World Bank – Higher cost of
doing business in Malaysia than Thailand
- on the 2005 Budget
by Lim Kit Siang
(Dewan Rakyat, Monday): 2005 will be the eighth year in which the Federal Government will run a deficit. It would appear that deficits are now a permanent feature of the policy package of BN Governments. The Prime Minister stated:
“…..the overall Federal Government deficit is expected to be reduced to 3.8 percent of GDP. Of this, RM89.1 billion or 75.9 percent is for Operating Expenditure and RM28.3 billion for Development Expenditure. In this regard, the Government has successfully implemented consolidation measures, which have contributed to a significant reduction in its fiscal deficit from 5.3 percent in 2003 to 4.5 percent of GDP this year and 3.8 percent in 2005.”
What the Prime Minister did not state was that while operating expenditures will continue to climb. The expenditure growth is a case of a little here and a little there. Development expenditures will be scaled back to give the illusion of fiscal responsibility. The revenue side of the budget will be largely untouched and revenue growth will be far below economic growth.
The statement about deficit reduction runs against the historical record. In each budget presentation, the nation is told that the deficits are going to be lower in the year ahead. Yet when the final accounts are delivered, the deficit recorded is larger.
Deficits do matter – they create a burden on future generations of Malaysians; they introduce distortions in several other ways. The financing of these deficits through borrowings translates into less resources being available to the private sector for investment and increasing long term competitiveness. In this context I would like to quote from the IMF public announcement following the IMF Executive Board discussion of the Annual Consultations with Malaysia in 2003:
“However, the historical trend continues to indicate that public sector debt has been growing at a faster pace than implied by the net financing requirements of the consolidated public sector reflecting—in part—operations not captured by the consolidated accounts, including the acquisition of public assets and the assumption of debts by the federal government.”
The budget therefore is longer a transparent instrument. Off budget expenditures now run in the billions. This House is not informed nor its consent sought. The budget now presented continues this practice. This cannot stand if the Prime Minister wishes to remain credible on the issue of achieving greater accountability and transparency.
At that same discussion of the Report on the Article IV consultations other concerns were expressed. I quote:
“In particular, they(the Directors) encouraged the authorities to disseminate more detailed information on the fiscal costs of exemptions and implicit subsidies, and on the quasi-fiscal expenditures of the nonfinancial public enterprises. The government was encouraged to look into the scope for further divestment from major corporations
“Directors stressed the importance of monitoring closely tax revenue performance and further exploring ways to rein in the growth of nonwage operational expenditures. Directors welcomed the recent steps taken to reduce noncore investment spending, and encouraged the authorities to persevere in their efforts to streamline the public investment program. Directors recommended that the authorities look into the scope for reining in the recent increases in expenditures on subsidies and transfers, while ensuring that an adequate social safety net remains in place to protect the most vulnerable groups”.
These are far reaching admonishments delivered by the IMF, couched in the cryptic language it uses. There has been no indication from either official pronouncements or in the budget speech that the Government has taken heed of these concerns. The Government appears to be sailing full steam ahead to a potential disaster and gives on indication of a course correction.
It would appear that the lessons of the 1998 crisis have not been learnt. I do not wish to be an alarmist but the fiscal neglect could well be a trigger for the next crisis. And that crisis may come sooner than latter as the flawed policies of the US Government, rising inflation will trigger higher interest rates. Malaysia is not isolated particularly as its currency is pegged to a falling US dollar.
Let me turn to the rising debt service burden (domestic and foreign). It accounts for almost a quarter of the recurrent expenditure budget. It is significant that the Speech made no reference at all to this aspect of expenditure. Debt service on this scale reduces the resources available for other priority spending to meet the people’s needs.
Another aspect of the fiscal situation concerns revenue. In 2005, government revenue is expected to rise 2.2 percent to 99 billion ringgit. This is indeed most curious. If the forecasted GDP growth rate is of the order of 6 percent, why is it that revenue will only grow by 2.2 percent? This is most odd given that tax rates have not changed except very marginally.
Let me address the issue of competitiveness. This indeed is the greatest challenge Malaysia faces as new economic giants – China and India emerge – with huge domestic markets, strong indigenous technological bases, offering new and attractive opportunities for FDI. Where does Malaysia stand? A small market, dependent on foreign markets; a virtually non existent domestic technology base and an economy in which the cost of doing business is considerably high relative to its competitors.
The high cost of doing business in Malaysia has been well documented in a recent global study by the World Bank. The Doing Business Database provides objective measures of business regulations and their enforcement. The Doing Business indicators are comparable across 145 economies. They indicate the regulatory costs of doing business and can be used to analyze specific regulations that enhance or constrain investment, productivity and growth. How does Malaysia fare? Some highlights from the Database are in order.
Doing business in Malaysia
I have chosen Thailand for comparison as it is one of our closest competitors. Similar comparisons can be done for any of about 140 countries. What these numbers illustrate is that we are a nation tied in red tap, a less than business friendly bureaucracy and with high costs in general. These telling statistics also convey another message: over regulation and inefficiencies in the administration create the conditions for corruption which ultimately is a hidden cost of doing business, somewhat hard to quantify.
