AUGUST 24 — Pivoting the Malaysian economy requires that the MEF define the new high value-high impact growth areas to grow the economy in the short, medium and long-term. High value-high impact growth is needed to increase income and GDP growth. It should also make narrowing the inequalities a key goal. The new future envisioned in the MEF must be like the rising tide that raises both the big ships and small boats in the harbour. It has to ensure that GDP growth happens in tandem with raising the income of those at the bottom. All these have to be done while ensuring sustainability. This means going beyond just using more renewable energy but should include better environmental protection, reforestation, sustainable urban planning, more efficient consumption of resources and disaster mitigation. Explicit multi-dimensional targets should be set in pursuing MEF outcomes.

The future Malaysia envisioned under the MEF need to grow the middle-class to narrow the gap between the bottom and the top. New value creation will have to come from more innovation in both the manufacturing and service sector. More of the future economic growth should be driven by middle-class entrepreneurs. The experience in the Silicon Valley, Scandinavian countries and China show that it is the middle-class entrepreneurs who are more likely to innovate. Unlike big companies, they do not have the wealth to simply buy sophisticated technologies. These enterprises are mostly led by educated entrepreneurs who understand the value of innovation. Investments should be made to support human development and enhancing the technological sophistication of these enterprises. Business model innovation should be made a part of the innovation for these Malaysian businesses.

The MEF envisions Malaysia competing in a new game. And this new game has new rules and will require new capabilities from the ones that gave Malaysia success in the past. The failure to recognised this probably contributed to the MSC initiative not living up to the expectation of becoming Malaysia’s Silicon Valley. Malaysia continued to rely on the old template of relying on tax incentives, opened a township (Cyberjaya) and provided government support to attract FDI in hi-tech initiatives. These offerings are similar to the offerings Malaysia made when opening the Free Trade Zones to woo manufacturing companies to operate here.

But these offerings are not the key factors for success for technology hubs such as the Silicon Valley. Developing a Silicon Valley clone requires a different template, a different ecosystem from building a Free Trade Zone for manufacturing activities. As a result, Cyberjaya continues to attract labour-intensive call centres and shared service centres.

The new template that Malaysia needs has to include developing new ecosystems to develop new knowledge-intensive industries. It must not make the mistake of continuing to replicate the old template to create a new future. Otherwise, the goal of making the Malaysian economy innovation-driven will continue to elude us.

Malaysia also has to decide on its competitive posture. Malaysia can simply move along with the Asean herd and seek to be similar with its more ambitious neighbours and hope to reap similar gains and progress. This competitive posture means building capabilities that will provide parity with the likes of Vietnam, Indonesia, Thailand and the Philippines in the future. This competitive posture is more akin to a cooperative strategy.

Alternatively, Malaysia can take a competitive posture that seeks to break away from the pack. Indonesia’s ambition to become the fourth largest economy in the world by 2045 implies that it is determined to break away from the pack and move ahead. These two competitive postures will require different commitments and leadership behaviours. Seeking to break away from the rest of the pack will require boosting technology sophistication, develop stronger networking to access capital, technologies and markets quickly, accelerate innovation, introduce high impact digitisation initiatives and develop new ecosystems and reform its education system.

The government will play a key role in ushering this transformation. There will be a transition from low-cost-labour-intensive to high income knowledge-intensive activities. Those at the low end of the economic ladder may feel threatened and displaced by this transformation. Social safety net should be enhanced to support those affected by this transition and to reduce the pain for entrepreneurs who may not succeed. The Malaysian economic will become more like a social market economy. All these have to be done while being cognisant of the competitive environment Malaysia is in.

The competitive environment

As mentioned earlier, pursuing progress is not a stroll in the park. Malaysia has to bear in mind that we are in a race with other countries who are all having similar ambitions.

