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Zainal Aznam Yusof Council Member National Economic Advisory Council (NEAC) Malaysia

INTERNATIONAL GROWTH CENTRE, LONDON GHANA GROWTH FORUM ACCRA, GHANA NOVEMBER 11 th – 12 th , 2010 GROWTH, ETHNICITY AND GOVERNANCE IN MALAYSIA. Zainal Aznam Yusof Council Member National Economic Advisory Council (NEAC) Malaysia. Ghana and Malaysia gained independence in the same year – 1957

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Zainal Aznam Yusof Council Member National Economic Advisory Council (NEAC) Malaysia

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  1. INTERNATIONAL GROWTH CENTRE, LONDONGHANA GROWTH FORUMACCRA, GHANA NOVEMBER 11th – 12th, 2010GROWTH, ETHNICITY AND GOVERNANCE IN MALAYSIA Zainal Aznam Yusof Council Member National Economic Advisory Council (NEAC) Malaysia

  2. Ghana and Malaysia gained independence in the same year – 1957 • Ghana and Malaysia’s growth record have diverged. • What has been Malaysia’s growth record? • What accounts for Malaysia’s growth record? • Are there lessons from Malaysia’s growth experience for Ghana and others?

  3. Figure 1: Real GDP Growth Rate (%), Malaysia vs. Ghana, 1961-2009 Figure 2: Agriculture Sector Share of GDP (%), Malaysia vs. Ghana, 1961-2009 Sources: World Development Indicators, World Bank & International Financial Statistics, IMF

  4. Figure 3: GDP per capita growth (%), Malaysia vs. Ghana, 1961-2009 Figure 4: Manufacturing Sector Share of GDP (%), Malaysia vs. Ghana, 1961-2009 Sources: World Development Indicators, World Bank & International Financial Statistics, IMF

  5. Figure 5: Services Sector Share of GDP (%), Malaysia vs. Ghana, 1961-2009 Figure 6: Agriculture Exports as Share of GDP (%), Malaysia vs. Ghana, 1990-2009 Sources: World Development Indicators, World Bank & International Financial Statistics, IMF

  6. Figure 7: Manufacturing Exports as Share of GDP (%), Malaysia vs. Ghana, 1990-2009 Source: World Trade Organization

  7. Growth: 1957-2007 6 percent per annum 1991-2000 7 percent per annum 2001-2005 4 percent per annum Per capita income: 1957-2006 increase by 24 times Population: About 28 million Bumiputera Malays Kadazans Muruts Dayaks Orang Asli Others Chinese Indians Structural Changes – GDP Share (%) 19952009 Agriculture 10.3% 7.6% Manufacturing 27.1% 26.4% Services 51.3% 57.9% Growth, Structural Changes and Diversification

  8. Table 1 - Gross Domestic Product by Industry of Origin, 1995-2005 (RM million in 1987 prices)

  9. Economic Growth and Trade • Maintained its openness, beginning with its dependence on the exports of tin, rubber and palm oil, and then for labour-intensive manufactured exports. • Growth over the last more than 50 years have averaged about 6 percent per annum. • Per capita income has increased by 21 times since 1957. • Manufactured exports, with growth and structural changes, have long surpassed exports of agricultural commodities and now account for more than 70 percent of total exports. • FDI in manufacturing has made sizable contribution to the growth of manufactured exports. 8

  10. Figure 8: Terms of Trade Contribution to National Income, 1963-2006 9

  11. Economic Growth and Commodities Commodity exports and growth. Volatility and growth. Collier and Goderis (2007) – commodity booms have positive short-term effects on output but adverse long-term effects. Confined to “high-rent” non-agricultural commodities. Rise in trade GDP share and growth and per capita income & GDP. Results some similarity with Collier & Goderis (2007). Positive short-term effects on output but adverse long-term effects and confined to non-agricultural commodities. Resource, Revenue and Growth – Agricultural Commodities Revenue from exports of tin and rubber was largest source in post-war period – export taxes about 90 percent of total revenue for 1946-1962. Falling share from agricultural commodities. Rubber exports about 1.4 percent of total exports (2006). Rubber replanting and investment. High productivity. Financed from replanting grants raised through export taxes. Estates benefited more. R&D and clones. Palm oil investment. Replanting from rubber to oil palm. Sizable acreage increased; by mid-1980s oil palm output exceeded rubber. FELDA. Small revenue share – palm oil export duties of total revenue about 3.5 percent – mid80s.

