Search for a new growth model

| 26/04/2009 | Reply

By CECILIA KOK

Economists raise questions over proposal to rely on domestic consumption.

“NEVER
waste a crisis” has become an increasingly popular line among political
and business leaders these days as the world continues to battle one of
the toughest economic challenges that most of us have ever experienced.

“International
trade is the lifeblood of Malaysia’s economy” PROF DATUK DR MOHAMED
ARIFF OF MALAYSIAN INSTITUTE OF ECONOMIC RESEARCH

That
mantra is supposed to bring a whole new meaning to the current economic
angst – that as bad as the situation is, the experience does teach us
some valuable lessons, and by evaluating them, we can perhaps identify
new ways of doing things for a better future. As US President Barack
Obama succinctly phrased it: “We cannot rebuild the economy on the same
pile of sand.”

While everyone is searching for signs that the
current economic crisis has bottomed out, there is a more important
issue to contend with. What’s next when the dust settles?

From
reports about the Japanese government wanting to move away from a
manufacturing-dependent growth model to hints from Obama that his
administration wants to diminish consumerism (the major growth driver
for the United States and world economy), it is obvious that
policymakers around the world are seeking ways to redefine their
countries’ economic systems.

They all have one aim – to have a
sustainable growth model. In Malaysia, Minister in the Prime Minister’s
Department, Tan Sri Nor Mohamed Yakcop, recently said the country must
develop a new economic model that is less dependent on exports, but
relies more on domestic consumption.

The rationale is that a
strong domestic market can reduce the country’s vulnerability to
external shocks and set the economy on a more consistent growth path.

As
it is, Asian economies, including Malaysia, have slowed drastically,
with some already in recession, due mainly to the collapse of their
exports since late last year. This came as a result of their major
markets – the Western developed nations, particularly the United States
– slipping into recession last year.

Can the new model work?

While
the suggestion for a new economic model that is less reliant on export
seems timely, the question is, can that model work for a small economy
like Malaysia?

“The
appropriate strategy is to fine-tune the export sector so that we
become less dependent on major developed countries” NOR ZAHIDI ALIAS OF
MARC

According to Prof Datuk Dr Mohamed Ariff, the
executive director of Malaysian Institute of Economic Research (Mier),
the export-led growth strategy is not an option, but a must for the
country, whose population is only 27 million (compared with Indonesia’s
240 million and India and China’s more than one billion).

“Domestic
demand is no substitute for external demand,” he explains, adding that
Malaysia’s economy cannot grow and reach greater heights by reducing
its dependence on trade and focusing primarily on domestic demand.

Mohamed
Ariff sees international trade as the lifeblood of Malaysia’s economy.
He explains that trade and foreign direct investments (FDIs) are
intertwined in the sense that FDIs have flown into the country mainly
because of the country’s vast trade linkages. “If we attempt to reduce
our dependence on trade, foreign investors will have no reason to be
with us anymore,” he says.

Driving home another point pertaining
to the importance of trade to the country’s economy, Malaysian Rating
Corp Bhd (MARC) chief economist Nor Zahidi Alias says many local
industries, including those in the services sector (such as
communications, transportation and logistics), are also linked to trade.

“There is an implicit assumption that the external sector and domestic economy are independent of each other.

But in reality, the growth of many of our local industries is dependent on the external sector as well,” he says.

Net
exports contribute about 20% to the country’s gross domestic product
(GDP) annually. But beyond the numbers, any weakness in the external
sector could affect the other components that make up the country’s
GDP. So, Zahidi explains, policies that are meant to boost domestic
economic activity will have to take that into consideration.

“Retrenched workers should be taught new technological and R& D skills” DR YEAH KIM LENG OF RAM HOLDINGS

It
is without a doubt the services sector will play an increasingly
important role in the future economy of Malaysia. As the country’s
economy progresses, the services sector will increasingly become the
main engine of growth, says Mohamed Ariff.