Vietnam’s National Master Plan for the 2021-2030 spells out the country’s aspiration as "striving to become a developed nation with high income, full and harmonious socialist-oriented market economy institutions, and a fair, democratic and civilised society by 2050”. It is targeting to reach GDP per capita of between USD27,500-USD32,000 by 2050. Vietnam has a population of almost 99 million and is ranked 10th globally in terms of the value of export of electronics products. Vietnam is also often lauded for the high quality of its education system. Its location neighbouring China provides it an advantage and gives it easy access to the Chinese market and supply chain networks.

Thailand’s national vision 2037 is to "become a developed country with security, prosperity and sustainability in accordance with the Sufficiency Economy Philosophy”. Thailand has a population of almost 72 million and, like Malaysia, electronic products are also one of Thailand’s main exports. The automotive industry in Thailand is the 10th largest in the world whereas Malaysia is the 23rd largest in the world.

Indonesia’s Golden Indonesia Vision 2045 sets the goal for the country to become "a sovereign, advanced, fair and prosperous nation by 2045”. It is expecting Indonesia to become the fourth largest economy in the world by 2045. The target set is for Indonesia to have a GDP per capita of USD30,000 by 2045. With a population of 277 million, it will become the biggest market in Asean. Like Malaysia, Vietnam and Thailand, electronics products are one of Indonesia’s major exports. The automotive industry in Indonesia is the 17th largest in the world.

The Philippines is rarely mentioned as a strong contender among possible competitors to Malaysia. Yet, a World Bank report describes the Philippines as having "one of the most dynamic economies in East Asia and the Pacific region”. Its GDP growth grew from 5.6 per cent in 2021 to 7.6 per cent in 2022 after contracting 9.5 per cent in 2020. FDI flow to the country overtook Malaysia in three of the last 5 years. It has a population of 117 million and offers a big domestic market. Like Malaysia, its work force is largely English speaking. Like many of its neighbours, the Philippines’ biggest export from its manufacturing sector is also electronics products. It is fast becoming the darling of investors.

These Asean countries are not the only ones in Malaysia’s competitive space. Countries like Brazil, China and India are also competing in many areas Malaysia is in and may be venturing into. Potential newcomers to this space may include Costa Rica and even Rwanda and Angola in the long run.

Again, it’s all about competitive advantage

The preceding analysis highlights the convergence between a number of Asean countries in terms of their current strengths and capabilities. While each country has it unique strengths, there are areas where these countries are similar. Malaysia’s labour cost has gone up, whereas most of the other Asean countries are still able to offer low-cost labour.

An inward-looking analysis will probably infer that Malaysia is strong in E&E and automotive because the established ecosystems in these industries. However, these strengths are not unique to Malaysia. And it may not necessarily be a source of sustainable competitive advantage in the future if these ecosystems’ level of sophistication remains at the current level. Other Asean countries are also relatively strong in the E&E industry. Likewise, besides Malaysia, Thailand and Indonesia also have a fairly developed ecosystem in their automotive industry. While the race to become high-income economies is not a zero-sum game, all these countries will try to outdo others in competing for investments, markets and resources. The ones that will move ahead of the pack will be the ones who can innovate more and faster and build new capabilities and ecosystems to shift from their dependence on low-cost assembly manufacturing activities to a high value-add innovation-driven economy. Speed and substance are critical.

In the past, the competitive advantage that countries like Malaysia had relied on were low labour cost, relatively good infrastructure, political stability, rules and regulations that are investor-friendly and the use of tax incentives to entice investors. With the exception of political stability, all of these offerings are imitable in the medium-term.

In addition to understanding the behaviour of competitors, Malaysia needs to be mindful of potential threats and setbacks created by possible regional conflicts, potential trade war, the impact of climate change and possible pandemics. It needs to assess its vulnerabilities and treat developing capabilities to deal with these uncertainties as part of the risk management in pursuing the MEF goals. The impact of climate change includes downstream consequences to agriculture and food security. Malaysia’s coastal areas are also vulnerable to the rising sea level. Urban planning and infrastructure development will be affected. Anyone who ignore these downstream consequences of climate change do so at their own peril. A pre-mortem analysis of the future envisioned in the MEF need to be performed to assess potential vulnerabilities and possible causes of failure.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.