Wednesday, March 12, 2014

Can transformation close the gap?

夏伟文 & 陈薛卉 (30th Sept 2013)

In less than seven years, Vision 2020 will reach its day of reckoning. The vision aimed to propel Malaysia to developed nation status by year 2020. After setbacks from few crises, particularly the Asian financial crisis 1997/98, can the country still reached its target? Economic Transformation Plan (ETP) has been formulated to help Malaysia to achieve rapid development. Yet, what are the gaps between now and our dream in 2020? 

ETP itself has three main targets, namely “high income”, “inclusiveness” and “sustainability”.

High Income Target
For the first target, it aims to achieve income per capita of USD15,000 or RM48,000 (thus, implying exchange rate of RM3.20 per USD being used). Based on World Bank’s benchmark estimation using nominal value and Atlas method, Malaysia’s latest income per capita for year 2012 is USD9,800, thus USD5,200 short of ETP minimum target.

Various projected growth rates from 2012 to reach the USD15,000 target in 2020 are presented in Figure 1. With ETP 6% growth per annum, Malaysia will reach the target. However, is the 6% projected growth rate too ambitious? Average annual growth rate from 1962 to 2012 (all available years in World Bank’s data) is only 4.21%. Taking a more recent estimation, average annual growth rate from 2000 to 2012 is even lower at 3.36% only. Both of these average growth rates will fail to make Malaysia a developed nation by 2020. The most optimistic approach is to take average rate on Asian Miracle years, namely between 1988 and 1996. The rate is 6.76% but do we expected those “miracle” will repeat itself now?

Figure 1: Projected GNI with Various Growth Rate

Another benchmark targeted by ETP is service sector accounting 65% of GDP. Based on data from Malaysia statistical department, service sector contribution to GDP fluctuated between 44.64% (lowest, recorded in 1998) and 52.37% (highest, 2001). Mathematically, service sector’s contribution need to increase at a calculated rate of 1.57 percentage points per year from its 49.31% in 2010. Historical trend from 1988 to 2010 recorded only an average growth rate of 0.17 percentage point per year. Service sector contribution grew most rapidly from 1988 to 2001. Yet, it grew a low average 0.5 percentage points per year. In the most optimistic view, only average annual growth for all positive years since 1998 yields a rate (1.68 percentage points) to achieve ETP target.

Figure 2: Projected Service Sector Contribution to GDP (Current Value)

Inclusiveness Target
ETP’s inclusiveness target aims to enable all Malaysian to enjoy the fruits of growth. In another words, it aimed to reduce inequality gaps. Focus will be given to households from lowest 40% income group. Based on World Bank’s data, the different between the forth 20% income group and highest 20% income group averaged around 31%. The same different between the first and second lowest 20% income groups is only averaged around 4%. Average income share held by lowest and highest 40% are respectively 13.64% and 72.84%, hence creating an average income share gap of 59.2%. Overall income disparity is shown in Figure 3 and Table 1.

Figure 3: Malaysia’s Income share Distribution

Table 1: Malaysia’s Income share Gaps Analysis
Different lowest 20%  - second 20%
Different second 20%  - third 20%
Different third 20%  - forth 20%
Different forth 20%  - highest 20%

After 1997, income share of the richest group has fall drastically to 22.41% in 2004, perhaps due to the Asian financial crisis. Note that no data available between 1998 and 2003. However, their share of income rose gradually toward 30% level in 2009.

In our previous article, we highlighted that “inequality” issue in Malaysia often narrowly focused on inequality between ethnic. Thus, no surprises that one of the Strategic Reform Initiatives (SRIs) in ETP, namely “narrowing disparity”, only aims to improve Bumiputera representation in market equity, employment, high value-added occupations, and management positions.

Yet, inequality should be viewed in wider scopes which include inequality between states and sectors. For example, agricultural sector only contributed 10.6% of Gross Domestic Product (GDP) in year 2010 as compared to manufacturing (26.1%) and services sector (32.3%). Besides commercial agriculture like palm oil and rubber plantation, income earned in this sector is relative lower.

