Home / Tag Archives: Malaysia

Tag Archives: Malaysia

Anwar jailing could hurt both opposition and Najib

Author: Yang Razali Kassim, RSIS

The jailing of Anwar Ibrahim following a second sodomy conviction could trigger a chain of events that could shake up Malaysian politics. Unlike after his first jailing in 1998, the opposition, which he leads, is already split and could crumble. But this may well play out as Prime Minister Najib Razak, who is currently under siege within his ruling United Malays National Organisation (UMNO), fights for his own survival. Anwar currently is serving a jail term of five years for what he maintains was a political conspiracy by his enemies, including Prime Minister Najib.

Thousands gather outside the Masjid Jamek LRT station on March 7, 2015 for a giant street rally to pressure the government to free jailed opposition leader Datuk Seri Anwar Ibrahimi in Kuala Lumpur, Malaysia. (Photo: AAP)

Unless pardoned by the Malaysian King, the verdict could well end the 67-year-old Anwar’s political career. Besides losing his parliamentary seat, by the time he is released, he would be 72 making any political comeback difficult. But the former deputy prime minister has in the past proven to be like a cat with nine lives — and might just have one more. His family’s move to petition for a royal pardon was unexpected, but that prevented Anwar from losing his parliamentary seat pending the King’s decision. Anwar did not make the appeal, insisting on his innocence.

In 2000, two years after he was sacked as deputy premier following a clash with then prime minister Mahathir Mohamad over the handling of the Asian financial crisis, Anwar was jailed for his first sodomy conviction. He was released four years later when that conviction was overturned by the court. Anwar countered his latest court verdict with a vow to continue his fight from behind bars, thus promising to turn himself into a political martyr.

So, what now?

Anwar’s fractured opposition alliance, Pakatan Rakyat (PR), could close ranks and turn his incarceration to its advantage. This could mean an explosive phase for Malaysian politics at Najib’s expense and the ruling Barisan Nasional (BN) coalition. But closing ranks appears to be tough without Anwar to act as a bridge between internal factions. And if the PR fails to overcome its internal divisions, the opposition will find itself heading for demise.

The challenges are daunting: 1998 is not 2015. Anwar is older and his health is also an issue. There is also no clear alternative leader of Anwar’s stature, with his charisma and political acumen to pull the divided alliance together.

This leaves the opposition coalition with little choice but to fall back on Anwar’s appeal and leadership again despite the odds. This would buy more time for the opposition to sort out its leadership crisis and throw up a new generation of opposition leaders.

To this end, the surprising move by Anwar’s family to seek a royal pardon allows the PR to retain Anwar as leader of the opposition in parliament A core of younger leaders, who have emerged on the wings of Anwar’s reform movement, are stepping up to the plate. These younger leaders, which include his daughter, Nurul Izzah, Azmin Ali, Rafizi Ramli, Saifuddin Nasution, Nik Nadzmi and Tian Chua, are now set to play a more prominent role to redefine Malaysian politics post-Anwar. An unexpected development is the emergence of more of Anwar’s offspring to continue his struggle, such as Nurul Nuha and Nurul Hikmah. There are also more promising young leaders in the broader opposition coalition beyond Anwar’s own party.

Will Anwar’s jailing help Prime Minister Najib?

Anwar’s second jailing has obvious implications for Najib. If Anwar’s family fails to secure him a royal pardon, the charismatic opposition icon will, by law, lose his parliamentary seat and will no longer be a major factor in the political equation. He will miss the next general election. But the family petition for the pardon has automatically suspended Anwar’s disqualification, pending a decision by the King. This means PR will not be as leaderless to fight the next polls as initially thought.

If Anwar becomes a political martyr and the opposition alliance overcomes its division, he might potentially become a more potent threat to Najib. But at this point, the split within the PR — between the Islamist Pan-Malaysian Islamic Party (PAS) and the Chinese-based Democratic Action Party (DAP) — seems difficult though not impossible to reconcile.

Anwar’s political lifeline ironically may come from Najib’s own problems. As it is, Najib is already looking at a tough year ahead on both the political and economic fronts. He has entered 2015 under the clouds of three dramatic airplane disasters. He is probably the only Malaysian leader since independence to have come under such unprecedented misfortune.

Ominously, one of the worst floods to hit the country’s peninsular in a ‘mini tsunami’ ushered in 2015. A subsequent photograph of Najib playing golf with President Obama during a private visit in Hawaii during the floods didn’t help either.

Najib also took the rap for losing the popular vote in the last general election to the Anwar-led opposition. A new investment fund which he advises, 1Malaysia Development Berhad known as 1MDB, has been heavily criticised for amassing huge debts so soon after formation. The alarming debt size has drawn heavy fire from two UMNO stalwarts, Mahathir and former finance minister Daim Zainuddin. The 1MDB issue continues to burden Najib.