However, competitiveness goes beyond these quantifiable aspects. It can hardly be denied that Malaysia has lost an advantage with the deterioration of the comparative skill pool of its work force linked with the lowering of educational standards. The latter can be attributed to the foolhardy educational policies that the BN has imposed on the nation over its long tenure of office. The chickens come home to roost and Malaysia stands on the edge of further losses in competitiveness.
The budget addresses none of the underlying failures. It does not address the serious aliments. Educational reforms are of the utmost urgency; yet nothing is said in the budget. The malaise is supposedly to be addressed through throwing more money rather than by a serious and honest assessment of what is wrong and the adoption of policies that correct the fundamental flaws. It is indeed sad that the Prime Minister could say little about how the educational system is to be revitalized beyond creating 12 Special Grade C posts on a personal to holder basis for Guru Cemerlang and 5 JUSA C posts for Pengetua Cemerlang. No one would oppose the creation of these “cemerlang” posts but how do they contribute to creating a quality education system?
There are yet other dimensions to ensuring that Malaysia regains its competitiveness. I refer in particular to the pegging of the ringgit to the US Dollar. The peg was introduced as a temporary measure in 1998 in the midst of a devastating financial and economic crisis to bring stability in the exchange rate, to permit exporters to regain a competitive edge, and to pursue reforms.
The decision to resort to an unorthodox approach was criticized and debated. I do not think it is appropriate to reopen that debate. What is appropriate however is to pose the following questions: Is the ringgit peg serving Malaysia’s best interests in the current circumstances? Is it time to alter course? What are consequences for restoring competitiveness?
I have been advised that the following is a broad review of the the impact of the peg:
There is an urgent need to revaluate our exchange rate policies. I urge the Prime Minister to initiate an independent study. There should be an independent and honest appraisal because leaving it to the Ministry of Finance and Bank Negara would be inappropriate. These two institutions are headed by the two principal architects of the policy – namely the Governor of the Bank and the Second Finance Minister. The urgency is underlined by the significant changes that are anticipated in the standing of the US Dollar, rising interest rates at the global level and somewhat slower growth in world trade in the year ahead.
The Prime Minister needs to be reminded that this is not a party political issue. The call for a review of the policy has come from a variety of respected sources that include the Malaysian Institute for Economic Research, the IMF Board of Directors and academics that have sound credentials.
I would like to draw the Prime Minister’s attention to the following statement from the IMF following the discussion of the Article IV Consultations report:
“…some Directors saw no convincing case to reconsider the peg at this time. At the same time—and with a forward-looking perspective—many other Directors thought that a move toward greater exchange rate flexibility would be beneficial for Malaysia if it were well prepared, pursued from a position of strength, and carefully sequenced. Such flexibility would help to manage risks associated with capital flows, alleviate the burden of adjustment on fiscal policy to deal with shocks, and facilitate adjustment to structural changes in the economy.”
The language quoted above reflects a majority view and is objective and measured. The position taken appears to be balanced and does not go back to the earlier orthodoxy of the IMF that was a red rag to the previous Prime Minister/ Minister of Finance. The Prime Minister should note that that nation runs high risks of yet another crisis if the Government chooses to ignore somber advice. Let not false pride stand in the way of taking measures that new circumstances demand; let us not cling to positions that may have been correct once, but are no longer in the interests of the nation.
Regaining competitiveness demands actions on many fronts and the review and adoption of new exchange rate policies is but one such action.
Agriculture as the growth engine
Hopes for “Accelerating the shift towards a higher value-added economy” rest largely on the Government’s intent to move towards a greater reliance on the agricultural sector as a growth engine. Since this policy goal was re-emphasised when the present Prime Minister took office in late 2003, little has emerged by way of a coherent, carefully thought through strategy.
What we have heard are broad statements of intent, a rather loose distribution of resources, continued in the current budget for a series of unconnected projects directed at parts of the country and narrow constituencies that once were the base for UMNO who are increasingly leaning towards PAS. To this extent then, question that can be posed is: Is the so called agricultural strategy really a strategy to regain and consolidate the support of those who have deserted UMNO or are likely to do so in the medium term?
Even if this assessment is wrong, it is wholly legitimate to raise the following questions:
Developing Human Capital
The third prong of the budget strategy is: “Third: Developing human capital as a catalyst of growth.” There can be no disagreement about the validity of this statement.
What is urgently needed is a radical revamping of the educational policies being followed. This must start with primary through secondary to tertiary education. Meritocracy must be the overriding criteria, be it in the selection of students or teachers or academic staff. It is indeed shocking that after 47 years as a nation, there no non-Bumiputra Vice Chancellors or Deans in any of the public universities.
Satu Bangsa, and national unity cannot be built upon foundations such as these. In the early 1970s when the NEP was adopted, one of its tenets was that race would not be identified with occupation. Why have we regressed? Why have we denied and failed to implement a policy that was agreed to and accepted by all ethnic groups?
I call upon the Government to start a reversal of the process by appointing an All Party Educational Commission to formulate a truly national educational policy that recognizes the constitutional provisions concerning education, its central place in nation building and determining our capacity to be competitive. Education is a key to the future of this nation; it cannot be sidelined without grave consequences for us as a nation politically, socially and economically.
* Lim Kit Siang, Parliamentary Opposition Leader, MP for Ipoh Timur & DAP Central Policy and Strategic Planning Commission Chairman