Ninth Malaysia Plan: Towards Sustainable Economic Growth in Sabah

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Ninth Malaysia Plan Towards Sustainable Economic
Growth in Sabah Friday, 28 April 2006FEA,
University of Malaya,School of Business and
Economics, Universiti Malaysia SabahBank Negara
Malaysiaby Datuk Seri Panglima Andrew L.T.
ShengTun Ismail Ali Professor of Monetary and
Financial EconomicsFaculty of Economics and
AdministrationUniversity of Malaya
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The Changing Landscape

• Since Berlin Wall in 1989, over three billion
  workers and consumers have joined the market
  economy. Brazil, Russia, India and China (BRIC)
  are expected to become larger than G6 in less
  than 40 years. China overtake Japan in 2016,
  India overtake Japan in 2032
• 1.02 trillion Internet users (15.7 of world
  population) pushing spread of knowledge and
  global market.
• Trade and financial liberalization have resulted
  in larger capital flows. Global trade in
  physical goods and services reached US11
  trillion in 2004, but trading in foreign exchange
  amounted to US 1.9 trillion daily.

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Asian Supply Chain Network

• Information technology, automation, innovation
  and competition have converged so manufacturing
  has become more flexible, with higher quality
  standards and greater responsiveness to consumer
  needs.
• IT has driven globalization through its networks,
  so that the global is increasingly operating as
  one global net where ideas, capital and products
  flow with less and less concerns for geographical
  borders.
• Through World Wide Web, manufacturers are able to
  source production, restructure operations and
  delivery system to serve global customers. This
  means that production and services can be shifted
  out very quickly.

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Network Economics

• Economies of Scale
• Supply side - Biggest producer wins
• Demand side - Biggest buyer determine standards
• Critical Mass
• Aggregation of local knowledge and skills
• Best combination of skills create economies of
  scale
• Critical Mass Clusters skills concentration
• Supply Chain Management - where in the chain is
  real value?

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The Knowledge Economy

• Commoditization means that low-knowledge products
  and services have high competition, low prices
  and are easily duplicated and therefore taken
  away.
• Network Economy demonstrates winner-take-all
  situation. See value of Vijay Singh today vs
  Vijay in Sabah.
• Markets are all about branding and high
  knowledge content products. Knowledge content
  needs governance - value creation needs total
  inputs at production, design, packaging and
  marketing levels.
• Knowledge is value. How Malaysia and Sabah
  become Knowledge Economies determines our
  competitiveness and wealth.

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Hierarchy of Information

• Robert W Lucky, Silicon Dreams Information, Man
  and Machine, St Martins Press, 1991.

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Sequencing and Hierarchy of Domestic Financial
Markets

• Asset-backed
• securities and
• derivatives
• Corporate bond and
• equity markets
• Government bond market
• Treasury bill market and
• foreign exchange markets
• Money market

Source Karacadag, Sundrarajan Elliot, 2003
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Intra-Asian Trade is Growing(Trade Flows as a
percent of Total Asian Trade, 2004)
Source David Roland-Holst, Mar 2006
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Asias Growth and Its Sources, 2005-2025 ()
9MP GDP 6 TFP 7MP 1.1, 8MP 1.3, 9MP 2.2
TFP means total factor productivity - Source
Asian Development Bank
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Great Gains in Real Income if Liberalization(
change from baseline in 2025)
Source Asian Development Bank
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Great Gains in Real Exports( change from
baseline in 2025)
Source Asian Development Bank
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Sabah Changing Patterns in Exports
Sabah Statistical Yearbook
Source
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9MP Key Objectives

• Move up Value Chain
• Raise Capacity for Knowledge first class
  mentality
• Address Inequalities
• Improve Quality of Life
• Strength Institutional Capacity

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1. Moving Up Value Chain

• When China is having 9.5 and India is having
  7.5 growth on average, targeting 6 growth for
  Malaysia means that we are not taking advantage
  of growth poles around us. We should look at
  competitive opportunity from fast growing
  neighbours.
• US will slow in 2007 and will put pressure on
  Asia to increase consumption and be engine of
  growth. China and India will need natural
  resources. Therefore, we must target growth
  markets in our areas of comparative advantage
• Overall, manufacturing will meet strong
  competition, commodities will benefit from
  regional demand, services potential underestimated

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Malaysias Comparative Advantage

• Strategic Location in Fastest Growing Zone
• Political Stability, Cultural Diversity
• Underpriced talent pool in human capital -
  Malaysia is feeding professionals abroad
• Huge Natural Resource base - oldest tropical
  jungle, relatively unspoilt reef resources
• Good physical infrastructure and relatively
  strong soft infrastructure (eg Common Law
  framework) that fits with globalisation.