  12. Figure 9: Commodity Export Price Index Figure 10: GDP Per Capita, Trade and Commodity Exports

  13. Forestry Resources Forestry under states control constitutionally. Sabah and Sarawak depend more on forests for revenue. Natural forests about 61 percent (21m.hectares) of land mass. Sawn logs and timber main exports – 6 percent of total primary commodity exports (2006). Coupe or annual allowable cut rate falling. Conservation. Royalty revenue falling (25 percent), rising for silviculture cess. National Forestry Council in 1971. National Forestry Policy in 1978. National Forestry Act, 1984 Permanent Forest Estate (Reserves). About 43 percent of PFE. Timber Concessions. Tenders. Negotiations. Others. Rent capture has been low. Re-investment for reforestation has been low. Oil and Gas Two basins – Northwest Borneo and Malaysia. Esso and Shell with concessions. Offhshore oil in 1970s. PSCs in mid-1970s replaced concessions. Three revenue resources – direct tax (Petroleum Income Tax), indirect tax (export duties) and non-tax revenue (dividends and royalty). Oil gas revenue of RM53 billion in 2007. Dividends (45 percent) of income tax (42 percent) two largest sources – dividends in 2007 reached RM24 billion. Oil and gas revenue finance about a third of Federal Government expenditure (RM165 billion) in 2007 and 8.5 percent of GDP. In 2008 Petronas profits of RM110 billion, RM67.6 billion to government – 44 percent of total government revenue. Since 1974 Petronas paid RM403 billion to government which is about a half of total development expenditure of 5-year plans.

  14. International Trade – Structure, Composition and Patterns Trade Intensity and Openness Over the period 1971-1990 exports of goods and services grew at 14 percent per annum and by 17 percent per annum for the 1991-2000 period. The trade intensity ratio was about 86.9 percent of GDP in 1970 and increased by slightly more than two-and-a-half times by 2000 (228.9 percent of GDP) and reached 223.2 percent of GDP by 2005. The economy grew at 6.7 percent per annum over the 1971-1990 period, 7 percent per annum for the 1991-2000 period and slowed down to 5 percent per annum since 2000. Exports of commodities, tin and rubber, and later palm oil, dominated exports in the 1950s-1960s. The export-led industrialisation drive from the 1970s raised the share of manufactured exports to about 81 percent by 2005. Exports of electronics and electrical products accounted for a sizable share of total manufactured exports. Imports of intermediate goods rose in importance with the growth of manufactured exports. USA and by 2005 accounted for about a fifth of total exports (19.7 percent), compared to 13 percent in 1970. Malaysia’s trade with the European Union (EU) has recorded a decline, with exports share of EU falling to 11.7 percent in 2005 compared to 19.2 percent in 1970. 13

  15. Table 2: Direction of External Trade, Malaysia, 1970-2005 (%) Source: UNDP (2006) 14

  16. Exports to ASEAN accounted for about a quarter (25.8 percent) and Malaysia’s exports with Singapore (15.6 percent) being the second largest export market after the USA. Malaysia’s exports to Japan have been falling and rising for China, Hong Kong, Australia and India. From the mid-1980s to the early 2000s (1985-2002) exports to other East Asian countries increased by more than 11 percentage points (from 23.7 to 35 percent). ASEAN did not play a large part in the expansion of East Asian intra-trade trade. Malaysia’s exports to East Asian increased from 38.1 percent in 1985 to 42 percent in 2001 (Ng and Yeats, 2003). Malaysia’s share of intra-regional trade in East Asia has increased and is more apparent for imports; its share of intra-regional imports increased form 44.4 percent in 1985 to 51.6 percent in 2001 compared to 38.1 percent and 42 percent, respectively, for exports. China’s importance to Malaysia’s export growth, as well as for other East Asian countries. 15

  17. Early Diversification and Growth • Economic diversification has been a key theme of long- term strategy in Malaysia, and is a continuing concern today. • Diversification had two components: first was the diversification of agriculture from rubber into the cultivation of palm oil (and other crops) on a large scale; and second was the diversification away from primary into secondary industries, especially manufacturing. 16

  18. Agricultural Diversification Rapid diversification during 1957-1970. Volatility of rubber and tin prices. Competition from synthetic rubber. Diversification through R&D. RRIM. High yielding clones. Oil palm acreage and production increased in 1960s. Rural and land development. FELDA. Industrialisation – Export Oriented Manufacturing Industries Growth of electronic and electrical industries (E&E). Semiconductors. Penang growth enclave. Labour intensive manufactured exports. Non-resource based industries. Resource-based industries. Rubber gloves. FDI and manufacturing growth. Fiscal incentives. FTZs. Infrastructure. Labour supply.