In term of geography disparity, Malaysia Statistical Department estimated that in year 2010, Kuala Lumpur has the highest GDP per capita at RM55, 951. That is about 6.8 times more than Kelantan, the lowest at RM8, 273. Kuala Lumpur GDP per capita almost doubles Penang, the second highest state. Sarawak and Selangor come third and fourth highest.

Sustainable Target
One of the criteria for sustainable development is manageable debt level. Debt may be needed when saving is insufficient to reach needed investment level. Continuous threat of global recession has also prompted the government having deficit budgets, which are financed by debt. Yet, two questions are important. First, is the government spending prudent and necessary? Second, is the current debt level alarming?

 An analysis of operating versus development expenditure reveals ineffective government’s spending pattern. Based on data from Ministry of Finance, Figure 4 and Figure 5 show that operating expenditure is higher than developing expenditure except for year 2003. The gap is getting wider since 2003, averaging about 1.55 times for years between 2004 and 2012.

Figure 4: Operating versus Developing Expenditure

Figure 5: Operating – Developing Expenditure Ratio

High operating expenditure is burdening the government, thus public sector should be reduced in size but increase in efficiency. In addition, it is important that the Strategic Reform Initiatives (SRIs) of “Public Service Delivery” fully utilized information technology automation and reduce redundancy. It is good that PEMANDU revealed that a total of 49 licenses have been either abolished or identified to be abolished to reduce redundancy and create clear governance structure.

Under “Public Finance Reform” SRIs, ETP targets to reduce fiscal deficit to 3% of GDP by 2015 and near budget neutral by 2020. Can we achieve this target given the trend as shown in Figure 6? Since 2008, we have five consecutive years of deficit, the worst being in 2012 (latest available data year). 

Figure 6: Ratio of Budget Deficit (Surplus) to GDP

ETP Plan and Strategies
Increasing Gross National Income (GNI) is always main focus of ETP. It is necessary but not the only factor to enable equality and sustainability. Top six EPP from various NKEA are listed in Table 2.

Table 2: Top Six EPP Contributors of GNI
GNI added in 2020 (RM million)
Attracting the right mix of internal & external talent
Greater KL/KV
Attracting 100 of the world’s most dynamic firms within priority sector
Greater KL/KV
Solar electronic (silicon, wafer & cell, and module producers)
Electronic and Electric
Improving energy efficiency
Oil, Gas and Energy
Pushing generics (healthcare) export opportunities
Increasing the (palm) oil extraction rate
Palm Oil

All EPPs have GNI target but Greater KL/KV NKEA seem to be obvious contributor. Therefore, will this help achieve economic balance between geography (states in Malaysia)? In addition to EPP, five economic corridors help to increase national income too but also in favor of Kuala Lumpur / Klang Valley and industry or service sectors. Exceptions are NCER that does focus on agriculture and “oil and gas” plans under ECER may benefit the two less developed states of Terengganu and Kelantan.

NKEAs such as modern agriculture, wholesale/retail, palm oil and tourism could help achieve inclusiveness if they give priority focus on rural or relatively less developed states in Malaysia. It will be better if micro-financing is included in Financial Service NKEA to fight poverty. In order for ETP to be success, some areas need to be considered too. For examples, ETP need to solve brain drain, corruption and wastage in economy.

In summary, time does not wait for anyone while uncertainty of global politics and economy pose danger to our economic dream to be developed nation by 2020. ETP may have it comprehensive plan to bring us there. Yet, can it bridge the gaps between now and targets level for 2020? More efforts certainly needed.

[Chinese version published at Nanyang Press, 30th September 2013. Available online at This English version may be slightly different from the Chinese online/printed newspaper version]

1 comment:

Alas long said...

Impossible 6% growth of GDP per year; failure in reducing the inequality gap after 7 years; inefficiently of government cause the operating spending more than development expenditure. Obviously, ETP had failed in acting its role to help Malaysia achieve rapid development.