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Sabahs Comparative Advantage

• Strategic Location between North Asia and
  Australia/East Indonesia
• Cultural Diversity and Political Stability
• Underpriced talent pool in human capital - Sabah
  talent world-wide
• Huge Natural Resource base - oldest tropical
  jungle, relatively unspoilt reef resources -
  gateway to Pacific Islands
• Improving infrastructure and common law property
  rights that fits with globalisation.

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Manufacturing

• Can no longer rely on cheap labour as comparative
  advantage. Not sure that competition from China
  and India will erode share of manufacturing as
  of total exports to 80. Manufacturing 30 of
  employment. Vulnerable to production shifts.
• Huge Manufacturing capacity increase in China and
  India in last 5 years. This will put threat to
  manufacturing margins
• How do we move up value-added chain in global
  supply chain manufacturing? Need careful study.

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Agriculture Squeezed in Middle

• Must move up Value Added Chain - even palm oil
  prices are threatened by soya bean and other
  vegetable oil substitutes
• Palm Oil and Rubber - Indonesia has land and
  labour - will provide huge competition
• RD is vital, but must be market-oriented - How
  do we ensure that RD can be nurtured and
  commercialized is test of governance structure
• Look at high value crops, including jungle
  biodiversity

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Services the next frontier

• ICT - Internet SME growth is the wave of the
  future. Why is broadband usage only around 1?
• Malaysia moving from 53.9 of GDP in 2000 to
  59.2 by 2010 (58.1 in 2005)
• Sabah service sector less than 50 of GDP
• US services sector 78.3 of GDP.
• Higher service sector growth is inevitable for
  developed country (say 70 by 2020, therefore
  national 63 by 2010).

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Financial and Commercial Services

• Malaysia as Global Islamic Financial Centre -
  watch the competition.
• Make KL Asset Management Centre for Asia - Labuan
  is already booking centre.
• Commercial Services - why dont we be outsource
  subcontractors in accounting, secretarial,
  cartoons, sound, film, book production etc to
  high cost centres?
• This can only be achieved if we have widespread
  and stable broadband.

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Tourism Malaysia truly Asia

• Tourism earned RM32.4 bn or US8.8 bn based on
  16.4 mn tourist arrivals. Thailand earned
  US11.6 bn on 13.4 mn arrivals.
• Tourism earns 80 more than palm oil, 6 times
  more than rubber and only 30 less than oil and
  natural gas (a depleting commodity).
• Where is our share of China and Indias outward
  tourism? 2000-2010 3.8 to 6.1 1.3 to 1.8
  (India lower than Taiwan?)

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Tourism Sabah a truly success story

• Tourism earned Sabah RM2.2 bn or 6.8 of national
  total. Sabah has very good brand for Eco-tourism
  and adventure travel. Can build on this.
• In 2004, tourism earned as much as Plywood Sawn
  Timber Veneer Exports (RM1.5 0.6 0.1 2.2
  bn). We sell only our lifestyle!
• Tourism worldwide is growing business. Tourism
  attracts FDI (your eco-tourist is your highly
  educated, high income top management group who
  makes decisions on FDI).
• We have what India, China and many countries do
  not have - tropical eco-systems - highest
  mountain in SE Asia.

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Sabah Macro-Story - improving with great potential

• GDP growth - 6.5-7, should be able to grow
  faster because of our comparative advantage.
• Balance of Trade - in 2004, trade surplus of
  RM6.5 bn or 26.8 of GDP, compared with deficit
  in 1997.
• State is in full employment because of imported
  labour, but we have graduate unemployment
• Timber and Oil/Gas are non-renewable resources,
  whereas the future of Agriculture and Services
  must be dependent on Value-Creation.

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But development indicators suggest there is room
for improvement

• Development Composite Index by State Ranked
  14th. (9MK Table 17-1)
• GDP growth in 8MP - 4.3, (5th after Selangor,
  Johor, Penang and Sarawak). 9MP - 5.8 versus
  national target of 6 (Table 17-2)
• Mean Household Income, RM2,487 (8th rank) vs
  national average of RM3,249 in 2004.
• Incidence of poverty at 23.0 in 2004, slight
  improvement from 23.4 in 1999, but highest in
  Malaysia and vs 5.7 national average Tble
  17-3.
• Urbanisation rate 49.5 vs 63 national average.
• Highest urbanization growth of 3.1 in 8MP.

