Brief analysis on the New Economic Model

Update 4 April 2010 : I came across two articles from a twenty year old regarding the economy. I am pleasantly surprise with the clarity of his presentation and the simplicity in his arguments. There is hope out there for the young ones. You can read the articles on the NEM here and here.

Original article:

The book on the New Economic Model (“NEM”) landed on my lap this morning. It is about 200 pages thick.

It is impossible to review it comprehensively over all the technical aspects of it.

Overall, I think it is one of the most ambitious project government is willing to take.

The word ‘ambitious’ I stated above is supported by one of the best line within the document which is;

“To break the logjam of vested interests through political will and leadership”

The statement above is the single most important thing to make the NEM a success.

The New Economic Model: Enablers and Strategic Reform Initiatives

Let’s start with the risk areas of the NEM document.

Firstly, has the NEAC conducted enough study and research when developing this momentous document?

How did they arrive at the conclusion to say that Malaysia has reached its defining moment? Have they made the necessary surveys and tireless statistical data gathering before they can claim that the “NEM takes a holistic approach, focussing also on the human dimension of development, recognising that while we have substantially reduced poverty, a hefty 40% of Malaysian households still earn less than RM1,500 a month. Income disparity must still be actively addressed. Measures are needed to narrow the economic differences prevalent in Sabah and Sarawak as well as in the rural areas of the Peninsula.”

How holistic could the NEM be when just a few days ago, the Deputy Prime Minister revealed that the Government will start to update the data on wealth distribution by race to evaluate the people’s social-economic achievements only after Tun Dr Mahathir Mohamad suggested for a more comprehensive study to be done.

Hence, is the NEM’s projections and approach is based on an INFORMED analysis?

By the DPM’s own admission, the data on wealth distribution is not updated. What is the current wealth distribution of the corporate Malays in Malaysia after the PM, Dato’ Sri Najib Tun Razak announced several liberalisation of the economy particularly in the financial services last year? Has the incorporation of Ekuinas helped to improve the wealth distribution among the Malays?

Or has it gone down for the past one year from the previous 18%?

I believe not getting a complete outlook on the current situation and taking stock on the actual realities of the current social-economy will further increase the chances of the failure rate of the NEM. In other words, we are at risk of being conned by the consultants. If we work from an incomplete data, all the initiatives proposed could be misguided and render the contents of the NEM useless.

Secondly, I believe the NEM is not taking into relevance the other important socio-economic factor when developing the document. They are stressing too much on breaching the USD15,500 per capita  annual income for all Malaysians. In their mind, that level must be breached in order to catapult Malaysia into the high income economies.

But nowhere in the document are they talking about the Purchasing Power Parity (“PPP”). This is a more relevant and accurate measure of a country’s wealth status. There is no point of having high income if the inflation rate is even higher.

Blogger Hidup Tuah succinctly put it as follows:

Low/medium/high income country is based on GDP Per Capita, as defined by the World Bank. It is measured in US$. For example, in 2009, Malaysia’s GDP Per Capita was US$6,818. Hence, Malaysia is categorised as in the middle income group.

If it is measured in PPP, it was US$12,826; nearer to the high income (minimum) level of US$14,818.

Since PPP is a better measurement of comparable purchasing power and, hence, comparable disposable income and, thus, a better approximation of a comparable standard of living, therefore, it is strongly urged that PPP be used instead of US$.

Thirdly, one of their strategies is to develop a quality workforce and reducing dependency on foreign labour. How are they able to achieve this? By reviewing the education system. Apart from shifting educational approach from ‘rote learning’ to ‘creative and critical thinking’, the education system itself must be conducted on a streamlined platform.

If the NEM wants to achieve an inclusive and sustainable resources for the rakyat to benefit, then I believe, the education system must be streamlined into one national school system. This will produce a more equitable product where the graduates of this system can be integrated closely with one another. Thus, everyone comes from the same education system which won’t make them feel alienated from each other. Bahasa Malaysia and English must be  the core unifying factor among the young Malaysians. Only when a strong primary and secondary education system is developed, will the institutions of higher learning can prosper much easier.

The time is now. It is indeed our defining moment.

But alas, will the government have a strong political will and sturdy leadership skills to break the potential logjam of vested interests?

