Malaysia is at a critical point in its economic development
There has been a loss of growth momentum over the past decade, and it has become increasingly clear that the historical drivers of growth can no longer be relied on to deliver strong economic outcomes.
It is more difficult to generate high rates of economic growth in an increasingly competitive global economy. Growth can no longer be taken for granted, but needs to be earned.
There are four reasons why a fundamentally new approach is required.
Historical Growth Engines are Slowing Down
Malaysia's relatively sluggish economic performance over the past several years indicates that the historical engines of Malaysia's economic growth are slowing down.
A large part of the reason for this relatively poor growth performance has been slow labour productivity growth. To transform productivity, significant improvements are required in two areas. First, the level of business investment will need to be substantially increased. A 6 percent annual growth rate over the next 10 years will require private investment to grow by more than 12 percent over the next five years, a significant increase from the 2 percent per annum growth achieved in the past five years. Second, enhanced investments in human capital will be made to support a high-skilled, knowledge-based and innovation-intensive economy.
Risk of Being Stuck in the Middle
Malaysia is no longer able to remain competitive with low-income countries as a high volume, low-cost producer
At the same time it has not yet moved up the value chain and become competitive with high- income countries. Other countries are more competitive than Malaysia in both low-cost production and in high-value markets. This is not a sustainable position. Strategies that were successful in driving Malaysia's transformation from a poor country, reliant on rubber and tin at Independence, into a diversified middle- income economy are not appropriate for the next stage of Malaysia's developmental journey
An Unsustainable Fiscal Position
Malaysia has run fiscal deficits every year since 1998, with a deficit of 7 percent of GDP recorded for 2009.
Moving back to fiscal sustainability and achieving the Government's commitment of a deficit of 3 percent of GDP by 2015 will require a change in direction. Investor attitudes to sovereign debt have changed significantly over the past two years, and capital markets may be less inclined to finance sovereign debt on the terms they have extended in the past. There is also increasing evidence of fiscal policy competition between countries, with governments cutting corporate tax rates to obtain a competitive edge. In order for Malaysia to offer competitive personal and corporate tax rates and invest in education, research, public services and infrastructure, it will need to strengthen its fiscal position substantially.
Increasing Global Competition for Markets, Capital and Talent
The global economy is becoming much more competitive.
The emergence of new, highly competitive regional and global companies has eroded the strong position of Malaysian-based companies in the manufacturing and services sectors. In addition, companies, investors and talent have an increasing number of opportunities and location options. Malaysia, therefore, needs to demonstrate a clear value proposition in order to attract and retain them. Moreover, many other governments are aggressively positioning themselves to compete for talent and capital. The low levels of foreign direct investment (FDI) that Malaysia has attracted over the past decade are one indication of a weakening competitive position.