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Urbanization

• Japan and Korea accomplished industrialization in
  1973 and 1999 respectively.
• In 1971, Japans per-capital GDP exceeded
  US2000, and its primary industry made up 6.5 of
  the GDP and its urbanization rate reached 72.1.
• In Korea, in 1991 the urbanization rate reached
  74.4, primary industry in the GDP amounted to
  7.1, and the per-capital GDP surpassed 6,000
  dollars.
• By 2005, Malaysias GDP per capita in PPP terms
  reached US10,000, but urbanization rate is only
  63 and targeted to be 63.8 by 2010.

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International Lesson Growth is a function of
governance

• Natural Resources not a guarantee of growth eg
  Middle East, Africa and Latin America.
• Neither is cheap labour Myanmar, Vietnam and
  Bangladesh.
• In last 50 years in Asia, richest economies are
  Hong Kong (US52,000 per employee and Singapore
  (US54,000), which had no natural resources and
  also overpopulation higher than Korea and
  Taiwan.
• Hence, governance and political stability key to
  growth with stability.
• Global competition means that countries in middle
  will be squeezed by China and India, where labour
  is both cheap, and with FDI inflows, capital and
  modern technology is also no constraint.

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Markets are a function of Liquidity Friction
Costs

• The greater the friction cost, the more the
  market moves to areas with lower friction costs
• The lower the friction cost, the higher liquidity
• Friction costs depend on the following-
• Time speed to market
• Factor costs Labour, Capital, Taxes
• Infrastructure costs - how good is physical
  utilities?
• Government costs - are rules policies costly?
  
• Barriers to Entry - competition policy

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Structural Costs Compared

• HKSAR China US Japan
• Production Costs High Low High High
• Transaction Costs Low High Low Medium
• Infrastructure Cost High Medium Low Medium
• Saving Rate Medium High Low High
• Expected Investment
• Return Low High Medium Low
• Speed to market Slowing Improving Good Slow
• Government Costs Low High Low High
• Barriers to Entry Rising Lowering Low High

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ABC of Knowledge Economy

• ACADEMIA - Holders of Knowledge, but bogged down
  in teaching. Segmented from market or government
• BUSINESS - Close to market, but do not use
  Academia for RD and sees Civil Service as
  hindrance rather than partner
• CIVIL SERVICE - Holder of massive public
  information and resources that can help growth.
  Currently, rarely uses Academia for RD and
  policy work. Focuses more on regulation rather
  than BUSINESS facilitation.
• Competing internationally means that transactions
  costs of doing business in Malaysia must come
  down. Its all about teamwork. We have to
  operate as truly Malaysia Inc.

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IFC Doing Business Global Index
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Development and Growth is a Process. To have
Sustainable Growth, you need a Process to Manage
Development Process

• Development is complex, because those who face
  most problems are those who are closest to the
  problem the poor, SMEs, private sector, grass
  root public servants.
• Its not about QUANTITY OF GROWTH, BUT QUALITY.
• In the past, development has been top-down. Aid,
  not trade. Today, we understand that we have to
  use market forces to lead growth.
• Therefore, the key to sustainable growth is to
  have inclusive, transparent and accountable
  processes to manage the growth process.
• This is a co-operative venture, not
  public-private competition.

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Get Partners in order to win knowledge,
experience and credibility

• There are both foreign and domestic partners.
• We could consider a COUNCIL OF INTERNATIONAL
  ADVISERS at State Level. Bring renowned foreign
  experts who can help Sabah link to rest of world.
  
• Example Sipadan was made famous by Jacques
  Cocteau. We should get top ranked universities,
  working in cooperation with UMS, to study our
  biodiversity and reefs. Be the most serious
  eco-tourism centre in the world.
• Since we are top palm oil producer, lets work
  with palm oil companies to relocate RD centres
  in Sabah.
• Let Sabah be Malaysia-My Second Home to top
  scientists, research workers, educationists
  working in areas of Sabah comparative advantage.
  

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CONCLUDING THOUGHTS

• In the global world, development is too complex
  to be undertaken even by a small team. It has to
  be a process of discovery and execution.
• Be clear in objectives and have constant feedback
  on whether the objectives and implementation are
  meeting the targets.
• Development is about getting the right incentives
  in place. Teach a man to fish, not to eat fish.
  Value our heritage, our heritage will give us
  value.
• There is no one right way to development - just
  pick important problems, fix them and tell
  everyone. Harvard Professor Malcolm Sparrow.

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• Thank you
• Questions to as_at_andrewsheng.net