12th Malaysia Plan: Three Backward Steps

Latest five-year plan sure to result in economic blight

By: Ramesh Chander and Lim Teck Ghee

The 12th Malaysia Five Year Plan tabled in parliament on September 27, if implemented as presented, is likely to be a self-inflicted wound that will adversely alter the trajectory for socio-economic growth and heighten the likelihood of further entrapment as a middle-income economy, with clear risk of going backward in development and prosperity.

The plan, presented by Prime Minister Ismail Sabri Yaakob, is replete with claims of its policies and programs being “game changers,” “catalysts for,” “enablers,” etc. However, our scrutiny leaves us deeply disappointed as we fail to discern specific policies that qualify that description.

Three key longstanding stalled issues necessitate rethinking and an entirely different set of policy initiatives if the Plan is to meet its goals of a high-income country with inclusive and sustainable growth. Our concerns are echoed in part by the leader of the Opposition, Anwar Ibrahim, and a host of other commentators.

An early warning backdrop is the disclosure by the Federation of Freight Forwarders (FMFF) of the government’s attempt to enforce a drastic restructuring of the industry. The proposal to require existing non-Bumiputera firms in the industry to divest 51 percent of equity has been described as tantamount to a robbery and classic “UMNOism.” Yet other observers have pointed out the negative vibes this announcement sends to other sectors. Most quarters agree that this will be a contributing factor to further damage the investment climate as well as disrupt the supply chain’s efficiency and productivity.

In our judgment, the government proposal overturns the solemn undertaking given by Tun Abdul Razak, Malaysia’s second prime minister, that the 30 percent target would not entail the takeover of existing assets but would be achieved via growth when he presented the New Economy Policy (NEP) in Parliament. The Barisan Nasional Cabinet also rejected the initial version of the Industrial Coordination Act which attempted to put in place a regime in which 30 percent of equity in each limited company was to be made available to Bumiputera investors.

We believe the proposal is not only a regressive policy change. It is also contrary to Article 153 of the Federal Constitution and is likely to be litigated.

We next take up the contentious issue of how the 30 percent equity ownership target is measured. We do so in order to highlight how deeply flawed numbers have come to determine policies that are not in the best interests of the nation. The resulting policy distortions have created negative outcomes that include rent seeking, crony capitalism, widening income disparities especially in the Bumiputera community and ethnic tensions.

Corporate equity

The 12th Plan errs by suggesting that the 30 percent target has yet to be attained. This is a debatable contention as no reference has been made to research studies that report contradictory findings; no credible statistics have been provided to support it.

To set the record straight, we need to remember that comprehensive ownership data collected by the Department of Statistics is available to determine the value and ethnicity of equity holdings. These, however, have been classified as “sensitive” and not released. This is an omission that can be easily rectified to provide a truer and less politically exploited understanding of company ownership in Malaysia

The absence of actions to correct the basis for calculating the value of equity holdings has reduced the credibility of the statistics released. The current deeply flawed numbers should not under any circumstances underpin important policymaking.

Credible data is a fundamental requirement to support evidence-based policies. Greater transparency in the ethnic-oriented data on equity holdings as well as on other aspects of the economy and society are necessary if there is to be public confidence that there is a fair and just government. 

Finally, there is one reality for any economy that legislators must not forget. The Plan speaks of a decline in the equity held by Bumiputeras resulting from their disposal of shares. No account however is taken of the fact that trading of shares is a normal activity. Proceeds from such sales are often invested in other assets e.g. real estate, financial instruments, etc. Additionally, many of the elite appear to have transferred their newfound wealth offshore.

If further affirmation is needed, one has only to look at the estimates of capital flight which places Malaysia as among nations with the largest source of capital flowing out of an economy.

GLCs and Re-energizing the Private Sector

The 12 Plan has omitted GLCs as a key sector to reform. Not only is the role that government-linked companies play pervasive but among countries in the world, we rank with the highest in terms of SOE presence among the largest firms. The negative economic impacts of such a dominating presence of GLC are well known and need little elaboration.

Since then, we are encouraged that former PM Muhyiddin Yassin in his recent address to Parliament called for a review of GLCs (and GLICs) and voiced the view that they should not be competing with the private sector.

However, this opinion is nothing new. In fact, it is too little and too late. Initially established to facilitate Bumiputera participation in the modern economy, GLCs have proliferated to control not only the commanding heights of the economy but also to encroach into the mid and lower tiers. GLCs today constitute over 40 percent of the capitalization of all publicly listed companies,

They are the elephant in the room crowding out private enterprises including Bumiputras, and contributing to poor governance. There is every indication that they are among the main sources responsible for the growing income disparity in the country, in particular, that pertaining to the Bumiputera community.