Currently, the
services sector contributes about 55% to the country’s GDP, and the
manufacturing sector about 30%. Mohamed Ariff foresees that by 2020,
the contribution from the manufacturing sector to the country’s GDP
would shrink to 25% (even though the sector would continue to grow in
absolute terms), while the contribution from the services sector would
increase to 65% of GDP.

However, he believes that growth of the
services sector can be hampered if the country is inward looking,
catering mainly to the domestic market.

“The services sector can
only become a dynamo if it becomes internationally competitive,
aggressively penetrating into foreign markets,” he explains, adding
that Malaysia needs to focus on areas in which it has clear competitive
advantage, such as education, health, tourism, and financial services.

Dynamism in diversity

In
general, economists believe that looking inwards is not a solution for
Malaysia’s economy. In fact, they say, the country needs to be even
more open than it is now. Then, what is new about a “new economic
model”?

A healthy external sector, one that is even more
geographically diversified, without depending too much on any single
market or region, says Mohamed Ariff.

MARC’s Zahidi concurs,
saying that the appropriate strategy is not to ignore the export sector
but to fine-tune it in such a way that we become less dependent on
major developed countries such as the G3 (the United Stares, Japan and
euro-zone).

Economists see the need for Malaysia to make further
inroads into non-traditional markets, such as the Gulf region, where it
clearly has the competitive advantage because Malaysia has been
recognised as an international halal hub.

They also see
the need for the country to establish a stronger presence beyond the
Asean region and into larger Asian economies such as China and India.

According
to the Department of Statistics, more than one quarter of Malaysia’s
exports last year were to the Asean region, with the interim figures
showing Singapore has overtaken the United States as the single-largest
market for the country’s exports. Exports to Singapore made up about
14% of the country’s total gross exports, while shipments to the United
States stood at about 12.5%.

However, Mohamed Ariff points out
that the pursuit of new markets should not come at the expense of the
country’s existing export markets. “We also need to continue expanding
our market share in traditional export destinations,” he explains.

Moving up the value chain

Besides
having a more diversified export market, economists reiterate the
importance of accelerating the move up the value chain, which involves
shifting from low value-added products to high value-added ones.

For
instance, export substitution is a strategy that can add value to
Malaysia’s primary commodities. This involves exporting resource-based
products that have been processed instead of exporting them in their
primary forms. This strategy, besides adding value to the country’s
exports, can also create job opportunities.

At present, most of
Malaysia’s exports are made up of manufactured products, which
represented 74% of the country’s total gross exports last year.

Of
the manufactured products, more than 40% are electrical and electronics
components, the bulk of which are still in the low-cost, low-skill and
low value-added category. The climb up the value chain requires new
skills and technology as well as higher innovative and research and
development (R&D) capabilities.

RAM Holdings Bhd chief
economist Dr Yeah Kim Leng says it is high time for Malaysia to
seriously focus on improving the capability of its human capital. Yeah
points out that retrenched workers that have been sent for retraining
should be taught new technological and R&D skills that will benefit
the country as a whole when the economy rebounds.

Small but smart

Mohamed
Ariff says the current economic crisis is good in the sense that it
provides a wake-up call for policymakers on the need to constantly
remould their economic models so that they do not get stuck in the old
ways of doing things.

“When times are good, we tend to take
things for granted and become complacent. Sometimes, it takes a crisis
like this one to strike before we begin to reflect on our strategies so
as to change gear and move forward,” he says.

According to him,
the fashioning of a new model for Malaysia also calls for the
rethinking of the country’s single-minded pursuit of high growth. He
believes that double-digit growth rates for Malaysia is no longer
feasible or even desirable, as growth way beyond the country’s
potential is simply unsustainable.

Mier’s calculations show that Malaysia’s potential annual growth rate is around 5.5% to 5.8% (with a margin of error).

“We
should aim for quality growth, with low inflation, full employment,
clean environment, high productivity, high wages and high living
standards,” Mohamed Ariff explains. “We may be a small economy, but we
can be a smart economy.”

Category: Asia, Research

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