AUGUST 24 — The Prime Minister’s speech on the Madani Economics Framework (MEF) was much anticipated. Observers have been wondering whether the economic policy under the PMX will be more of the same or whether it will be an inflection that will steer Malaysia away from the ambiguities of the past. More importantly, will the MEF really be able to propel Malaysia towards a better future given that other countries in the region also have similar aspirations?
This analysis seeks to examine the MEF from a strategy lens. To be of strategic value for Malaysia, the MEF has to identify and develop the competitive advantages needed to create the desired future. Malaysia is not the only country trying to become a high-income economy. Many of its neighbours also have similar aspirations. And Malaysia is competing with them for investment, resources and markets. All these countries are in a race and the winner is going to be the one who is clear of how to break away from the pack.
Nevertheless, this paper is not meant to be an exhaustive analysis of what needs to be done. Neither does it offer specific prescriptions on how to do them. Our intention is to raise issues that need to be addressed to embark on the MEF journey. It takes more than having a destination to complete a journey. We must take into consideration the terrain we will be going through, the challenges on the way, the requisite conditions to enable us to complete the journey and our own readiness and experience, or the lack of it, to undergo this journey.
We hope this paper will stimulate a discourse on the details needed to make the MEF successful. And perhaps, it will provide the basis for identifying who else need to be engaged to fill in the blanks and complete the MEF picture. Malaysia does not have a shortage of ideas and talented people. Unfortunately, sometime these talents are suppressed by the high power distance in our culture, slowed down by bureaucratic inertia, betrayed by corruption and malfeasance, hindered by self-serving, incompetent and clueless leaders, and undermined by the toxic political culture that has permeated our society.
We also need to understand what has been dragging us from breaking out of the middle-income trap and constraining our progress for the last two decades. This discussion will inevitably include assessing regressive policies and regulations, resource allocation decisions, mental models, the role and impact of government-linked corporations, the risk appetite of our private sector, the responsiveness of our civil service and the level as well as quality of leadership in this country.
This paper will not be able to address all the issues raised above. But we hope it will start the ball rolling. We are sure there are many more capable people in the civil service, private sector, academia and NGOs who can contribute to this discourse.
Competitive advantage in the MEF
It is therefore important to have a clearer idea of how Malaysia will compete and outdo others in this race. Seen from a strategy lens, the three key questions that the MEF has to address in more detail are competitive advantage, competitive advantage and competitive advantage. Without a clear understanding of the competitive advantage Malaysia needs to develop for the future, its resource allocation decision can be misdirected and it may fail to propel the country ahead.
To be successful, Malaysia needs to invest in developing new and inimitable competitive advantages. The general idea in the field of strategy is to see sustainable competitive advantage as relying more than just simple and discreet strength that can be easily replicated by others. Instead, sustainable competitive advantage is the product of a configuration of capabilities that creates layers of competitive advantage which is difficult for others to understand, describe and imitate. This will enable Malaysia to move ahead of its competitors and create a huge competitive distance with its peers.
The MEF has a number of quantitative targets as outcomes. However, in strategic thinking it also important to define clearly the performance drivers needed to create the outcomes. Managing strategy implementation is not about managing the outcomes. It is about managing the performance drivers in order to create the outcomes. The performance drivers needed is rooted in our understanding of the competitive advantage that will be used to outperform competitors. Developing some form of consensus on this is necessary to enable implementors to understand their priorities and focus. Otherwise, those responsible for developing programmes and initiatives for the MEF may go in many different directions and do not converge towards creating the same outcomes. All these efforts will fail to develop sustainable competitive advantages for Malaysia and the country will remain stuck in the middle-income trap.
It should be noted that the MEF is a framework. A framework defines broad parameters and does not spell out all the programmes and initiatives needed to realise the aspirations spelt out in the MEF. One can expect the 2024 budget and the mid-term review of the 12th Malaysia Plan and probably the 13th Malaysia Plan to provide more details of the programmes and initiatives needed to realise the aspirations in the MEF.
Causal model of MEF
The MEF sets seven benchmarks as the aspirations for Malaysia. From a strategy lens, these seven items need to be seen as the basic elements of a strategic causal model. The desire to become i) among the 30th biggest economy in the world is the ultimate outcome sought under the MEF. This is to be achieved in tandem with ii) raise labour’s share of total income to 45 per cent. This a sub-goal and implies that workers will experience a rise in their salary level and thus narrow the income inequality here. Another outcome set is iii) enhance women’s participation in the labour market to 60 per cent.
The macro level performance drivers for these outcomes are iv) improve our national competitiveness (to reach in the 12th position globally in competitiveness ranking), and v) improve human development (to attain 25th ranking in Human Development index). Two strategic enablers are vi) improve Malaysia’s score on the Corruption Perception Index from the current 61st position to the 25th position and vii) improve fiscal sustainability by reducing fiscal deficit to 3 per cent or less. However, this macro level MEF causal model needs further development to provide a more complete picture of the strategic requisites for ensure the success of the MEF.
