My Say: The 10th Khazanah Megatrend Forum and Budget 2015 — a disconnect?

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AS someone who helms an opposition party think-tank, I was privileged to be invited to attend the 10th Khazanah Megatrend Forum (KMF) last month. The two-day engagement was intellectually enriching.

Permit me to quickly revisit pertinent observations from the many distinguished speakers. Admittedly, I can only be selective. Speeches, forum and events traversed the usual realms of economics and finance, evidently depicting the Khazanah leadership’s grasp of what it takes to propel the nation further.

That novel characteristic alone makes this year’s KMF unique – moving away from obsession with economic growth numbers to defining the challenges of the nation going forward.

Simply put though, it is a gathering of thought leaders and experts to address the critical malaise of why Malaysia is stuck in the middle-income trap and what it will take to transition it into a high-income economy and, by logical extension, a truly developed nation.

For the record, the history of our socio-economic development is arguably one of relative underperformance. While we pulled ahead of regional peers like Thailand and Indonesia, we have been outperformed by South Korea, Taiwan, Singapore and Hong Kong.

Going back to basic economics, it has long been observed that the productive capacity of an economy is capped by the availability of inputs like labour and capital, given a set of technological conditions.

The maximum potential level of production or the productive efficiency frontier of an economy is graphically represented by the Production Possibility Frontier (PPF) or Production Proficiency Capacity (PPC).

Against this backdrop, the forum’s theme of “Scaling the Efficiency Frontier: Institutions, Innovation and Inclusion” was indisputably most apt.

In their own ways, all the keynote speakers, namely Sultan of Perak Raja Nazrin Shah, South Korean professor Ha-Joon Chang  and Tan Sri Andrew Sheng, as well as others, provided compelling arguments for the need for Malaysia to affect a productivity challenge, moving beyond the “miracle” of input growth.

Chang provided new insights of what it takes to do things differently to develop a different trajectory of growth. To paraphrase him, we should  not only rely on our comparative advantage as it will impede our productivity growth and stifle our further innovative endeavours.

Significantly too, he stressed the need to embrace the downside of innovation. This is done by instituting legal provisions to provide for a second chance for entrepreneurs in the face of liquidation and other risks of doing new things and getting into uncharted markets.

Other speakers also alluded to the critical need for the government to incentivise these risk-taking efforts in an eco-system that will allow for innovation by “serial entrepreneurs”, who invariably exhibit “dysfunctional personalities”.

Companies were reminded to be robust enough to diversify in the face of the eventuality and trade-offs of Schumpeter’s creative destruction in the innovative economy. That is surely worth pursuing, though arguably, it’s always easier said than done.

Be that as it may, let me now turn to the recently tabled Budget 2015. It doesn’t need reminding that the budget proposals do not allow much fiscal space for the finance minister to manoeuvre.

This piece however, is not about the arduous task of balancing fiscal prudence with the rakyat’s needs. There have been ample critical comments, from both detractors and supporters alike.

But being the last building block in the five-year development blueprint, the budget is expected to provide an allocation for the creation of the desired structural changes as envisaged by the 10th Malaysia Plan (10MP). It is from this perspective that this article is keen to delve into.  

Simply put, has Budget 2015 laid down the strategic initiatives for the transition to the next five-year plan – the Eleventh Malaysia Plan? Has the budget sufficiently addressed the structural issues of getting the nation out of the middle-income trap?

The premier must take heed that no amount of capital spending on infrastructure projects will take us out of this middle-income rut. A slew of big-ticket infrastructural projects has been lined up as relentlessly as before in this budget.

For instance, seven highways and rail projects are to be built, starting in 2015, at a cost of RM48.2 billion, including the 56km MRT2 Line from Selayang to Putrajaya at a cost of RM23 billion.

Surely this will provide a good macroeconomic (input) boost for growth and with it, the attendant debt build-up. We are not against it per se but the issue is always about the opportunity cost. What should be our priority and what needs doing first as imperatives to propel the nation into a higher income economy?

What else can’t we do, when Datuk Seri Najib Razak committed RM711 million specifically for Permata socio-welfare programmes under the Prime Minister’s Department? Yet for R&D, the finance minister could only cough up RM1.3 billion for the Ministry of Science, Technology and Innovation.

Only RM10 million has been allocated for the Business Accelerator Programme under SME Corp. To enhance use of new technology, automation and innovation in the development of small and medium-sized enterprises (SMEs), only RM80 million is allocated for a Soft Loan Scheme for Automation and Modernisation of SMEs under Malaysian Industrial Development Finance Bhd. To further promote the industry, a Digital Content Industry Fund will be set up under industry regulator, Malaysian Communications and Multimedia Commission, with an allocation of RM100 million.

All this amounts to a mere RM190 million to encourage national innovativeness, against RM75 billion (for the combined MRT2 and Pan-Borneo Highway) for infrastructure, which will only lead to more lining of the pockets of crony companies. The “innovativeness budget” is not even one-seventh of Permata's allocation.

If the above is not serious enough, we should ask whether upgrading roads, schools and hospitals, and providing critical utilities and infrastructure, particularly in Sabah and Sarawak, costing even as much as RM27 billion, be an imperative as opposed to the Pan-Borneo Highway, which will also cost RM27 billion?

For the record, under 10MP, wasn’t unleashing productivity-led growth and innovation among the central themes when the plan was first launched? For all that, we have now come to know that at the end of 10MP, productivity levels remained flat. Besides, the economy continues to be anaemic with regard to talent and skilled labour availability, amply depicted by the total factor productivity, which evidently suggests a weakening dynamism in key sectors of the economy.

A recent report by The Asia Foundation (TAF) conceded that while Malaysia has effected some positive policy innovation in recent years, the stated reform measures have only been addressing the symptoms of the “middle-class trap”, rather than the underlying causes of the country’s economic “uncompetitiveness”.

Worse still, according to TAF, one of the sore points is that Malaysia’s economic progress had not been accompanied by reforms of the country’s political institutions. Insufficient checks and balances continue to dog the country’s economy, thus leading to increasing concentration of power within the executive branch and persistence of rent-seeking behaviour, patronage politics, opaque governance practices and pervasive corruption. Is it any wonder then that Malaysia is perceived as among the world’s worst countries on integrity?

Malaysia’s economy has no option but to transition from an input-led growth model towards one driven by innovation and productivity.

But to be on the trajectory of a high-income and inclusive economy and a truly developed nation where growth benefits all, Malaysia must embrace a sea change in its social, institutional and economic systems and a revolution in the mindsets of all stakeholders, starting with the leadership, and collectively, the rakyat.

From that perspective, Budget 2015 is a far cry from realising the imperative of “Scaling the Efficiency Frontier”, where a commitment to  change and reform must be effected through the 3Is — institutions, innovation and inclusion as mooted by Khazanah.

In this sense, there is a clear disconnect between the 10th KMF and Budget 2015.
Dr Dzulkefly Ahmad is executive director, PAS Research Centre

This article first appeared in Forum, The Edge Malaysia Weekly, on October 27 - November 2, 2014.