Four measures which the post-Iraq war multi-billion ringgit economic
stimulus package should adopt to prevent the Malaysian economy drifting to
by Lim Kit Siang
When the Budget for 2003 was presented in Parliament in September 2002, the
Prime Minister, Datuk Seri Dr. Mahathir Mohamad, despite the global
uncertainties and the sharp drop in FDI flows to Malaysia, chose to forecast
that the Malaysian economy would grow between 6 and 6.5 percent in the year
ahead, which was questioned and criticised by economists and analysts.
By adamantly sticking to the unrealistic forecast, the Government sent the
wrong signals to the markets and further damaged its credibility for
I had warned against such unrealistic forecasts at the time and called upon
the Government to move away from a state of denial to accept that the global
economy faced a precarious outlook and that Malaysia was not an isolated
oasis that could ignore the gathering storm.
In the six months since the budget was presented, the global economy has
suffered further setbacks and the prospects for growth in the next three
quarters have been sharply lowered. The US-led war of aggression against
Iraq has raised the level of uncertainty. The IMF has lowered its forecasts
and its Managing Director warned that the world economy was likely to face a
recession. And he is not alone. Alan Greenspan, the Chairman of the US
Federal Reserve Board has also expressed concerns. The war, coupled with the
reckless fiscal policies being pursued by the Bush Administration, has
created circumstances that are alarming from the viewpoint of global
economic prospects. The markets have recognized the dangers. The major
bourses are in retreat.
Bank Negara however has chosen to ignore the global
uncertainties. In its 2002 Annual Report released last week, it assumed
fairly robust growth when it postulated that "global economic growth is
expected to expand modestly by 3.1% in 2003 (2002: 3%), while world trade is
expected to increase by 3.5 - 4.5% in 2003. Growth in the major industrial
countries as a group is estimated at 1.8% (2002: 1.6%)"
Based on these rosiest of assessments, Bank Negara has in an ostrich-like
stance persisted with the fiction that Malaysian economic prospects remain
bright. The latest Bank Negara Report said:
"Based on the assumption of a modest world
economic growth, some pick-up in the global electronics industry, firm
commodity prices and further expansion in intra-regional trade, real GDP
growth in Malaysia has the potential to be sustained in the region of 4.5%
in 2003. Growth would be mainly domestic driven, supported by a modest
growth in external demand. While the public sector would remain supportive
of growth, private sector demand is expected to assume a more significant
role in driving economic expansion in 2003. The improved domestic
fundamentals would provide support for the sustained strong consumption and
continued recovery in private investment. More encouraging is that after two
consecutive years of negative growth, private investment is expected to turn
around to increase by 8.1% in 2003, supported by domestic capacity expansion
and a steady inflow of foreign direct investment."
The optimism reflected in the Report stands in sharp contrast
to the reality of the circumstances the nation faces. This is vividly
illustrated by the fact that more than 40,000 people lost their jobs in
2001-02 in the electronics industry. Restructuring of industries in Shah
Alam and other industrial sites led to the loss of some 100,000 people
between November 2001 and last month.
Realized FDI inflows as opposed to "approvals" are at the lowest levels in
over a decade. Lack of foreign investment is hurting the Multimedia Super
Corridor (MSC), which is on the road to being an IT ghost town. The recent
self-inflicted wound in the Palm Court Incident has further damaged
prospects. The war of words with our near neighbors is affecting tourism
earnings. Domestic investment is stagnating for reasons unconnected with the
global scene. The Islamic state issue has had a damaging impact on the
investment climate; so too the uncertainties linked with the internal
machinations within the Barisan Nasional.
Prices of almost all items have increased by an average two
percent as of last Thursday, which is not considered bad, but the maximum
increase was in communication, transportation and in industrial products. To
arrest price increases in export-oriented products, Malaysia announced a cut
in natural-gas prices by 50 percent, which followed a recent 2 percent
increase in petroleum prices.
As part of measures to kick-start the economy, interest rates have been
slashed in part to encourage people to buy locally-made cars to save the
ailing automotive industry and low-interest loans for housing.
Civil servants were given interest-free housing and car loans from banks to
keep the economy afloat. There is a growing fear that non-performing loans
are likely to increase sharply as the economy slows down.
Since the 1997 crisis, the Government has relied on pump priming as a key
instrument of policy to sustain growth. The government has been mistaken in
its use of pump priming as a viable policy instrument. It is an appropriate
instrument in countering cyclical movements but not a long-term tool for
addressing structural imbalances.
The Malaysian economy has deep structural problems linked with the bubble
created in the 1990s. It has over-invested in infrastructure with low rates
of return and has persisted with the policy. Even more telling is the loss
of competitiveness as evidenced by the inability to attract FDI, which
provided the impetus for export led growth.
The current strategy of the Government of domestic-led private sector driven
growth,"with the Government providing a positive enabling environment for
private sector activities and initiatives." is headed for failure. It is a
strategy dependent on the rapid growth of Small & Medium sized Enterprises.
But these are hardly in a position to act as an engine of growth. The Bank
Negara report makes reference to the role and status of SMEs in the
"The survey findings showed that in general,
the potential ability of SMEs in Malaysia to compete and contribute
effectively to the economy was affected by their relatively small scale, low
efficiency levels and insufficient comparative advantage. Other pertinent
issues affecting the viability of the SMEs including access to advisory
services and access to financing were also highlighted in the report. The
main findings of the survey are: -
SMEs are largely involved in the trading,
manufacturing and services sector.