  19. Figure 11: Percentage Share of Manufacturing Exports to Manufacturing Output and GDP, 1970-2008 18

  20. Table 3: Exports of Manufactured Products • Source: Third Industrial Master Plan, Government of Malaysia • 1 The value of the total export of manufactured products, compiled by Ministry of International Trade and Industry (MITI), differs from • the value of the total export of manufactured products contained in the Ninth Malaysia Plan, due to the difference in product groupings • adopted by MITI and Economic Planning Unit (EPU). For example, in 2005, the figure by MITI is RM413.1 billion, while the figure by • EPU is RM429.9 billion. 19

  21. Ethnic Diversity and Conflicts • Recorded inter-ethnic conflicts limited in scale and duration. • Small scale, anti-colonial rule “rebellions”. • Pre-independence Japanese Occupation inter-ethnic conflicts in 1945. • Twelve year Emergency longest post-war conflict with communism. • Seminal May 13th, 1969 inter-ethnic conflicts. • Post New Economic Policy (NEP) social and religious conflicts.

  22. Growth and Horizontal Inequalities Bumiputera poverty higher than Chinese and Indians. Income disparity ratio between Bumiputera and non-Bumiputera has narrowed but still sizable. Elite accommodation system i.e. consotionalism. Inter-ethnic accommodation. Federalism and governance. General post-1957 political stability. Inter-ethnic clashes in May 1969. New Economic Policy as Affirmative Action Policy. Ruling coalition National Front lost 4 states to Opposition and two-thirds majority in Parliament in March 2008 general elections. New post-2008 political landscape.

  23. Incidence of Poverty by Ethnicity and Strata, Peninsular Malaysia (1970-2007, %) Average Income (RM) 19802008 Top 20% 3,354 8,157 Middle 40% 1,016 2,957 Bottom 40% 377 1,222 Gini Coefficient by Ethnicity and Strata, Peninsular Malaysia (1970-2007, %) Source: Economic Planning Unit (EPU)

  24. Figure 12: Mean Income of Ethnic Groups Figure 13: Per Capita GDP Growth, Incidence of Poverty and Income Inequality 23

  25. Development Strategies • Export-led growth and industrialisation • Rural development • Regional development Affirmative action policy measures or instruments: • Macro-economic • Quotas • Prices • Subsidies • Privatization • Government procurement and tenders • Public sector investment

  26. Contentious New Policy Approaches to Affirmative Action • New Economic Model (NEM), horizontal inequalities and affirmative action. • Inclusive growth, bottom 40 percent and bottom 2 million plus. • Beyond ethnicity.

  27. Governance, Political System and Leadership • Dealing with ethnicity issues a central task for leadership Mahathirism – “…if you do exactly what they want you’re not a leader”. • Consociationalism a model of “elite accommodation system”. An inter-ethnic bargaining and accommodation approach. Strict consociationalism embody proportionally principle. • Consociationalism undermined by May 1969 racial riots but remnant of elements. Earlier Bargain / Social contact (Section 153 of Constitution) cannot be challenged. • Post-1969 Increase in executive/PM powers. “Dyadic structure of elite bargaining”. • Sharp growth of patronage and corruption. • General election of March 2008 and lessening salience of ethnicity?

  28. Policy Making and “Reform Cluster” Approach • Consider options preceding implementation. Investment of public and private/business sectors. • “Binding constraints” and reform clusters. Acting non-sequentially against binding constraints. • Reform cluster involves the bundling of related policy measures into packages to overcome legislative and co-ordination problems. • Policy making, leadership and learning within specific industrial contexts: • Rubber products (resource-based) • Oil palm products (resource-based) • Electronics and electrical products (non-resource-based) • Automobile/transport (non-resource-based) • Privatisation • Multimedia Super Corridor (ICT)

  29. Leadership, Implementation Machinery and Outcomes • Policy adaptation learning and adjustment. Privatisation and learning by doing. Reform clusters, co-ordination and implementation. • Technocratic and heteredox leadership. • Clarity. Co-ordination. Delivery system. • Cabinet committees. National Development Planning Committee (NDPC). • Oversight on implementation. Parliament. Economic Planning Unit (EPU), Implementation Co-ordination Unit (ICU). Pemandu, the Government Transformation Programme (GTP), Economic Transformation Programme (ETP).

  30. Governance Policy Making and Leadership – Key Factors for Growth • Vision for growth. Long-term towards a developed economy by 2020. Vision 2020. • Developmental planning. Macro and sectoral planning. Privatisation Master Plan, Industrial Master Plan, Financial Sector Master Plan. • Implementation and Coordination. • Transformation. Implications on institutions. • Heavy industries. Privatisation. Multi-Super Corridor. • Policy making regime. Political determination. Stability. High attention to growth with equity. Experimentation. Learning through implementation. • Reforms serially? “Reform cluster” approach to policy implementation. Address several co-ordination problems at the same time.

