This article first appeared in Forum, The Edge Malaysia Weekly on April 11, 2022 - April 17, 2022
News coverage of the prime minister’s recent visit to Indonesia highlighted that the two countries had signed a memorandum of understanding (MoU) on the protection of migrant workers. Even if the news was not an accurate reflection of the scope of discussions, it is obvious that it was deemed to be the substantive highlight of the state visit. It has the effect of defining the priorities in the present bilateral relations between the countries.
Besides the MoU, there were brief statements about implementing a travel corridor between the countries and the odd mention of Malaysia’s promotion of the use in Asean of the Malay language, which obviously the Indonesians will not regard as equivalent to the language they speak. Given the significance of Indonesia as a neighbour, as an economy and its geopolitical footprint in the region, Malaysia’s foreign policy posture towards it is wholly inadequate, which is to our detriment. If anything, the news highlight from the meeting would seem condescending from Indonesia’s point of view — that what matters most to Malaysia is the Indonesian workers it seeks.
Indonesia is a G20 country, which is a reflection of its overall standing in the global economy. It is the largest economy in Asean with a GDP of around US$1.2 trillion (RM5.05 trillion), which is about three times the size of Malaysia’s economy. It has a large domestic market of some 275 million people, and in most people’s books, it will be among the top five largest economies in the world by 2050. Malaysia’s relationship with such a country should be more ambitious and structured more broadly in a manner that will benefit Malaysia in the future. Just settling the foreign worker issue is insular and suggesting to the Indonesians that they speak Malay is an expression of that insularity.
Last month, Malaysia finally signed the Regional Comprehensive Economic Partnership (RCEP) agreement, potentially integrating its economy into the world’s largest free trade agreement (FTA) with a market covering 15 countries, comprising more than 2.2 billion people and making up nearly a third of the world’s GDP. The FTA includes the 10 Asean member states, the three East Asian economies of China, Japan and South Korea, and the Oceania duo of Australia and New Zealand. It does not include the US.
The RCEP, a flexible but meaningful FTA, gained greater importance when the US withdrew from the super ambitious US-led Trans-Pacific Partnership Agreement (TPPA) on Donald Trump’s first day as president. Malaysia was also a participant in the TPPA. The US has instead chosen to adopt an antagonistic posture towards China, which has not gone away after Joe Biden’s election. After a period of globalisation — involving the geographic dispersal of supply chains and the facilitation of the movement of goods, capital and talent globally that saw world trade growing in the last half century — there has been some consolidation as countries adjust to the demands of domestic politics, as the dividends of trade within countries have been uneven. The US is one such country where those displaced by globalisation were largely failed by its own policies and it is now turning the country inwards.
Trade, however, has always been central to Malaysia’s economy from the days when it was primarily a commodity exporter, but the total trade — the total value of exports and imports — to GDP ratio was less than 100%. The onset of industrialisation, driven primarily by the inflows of foreign direct investment (FDI) beginning in the 1970s, saw the ratio growing to some 220% by the end of the last century; the same period that saw Malaysia’s economy growing robustly until the 1997/98 Asian financial crisis. Since then, the economy has domesticated as the total trade to GDP ratio has declined to just over 100% today. The economy still produces and exports the same commodities it did two decades ago, but the manufacturing base has shrunk. The enlarged services sector has largely been domestic.
The shrinking of manufacturing is linked to declining investments, especially FDI, which was driving the growth in manufacturing. Malaysia no longer attracts the levels of FDI it once did and the inflow of investments has declined quite alarmingly. Although global FDI flows contracted by a third during the pandemic, such investment flows held up quite well in Asia. There were a great deal of intra-Asean investments flows, for example, as firms in member states invested in each other’s markets. Singapore and Thailand were the largest Asean investors within the bloc. In 2021, a quarter of Indonesia’s FDI inflows were from Singapore, and 40% of Vietnam’s FDI were from Singapore. Singapore too is the largest destination of FDI inflows into Asean, accounting for two-thirds of the total, followed by Indonesia, Vietnam and the Philippines. Malaysia is neither active in intra-Asean investments nor is it attracting FDI into Asean.
Malaysia is clearly at risk of losing its international footing as it is being left behind as an investment destination, and neither are Malaysian companies going outside its borders to the region to invest. Statutory funds such as the Employees Provident Fund must have invested heavily outside of the country as would have Bank Negara Malaysia in managing its reserves, but Malaysian companies or even Malaysian-based companies have not gone out there in numbers. Corporate balance sheets are in much better shape than government finances and the expectation is for these companies to do much more. One other reason for the domestication of the economy is that there have not been enough domestic firms that have leveraged on the presence of multinational companies to enter the global supply chains. This is something that needs to be understood and addressed if things are to change.
Now that we have signed a slew of FTAs, and the RCEP in particular, the issue for Malaysia is: How do we align all these commitments and opportunities (and challenges) that come with them with the broad national development strategy? How do we position ourselves in the new normal that is shaping the post-Covid-19 equilibrium? Unfortunately, Malaysia had been floundering even before the last general election, caught up in the 1MDB scandal and the political machinations to cover it up. It involved so many institutions that the environment was not conducive for either private investment or the formulation of strong public policy. Four years after the last GE, we are into our third PM and things have not improved. The preoccupation with internal politics has not helped to reverse the domestication of the economy as policies have become even more insular. The missed opportunities with Indonesia is a reflection of that.
The broad policy thrust should be about achieving an explicit measurable objective that creates the likelihood of solving the many other problems the country is facing. As an example, targeting to double the median household income in a decade is one such objective. Both the problem of inequality and the fiscal state of affairs can be improved if the median income moves significantly enough. A secondary objective is that growth narrows the distance between the mean and median incomes. The policy objective of median income doubling has an implied growth rate of some 7% annually, which clearly suggests that it is not achievable using domestic demand. The trade imperative is therefore clear — enlarge the tradable sectors of the economy or we will continue to decline.
On the supply side, even if the need for competitiveness to access export markets is recognised, the level of investments required to produce such competitive products and services requires a significant change in the overall mindset. This, in turn, is shaped by policies and the tone of political debates and posturing. Investments are all about confidence, and investor confidence is about the conversations they hear. Right now, and it has been so for a while now, politics has been divisive and parochial as parties seek to define solutions for real problems by adopting positions that actually make them worse.
The Russia-Ukraine war and the US-EU response to it, more so than the pandemic, will shape the new normal that is still forming. The Russian military invasion of Ukraine is a war that we know — as seen in the brutality, the loss of lives, and destruction of properties due to weapons of all kinds being used. But the economic warfare unleashed against Russia is unprecedented, its full ramifications are not fully understood, and the global economy will have to pause yet again and recalibrate, based on its impacts.
This presents Malaysia with yet another opportunity to sort things out and get its act together. The opportunities and platforms to leverage to get the economy going again are all there. We just need competence at every level. And a good dose of ambition to look beyond ourselves.
Dr Nungsari A Radhi is an economist
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