 years nor spend the additional RM400 million to achieve the goal of RM500 million turnover.

To be fair, industries differ and have different capital requirements but on average for the whole economy, to say that we need to invest RM1.4 trillion to increase our GDP by RM800 billion just doesn’t sound right to me.

If we don’t get real, the costs of our delusions will be visited on our children in the form of half-completed projects, white elephants, underemployment and a massive debt burden which will take generations to contain.

All the plans are done by the government trying to show that it knows what is best and yet most of the investment and responsibility to implement the plan is lumped on the private sector. When the factors of production (land, labour and capital) are mostly controlled by the government or the GLCs, do you really think the private sector can play such a pivotal role if the government is unwilling to cede control of these factors?

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

Reference:
http://www.themalaysianinsider.com/opinion/article/the-real-economy/