88% of SMEs are family-owned businesses with
72% operating as private limited companies. Foreign ownership in SMEs is
small with participation in less than 15% of SMEs, while 26% of SMEs
surveyed are Bumiputera-owned enterprises.
The SMEs are generally very small with 77%
having total assets of less than RM5 million and 74% having less than 50
The SMEs were generally affected by the 2001
economic slowdown. 29% of SMEs surveyed were insolvent while 33% were
breaking-even or making losses. 70% of the respondents generated sales of
less than RM10 million with 50% reporting sales of less than RM6 million,
while only 8% of SMEs export their products.
62% of the respondents indicated that they
did not have difficulty in obtaining financing. 47% financed their business
operations through borrowings from banking institutions, 32% through
self-financing while 11% were financed through borrowings from other
Generally, the survey showed that SMEs had
low investment in technology and computer utilisation. 45% of the SMEs are
still labour-intensive and 48% have low computer usage.
This then is the reality. Overcoming these hurdles will demand
much more focused and sustained measures well beyond those articulated in
the 2003 Budget. SMEs are not the saviours. The greatest challenge is to
channel finance to SMEs. That is unlikely so long as the Government is
obsessively focused on bail-outs of crony corporations, mega projects,
re-nationalization of failed privatized entities and other ill-onceived
schemes such as Valuecap. If the largest proportion of national savings are
thus channelled, little remains to strengthen SMEs.
The 2003 budget projected a deficit of 3.9 percent of GDP, lower than the
revised figure of 4.7 percent in 2002. This is the sixth fifth year in
succession that the Federal budget will record a deficit. There can be no
denying that budget deficits on this scale are unsustainable in the long run
and can only be harmful to the long-term health of the economy.
However, it is salient that in 2002 Net external borrowing is now estimated
at RM 11.95 billion as against what was stated in the budget at RM9.79
billion. The Report gives no estimates of borrowings in the current year.
Hidden in these arcane numbers is a devastating revelation - that the
government had borrowed heavily for bailouts; that it short-changed local
lenders (largely depositors in banks and EPF contributors) who were
compelled to lend at low rates so that the government could bailout its
cronies. The structure of the Federal Government's domestic debt is equally
revealing. Of the total domestic debt, 56 percent was owed to the EPF and
another 19 percent to banks and insurance companies. Thus, in the final
analysis, over the years ordinary Malaysians have loaned the Federal
government as much as RM 90 billion to squander in the name of
The absence of transparency and accountability in the
investment decisions of the EPF Board assume a new meaning when the
declining dividends paid out to contributors are in part at least due to the
low interest rates paid by the Federal Government for its borrowings from
The nation faces difficult choices and these times which demand
difficult decisions. The key challenge is: how it can regain competitiveness
and return to sustainable growth.
To meet the immediate task of cushioning the impact of the
global slow down , a number of policy initiatives are needed. These should
be viewed from the over-riding need to sustain demand and protect
Pump priming is a palliative and is delusional. It cannot be a basis for
sustainable growth in the long term. Massive pump priming over the past
years has led to resources being channeled to mega projects and the building
of white elephants. We are likely to see "more of the same" in announcements
that are pending. No attention has been paid to issues of the quality of
investment and its direction. Most investment has been channeled to projects
that have low economic returns, are capital intensive and have led to the
creation of bubbles.
What the nation needs, however, is more investment in schools, expansion of
tertiary education, and in R&D. Given these considerations, the development
budget should be carefully reviewed and reoriented. Hopes for a sustained
contribution from the SMEs to boost private investment, are unlikely to
materialize unless radical policy changes are introduced. SME growth will
only come about if it is supported by R&D and injection of capital. So long
as the government hijacks investment resources to support bail outs,
undertake reverse privatization and build more white elephants, the SMEs are
unlikely to have the capital to expand.
Fiscal and monetary policies, however sound, are inadequate to create the
environment to sustain growth in a difficult world environment. What is most
critical are changes to restore credibility and to improve the overall
There are four factors which the post-Iraq war multi-billion
ringgit economic stimulus package, which is expected to be announced any
time after more than two months in preparation, must take into account to
prevent the Malaysian economy drifting to disaster, viz:
corruption has reached levels that it sharply affects the
viability of doing business. The odor of corruption can no longer be masked.
In the aftermath of Sept 11, the issue of stability in the
region has become of concern to foreign investors. Toning down the rhetoric
of Malaysia being an Islamic state is essential to restoring investor
confidence. Better still, withdraw the unconstitutional "929 Declaration"
that Malaysia is an Islamic state.
The megalomania for mega-projects is seen as a negative factor
in long-term assessments of the economic prospects of Malaysia.
Efforts at corporate restructuring are seen for what they are -
out- and-out bailouts of cronies. Financing of these bailouts through the
use of public resources managed by Khazanah, EFP, or Petronas do not sit
well with markets. Even bond issues are nothing more than the use of private
savings to aid a few chosen tycoons. The time has come to put in place
policies that are driven by the national interest rather than private crony
interests. Greater transparency in investment decisions by EPF and other
bodies is urgently needed if markets are to be persuaded that investments
are solidly based on fundamentals and not politically-motivated
Malaysia faces challenges it has not faced before. It does not
have the luxury of following failed policies, or policies that have a short
term focus. The hard choices that have to be made can no longer be avoided
or postponed. The long term prosperity and well being of the nation demand
that the real issues be confronted frontally. Any new stimulus package that
ignores the pressing issues is likely to have far reaching long term
Lim Kit Siang, DAP National