In constructing a more complete causal model for the MEF, we will have to ask the fundamental question “What will have to be true for the MEF to be successful?”. This line of query will help us identify what strengths Malaysia need to have to create the desired future. What present strengths would it need to reinforce further, what new strengths are needed and what past strength it should maintain and which past strengths it no longer need and can be eliminated? All of these strengths are built around capabilities. Answering these questions will help us understand the capabilities configuration needed for the future.
In making this strategic assessment, let’s begin with the end in mind. If the US has a national brand image as a country where opportunities to make money from technology exists in abundant, China is the world’s biggest market, India and Indonesia are the future mega markets, what then is the brand image Malaysia should have in the future? Malaysia, like most Asean countries, had in the past built its reputation as a low-cost manufacturing base. Building a new brand image is not just about PR and communication. Most foreign investors are sophisticated and will perform an in-depth analysis of the strengths that Malaysia really has to understand what it can offer to investors.
This understanding of the future brand image of Malaysia provides the basis for defining the new competitive advantages Malaysia needs to develop as a country. It will then define the capabilities it needs to invest in. At the macro level, this includes defining the new ecosystem needed to develop, support and grow new industries. It will also help realign resource allocation to support all these. This understanding should serve as the premise in shaping the next national budget and the 13th Malaysia Plan.
Current challenges
The MEF sets new and higher aspirations for Malaysia. One thing that can be discerned from PMX’s explanation of the MEF is that it is a departure from past policies that put considerable emphasis on mega projects. The logic of having mega projects in the past was that it will have a trickle-down effect. And because SMEs cannot implement these mega projects, it’s the millionaires and tycoons and large corporations who are entrusted with these projects.
But evidence on this view, notably the work by Paul Krugman and Joseph Stiglitz, shows that the trickle-down effect hardly ever happened. Political scientists Peters and Nagel even went so far as to call trickle-down economics as a zombie idea and that it is the most enduring failed policy idea in the US. Even the term “trickle” suggests only a small amount of wealth flowing down to the low strata of the economy. How can this be good for society?
Instead, what usually happens is more akin to what Wright-Maley et al. term as evaporative economics. The work by Jomo and Gomez shows that many of the big companies benefiting from mega projects are the politically connected ones. Part of their role is to fill the coffer of their political masters. To do this, they then have to make above average profit. This, in turn, leads to higher charges that are passed down to the rakyat. In addition, public funds are used to bailout when these politically connected companies are in trouble.
The exorbitant price charged by the company recently awarded (subsequently cancelled by PMX) the contract for flood mitigation projects is another example of this abuse. The fiscal burden created by loan payments for the 1MDB debt is also an example of this. It is the rakyat at the lower strata of society who will be denied of benefits when public funds evaporate as all these take place. Corruption, leaks in public projects and malfeasance also contribute further to this evaporating effect. In actuality, the way Malaysia’s economy has been operating in the past closely resembles evaporative economics.
Evidence also indicates that as Malaysia’s economy grew, the disparity in the economy remained large. While Malaysia’s GDP has grown, its Gini coefficient, which measures income inequality in an economy, remains high. It is higher than the more developed Scandinavian economies. Instead, Malaysia’s Gini Coefficient is more similar to less developed countries like Uganda, Congo, Djibouti, Haiti and Papua New Guinea. Malaysia’s Gini coefficient has remained more or less at the same level, around 0.40, for most of the last 10 years.
An ILO report shows that Malaysia’s labour income share of GDP in 2020 is 44.9 per cent. This is low compared to developed economies where it is usually more than 55 per cent. This means that the wealth created in these countries provided more income to labour than in Malaysia. In Malaysia, a smaller proportion of the wealth created by labour trickled down to them.
The MEF also recognises that Malaysia is stuck in the middle-income trap. The cost of living in Malaysia has gone up but the increase in salary does not commensurate with cost of living increases. Our competitiveness as a nation is also eroding. There is also a mention in the MEF of the concern that Malaysia is experiencing pre-mature deindustrialisation. The contribution of the manufacturing sector to Malaysia’s GDP has declined. Instead, the service sector is now the biggest contributor to the GDP. Our manufacturing sector continues to be stuck in low-cost and labour-intensive activities and have not made the migration towards high-tech manufacturing. Other countries are narrowing their gap with Malaysia and some have already overtaken us or are poised to overtake us.
In addition, the impact of the damage and destruction to the environment is becoming more visible and more profound. In the past, Malaysia had condoned the destruction of the environment under the guise of pursuing progress. We are now paying the price for this abuse. Sustainable development is not just a nice thing to do. It is crucial for the future survival of the human race and the well-being of this country. As of now, the future that our children and grandchildren are going to inherit doesn’t look pretty.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