Fourthly, one of the ways to spur the economy with the objective of achieving the high income status is to let the private sector be the engine of growth. After the Currency Crisis of 1997-98, the government had been driving the economy as the private sector has been licking their wounds from the fast paced development they embarked in the early to mid 90’s. They had over extended their financial and business activities and failed to recover completely after the dust had settled at the turn of the century.

Now there are very timid in doing business. The government in turn, took the reins to spur the domestic economy.

With the absence of veritable data, the perception of the private sector being monopolised by one community IS the prevailing perception of the current situation.

Therefore, the NEM approach of having an economic growth led by the private sector can backfire especially when one of the goals of the NEM is to have a more inclusiveness in the economic development of this country whereby “all communities will be enabled to contribute  to and share in the wealth of the country.”

This will become more important when the private sector is tasked to “promote competition across and within the sectors to revive private investment and market dynamism”, assisted by the enactment of a competition law.

What does that mean in a non consultant-ish way?

Generally, there will be an open competition with a level playing field in all development stages. Tender for projects will be an open, transparent process. This is very good. Survival of the fittest. Please be careful when any competition law is enacted. At one extreme, it will make it illegal for anyone to gain an upperhand in any tendering process. How the NEAC going to construct and from which country the example of the law they are going to model it from will be an interesting thing to watch.

But will a law such as this contributes to an equitable and fair tender process? When some industries such as raw materials, logistics and the whole value chain are being monopolised by a few groups of people, surely only the same people will get the projects. With the practice of ‘know-who’ and not ‘know-how’ is very much entrenched in our society, there is no way the distribution of the projects could be done in a way that will allow all communities to “contribute and share”.

Ultimately, the economy will turn into an aquarium effect where food from above is eaten up quickly by the big fishes at the upper levels and only the crumbs will reach the smaller fishes at the lower levels.

Enter the fifth risk area of the NEM – the setting up of an Equal Opportunity Commission (EOC). The name itself will draw flak from the proponents of Article 153 of the Constitution. Again, just like the potential streamlining of the education system, will the government have enough willpower to wade this through?

The composition of the members in the EOC will be an equally interesting thing to see. The  motives (personal and professional) of  the members in the EOC will inexplicably steer the ultimate aim of the EOC. It is documented in the NEM that the EOC will cover and discriminatory and unfair practices.

Will the EOC take into account the quota requirements enshrined in the Constitution,  or  will it look into the unfair practices of some economic elements that are plaguing the economy and stifling the other would be players?

Sixth, the government will sell its land which has one of the highest value to the private sectors. These parcels of land are near the Jalan Ampang, Jalan Lidcol and Jalan Stonor. I find it hard to imagine why would the government sell these to people outside the government. Theorectically, the government is decreasing its potential wealth if they don’t outsource it out (if they believe they have no capacity to develop it). They should have just let governmental agencies to develop it. When you lose something monumental like this, it will be difficult to earn it back. UDA , PNB or Felda Pelaburan Hartanah Berhad (PHB) for instance, can be tasked to develop the land without the government losing it forever.

Another initiative that the government is embarking is to list two subsidiaries of Petronas in Bursa Malaysia in order to reduce the government’s presence directly or indirectly in their business activities. Who will buy these shares ultimately? Will the people with the lowest income afford to buy these shares? Will a more equitable wealth distribution be achieved through this method? Will 18% turned into 38%? Or will it dwindle even lower? How will this benefit all Malaysian ultimately?

Another con job in the making?

These are interesting times indeed. That is why I said in the beginning, the NEM is a very ambitious project to propel and catapult Malaysia into a developed status.

Now, there are many good and viable areas of the NEM. As you can see and read from the document, not all are bordering the fantastical and unrealistic mind of a consultant.

The aim to reduce rent-seeking behaviour and market distorting features is applauded. Its needs based approach for the lower income group is laudable. The best thing about the NEM is its affirmation that the previous economic policies did work.

NEM stated that it is not aimed to replace the New Economic Policy (“NEP”) or the New Development Policy (“NDP”) because of their perceived failure; it is aimed to build on the successes of the NEP and the NDP despite the many implementation weaknesses the previous policies have. The fact of the matter is, the NEP and its subsequent policies did achieve quite a number of success during their years of implementation. Only a few people with vested interests would continue to manufacture misperception of their failure.

At a crossroad where the nation is taking stock of itself, the current economic policies must be tweaked and amended to suit the current conditions. Hence, the birth of the NEM.

Thank you.