With its influence over, and links to, the national and state bureaucracy, quite apart from its role in facilitating clientelism, collusion, and nepotism of the political elite, GLCs have introduced distortions to the market in the products and services provided and have raised the costs of doing business whilst not improving economic efficiency.

Earlier plans failed to address the proliferation of GLCs and their pernicious economic and governance impacts. The most recent round of political appointees to GLC high positions, despite widespread public condemnation, gives little confidence that any review will be taken seriously.

It is crucial for Parliament to not delay with implementing policy reform proposals that can restore GLCs to an appropriate place in the economy as commercial and competitive entities shorn of unnecessary and inflated government privilege and other functions that provide openings for politically driven patronage and misuse of public funds.

Revitalizing our Private Sector and SMEs

In tandem with a GLC reform program, there needs to be a revitalization program for the private sector, especially directed at small and medium-sized enterprises. It is clear now that Malaysia has lost its competitive edge in attracting multinational corporations. The exodus of many established corporations to other countries is indicative.

According to the latest data, foreign direct investment (FDI) in Malaysia registered a net inflow of RM14. 6 billion in 2020 as compared to RM32. 4 billion in the previous year. This contraction is only partly a result of global economic uncertainties due to the pandemic situation. These corporations as well as the local businesses have also found the cost of doing business rising. The regulatory regime has grown, is stifling and is subject to uncertainties generated by frequent policy changes such as, for example, with the MM2H program.

Meanwhile, there is every likelihood that a significant proportion of the 900,000 SMEs will close shop or cut back on operations as a result of the pandemic crisis. That this prospect will considerably worsen poverty and unemployment is clear from the profile data of SMEs that they:

  • make up one million or 98.5 percent of all business establishments;

  • provide two-thirds of all employment;

  • contribute 40 percent to the national GDP; and

  • are located in all states and all sectors.

SMEs are not just pillars of the economy. They are the main source of multiracial partnerships and interaction at many levels. Also not generally known is that 20 percent of SMEs are owned by women thus contributing to gender equality.

Reviving the SME segment of the economy in the short and medium-term future should be amongst the highest policy priorities of the government in the 12th Plan.

Urgent game changer reforms

The third backward step relates to a wide range of sectors in which earlier policy reform measures were agreed to by a previous government.

To recall, 30 years ago at the National Economic Consultative Council (NECC) deliberations to propose the successor to the NEP, no quantitative targets were set in the final report. It was the consensus of the 150 members drawn from political, economic, and social sectors that what was important was not the numerical targets but the necessary capacity building to build and sustain businesses. The 6th Malaysia Plan 1991 to 1995 in fact did not specify such ownership targets.

Likewise in 2010 the New Economic Model drawn up by one of the most credible and qualified economic teams recruited to chart the country’s socio-economic future eschewed the continuation of a regressive NEP policy. 

Among the urgent policy imperatives identified to ensure the nation’s ability to meet the multiple challenges from internal and external factors were:

  • Refocusing from quantity to quality-driven growth. To boost productivity, Malaysia needs to refocus on quality investment in physical and human capital.

  • Relying more on private sector initiative as the primary engine of growth. This involves rolling back the government’s role, promoting competition and exposing all commercial entities (including GLCs) to the same rules of the game.

  • Making decisions bottom-up rather than top-down. These would lead to more accountable and less rent-seeking and crony-driven outcomes.

  • Redressing unbalanced regional growth. This would generate spread effects from more effective poverty alleviation and equitable income distribution outcomes.

  • Welcoming foreign talent including from the Malaysian diaspora whilst retaining local talent. Foreign skilled labor can fill the skill gap and generate positive spill-over effects.

  • Reforming the education sector which was a key laggard in the economic transformation of the country. In particular the public higher education sector is still unable to produce the skilled human capital needed.

  • Rightsizing the bloated public sector and rectifying its siloed and ineffective sectors that have impeded investment and productivity.

What was unprecedented about the NEM is not only its acknowledgment that falling FDIs and competitiveness, compounded by the brain drain and decline in standards of governance, have put Malaysia behind its neighbors in the region. It was also the recognition that the NEP had become a millstone holding back the country’s development. Hence the need to not simply shift to a higher-skilled, more competitive and private sector-driven economic ideology but also of the urgency of deep structural reforms for the country to attain its true potential.

When approved by the government of Prime Minister Najib Razak, the NEM had the strong support of business and professional elites and the country’s movers and shakers. However, it needed to be accompanied by actionable policies and a multi-year commitment to implement them. This has not happened.

Today as Parliament deliberates the 12th Plan, we urge legislators not to return to a NEP clone mindset but to use the NEM instead as a reference text to support the real game changers that the nation needs or we will risk a further falling back in our economic prosperity and standing among nations.

Ramesh Chander is a former Chief Statistician of Malaysia and a Senior Statistical Adviser at the World Bank in Washington D.C. Lim Teck Ghee is a former senior official with the United Nations and World Bank.