Random Thoughts: Can we regain our competitive edge?

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Among our peers — China, India, Vietnam, Indonesia, the Philippines and Thailand — our real GDP growth in the last three years was the second lowest at 5.5%. Our manufacturing sector is not investing up the value chain while our services sector remains low in growth and under-developed.
“Our economy has been stagnating in the last decade. We have lost our competitive edge to remain as the leader of the pack in many sectors of the economy. Our private investment has been steadily in decline,” Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah told an economic outlook conference last Tuesday.
This about sums up what is wrong with the domestic economy and such is not the usual government speak we hear when it comes to making a realistic assessment of how things are today.
Thus, it is a refreshing change when we hear government officials speaking frankly about the dismal state of the Malaysian economy and its dim prospects in the long term against the backdrop of a rapidly changing global economic landscape.
The harsh reality is that the Malaysian economy is losing ground to its peers in the region, and we have been slacking in the decade following the 1997/98 Asian financial crisis.
This is something many of us already know, because the alarm bells have been ringing for some time now. The latest wake-up call came last week when the Malaysian Industrial Development Authority investment statistics for the manufacturing sector showed very steep declines in the third quarter of this year.
Total approved investments in the manufacturing sector for the period fell 58.2% q-o-q to just RM3.7 billion, compared with RM8.7 billion in 2Q2009. Year on year, manufacturing investments fell by an even bigger 71%.
Approved foreign direct investments (FDIs) in the manufacturing sector plunged 73.8% q-o-q to RM1.9 billion, from RM7.4 billion in the second quarter. Year on year, FDIs fell by an even sharper 78.6%. Of the total amount approved in the third quarter, only RM2.4 billion were new investments, of which RM1.24 billion came from FDIs.
While the recession is to be blamed in part for the sharp drop, Malaysia is nonetheless an underperformer compared to others in the region. In September, Malaysia fell three places in the global competitiveness ranking for 2009 compiled by the World Economic Forum, from No 21 to No 24.
CIMB Investment Research in a report on Malaysia’s third quarter investment performance, expresses concern that both domestic and foreign investments have continued to weaken.
It says that the structural gaps that stifle private investments must be addressed if Malaysia is to achieve the targeted 10.5% growth per annum in private investments during the 10th Malaysia Plan (10MP).
Foreign investors, increasingly, prefer to go to other destinations such as Indonesia and even the Philippines. The more disturbing trend is that in the last year, capital outflows have eclipsed inflows. Major Malaysian corporates have spent billions buying foreign assets and investing in projects overseas.
Indeed, if the capital outflows continue and the dismal data on both domestic and foreign direct investments (FDIs) in Malaysia is an indication of things to come, the government’s aspiration to move the country into a high-income economy in the coming years will be a very steep uphill climb.
The World Bank warns in a recent country report that Malaysia has lost its competitiveness as a low-cost producer and lacks the investment to compete in more advanced industries. It says that while Malaysia is unable to remain competitive as a high-volume, low-cost producer, it was also unable to move up the value chain and achieve rapid growth by breaking into fast-growing markets for knowledge and innovation-based products and services.
According to the World Bank, a high percentage of Malaysia’s exports is made up of high-tech products, but it nonetheless served mainly as an assembler of imported parts, and not a creator of technological and product innovation.
What is holding us back? Chief among the reasons is an education system that produces graduates who are ill-equipped for the kind of high value work that is required in the new growth areas such as biotechnology, the World Bank says.
Lack of transparency and corruption are also high on the list. On the most recent Transparency International’s Corruption Index, Malaysia fell nine places to No 57, and this must be a strong signal that things cannot continue the way they are now.
We have become somewhat complacent since we became a “middle-income” economy, and there has been no great incentive or catalyst to extricate the country from this trap.The problem is, many who serve in the public sector — who are also politicians — do not want to think in the long term, but are instead focusing on what can be achieved in the short term. Why? Because most decisions that bring about long-term benefits invariably create short-term pain, and this is not good for political careers.
Having said that, the government has been slowly liberalising certain sectors and putting in place measures to make the marketplace more conducive to boost private sector participation.
But are these enough? Not really, because our competitors are doing more.

This article appeared in Corporate page of The Edge Malaysia, Issue 784, Dec 7-13, 2009