  31. Institutional Regime for Policy Making, Planning and Implementation … • Cabinet. Cabinet Committees • National Development Planning Committee (NDPC) • National Economic Advisory Council (NEAC) • Economic Planning Unit (EPU) Ministry of Finance Bank Negara Malaysia Ministry of Finance Ministry of International Trade and Industry (MITI) • Implementation Co-Ordination Unit (ICU) • PEMANDU • PEMUDAH

  32. Delivery Service and Implementation Focus … • e-Government • Improve administrative processes • Reduce bureaucratic procedures • Measure performance and Key Performance Indicators (KPI) • Use ICT • Outcome-based approach for planning, monitoring and evaluation of policies

  33. Some Likely Lessons… Economic Growth • Resource curse is avoidable and growth can be sustained. • Diversification essential for growth. • Openness and international integration helpful for growth. • Export-led growth essential for rapid growth through trade and capital flows. • Fiscal discipline and strict management of revenue, including resource revenues, essential for macro-economic stability. • Importance of industrial policies for economic diversification and FDI in financing economic growth. • Conservative principles of managing revenue and expenditure. • Federal constitution a strong framework for the governance of politics of oil and forestry resources and importance of centralisation of powers over resources. • Importance of relative independence, capacity and capability of national oil corporation.

  34. Ethnic Diversity and Inequality • Pro-poor growth is possible and necessary. • There is growth-elasticity of poverty and inequality can be persistent and non-linear. • “Within group – inequality” is more important than “between group – inequality” to overall inequality. • Affirmative action policies and programmes need to be grounded constitutionally. “Social contract”. • Economic, political and social costs of affirmative action need to be assessed. • Strong and continuous political commitment necessary for affirmative action programmes to work. • Consider longevity and time-bound affirmative action and how and for how long can previous generation bind future generations? • Growth does not destroy/erode salience of ethnicity and there are limits to going beyond ethnicity.

  35. Governance • Strong governance, leadership and institutions good for growth. • Balance of power in federalism between centre and periphery is a dynamic process and determines growth and inter-state inequality. • Institutions and processes crucial for growth and containing conflicts. • Consociationalism has its limits and need to evolve with changing circumstances. • Corruption is pro-rent seeking, is anti-growth and is positively correlated with direct state intervention in the economy. • There is a time and place for Big Bang or incrementalism. • Inertia and complacency are bred by growth succcess. • Implementation of economic plans is crucial.

  36. Moving Ahead to 2020 and beyond 2020 … • Losing competitiveness and new global economic forces call for transformation. • A New Economic Model (NEM) for High Income Economy, Inclusiveness and Sustainability • Economic Transformation Programme (ETP) and Government Transformation Programme (GTP).

  37. REFERENCES • Collier, Paul  (1998) The Political Economy of Ethnicity, Paper presented at the Annual World Bank Conference on Development Economics, Washington D.C. April 20-21. • Collier, Paul and Benedict Goderis (2007) Commodity Prices, Growth and the Natural Resource Curse: Reconciling A Conundrum. Paper presented at OXCARRE Launch Conference, Oxford University 12-13. • Collier, Paul (2010) War, Guns and Votes Democracy in Dangerous Places, London: Vintage. • Commission on Growth and Development (2008) The Growth Report Strategies for Sustained Growth and Inclusive Development • Easterly, William (2000) Can Institutions Resolve Ethnic Conflict?, World Bank Policy Research Working Paper 2482. • Economic Planning Unit (1971), Second Malaysia Plan, 1971-1975, Kuala Lumpur: Government Printer. • Economic Planning Unit (1991) Second Outline Perspective Plan, 1991-2000, Kuala Lumpur: Government Printer. • Economic Planning Unit (2001a) Eighth Malaysia Plan, 2001-2005, Kuala Lumpur: Government Printer. • Economic Planning Unit (2001b) Third Outline Perspective Plan, 2001-2010, Kuala Lumpur: Government Printer. • Economic Planning Unit (2005) Ninth Malaysia Plan, 2006-2010, Kuala Lumpur: Government Printer. • Economic Planning Unit (2010) Tenth Malaysia Plan, 2011-2015, Kuala Lumpur: Government Printer. • Ng, Francis and Alexander Yeats (2003) Major Trends in East Asia: What Are Their Implications for Regional Cooperation and Growth? World Bank, Development Research Group Trade, Policy Research Working Paper, 3084. • Yusof, Zainal Aznam (2005) Affirmative Action in Malaysia, Paper presented at the Workshop on Addressing Inequalities: Policies for Inclusive Development, organised by the Inter-Regional Inequality Facility, UNECA, Addis Ababa, 11-12 July. • Yusof, Zainal Aznam and Deepak Bhattasali (2007) Economic Growth and Development in Malaysia: Policy Making and Leadership, Washington D.C.: Commission on Growth and Development, Working Paper No. 27.

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