Economically, this could not have come at a worse time: plummeting global oil prices have hit Malaysia, an oil exporter, hard. This forced the government to downgrade GDP growth forecasts from 5–6 per cent to 4.5–5.5 per cent. But Najib shied away from declaring an emergency, stating ‘we are neither in a recession nor a crisis as experienced in 1997, 1998 and 2009’.

The drop in oil prices was not accompanied by a corresponding decline in the prices of consumer goods. This led to one UMNO minister accusing ‘Chinese traders’ of profiteering and calling on the majority Malay community to boycott Chinese businesses. There were even alarmist statements that certain parties had sabotaged the economy to profit from the falling national currency. This is probably the first time since the 1998 financial crisis that such talk has resurfaced, although it has been defused for now.

As he faces these challenges, Najib has to ensure that his ethnic-based ruling coalition remains stable. But a key partner, the Malaysian Indian Congress (MIC), has broken into a public power feud, forcing Najib to step in. Another component party, the Malaysian Chinese Association (MCA) has just recovered from its own power struggle. In the anchor party, UMNO, the Mahathir-led undercurrents against Najib’s leadership remain despite the re-jailing of Anwar.

Najib cannot afford any more upsets in 2015, especially as Malaysia will be under the spotlight as chair of ASEAN. Will Najib display sufficient political skill to ensure his survival as leader — even as his nemesis, Anwar, and the divided opposition struggle for their own political survival?

Yang Razali Kassim is a Senior Fellow with the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University in Singapore.

An earlier version of this article first appeared here on RSIS.

Read More »

Some Malaysian inequality measures more equal than others

Author: Hwok-Aun Lee, University of Malaya

Is inequality in Malaysia going up or down? Answers differ. Official statistics unambiguously show household income inequality going down in the past decade, but almost everyone seems to think it has gone up. So what’s going on?

 A boy runs at a temple casted with shadows of traditional Chinese lantern decorations ahead of the Chinese Lunar New Year in Kuala Lumpur, Malaysia, on Tuesday, 17 Feb 2015. (Photo: AAP)

The most common measure of income inequality is the Gini coefficient. It suggests falling inequality in Malaysia. The Gini coefficient fell from 0.46 in 2002 to 0.43 in 2012. This Gini coefficient series was calculated using Malaysia’s Household Income Survey — a large sample, consistent and nationally representative dataset. Statistics derived from this source carry substantial weight.

But popular perception and anecdotal accounts view the issue differently. Most people seem to think that inequality has been rising, or at least persisting at high levels. The dissonance between the official figures and public perception warrants further investigation.

Rising inequality also loomed large in Malaysian popular discourse in the 1990s. But across that period, official statistics backed up popular perceptions — Malaysia’s Gini coefficient increased.

Public policy has for decades been preoccupied with targeting and monitoring reductions in inequality between ethnic groups. But the data and the policy direction seem to be at odds. Since 2010, some ethnicity-blind programs have been introduced to target the exclusion and lagging socioeconomic progress of the bottom 40 per cent of households. But this group actually had the highest income growth in the preceding decade. From 2002 to 2012, mean household income for the bottom 40 per cent grew by 6.1 per cent annually, compared to 5.6 per cent for the middle 40 per cent and 4.6 per cent for the top 20 per cent of households.

Why are low income households still considered to be in great need of assistance when their incomes have improved significantly?

Inequality is a zeitgeist issue that has resonance materially, politically and emotionally, regardless of official Gini coefficients. The notion that inequality has risen is believable because of a wider malaise in Malaysia. Malaysians are dissatisfied with rising prices, sluggish wage growth and economic insecurity. Many also resent the concentration of wealth among elites, especially through political-business connections or suspiciously corrupt means. Continual reports of misappropriation of public funds and the lavish livelihoods of corporate, financial and political elites tend to reinforce perceptions of unfairness and unequal opportunity.

Surveys by the Merdeka Center offer some insight into public opinion. In recent years, concerns over economic conditions, especially inflation, employment and wages, have grown. In April 2005, the top concerns were crime and public safety (16 per cent of respondents deemed this the biggest national problem), inflation (10 per cent), business opportunities and economic growth (9 per cent), with unemployment/lack of job opportunities (4 per cent) further down the list. In October–November 2012, the majority considered price hikes/inflation/rising cost of living to be the most pressing issue (23 per cent), followed by crime (7 per cent), unemployment/lack of employment opportunities (6 per cent) and unfavourable economic conditions (6 per cent). It is possible that Malaysians are simply conflating the general economic environment with inequality.

But it is also important to remember that everyone experiences inequality differently. For example, household income inequality need not move in the same direction as personal wage inequality or household wealth inequality. And the Gini coefficient isn’t the only way of measuring income inequality, either.

Malaysia’s official inequality statistics are calculated based on gross household income — that is, adding together all forms of income from multiple sources, including earned income (wages and self-employment earnings) and non-earned income (rent, dividends, transfers, remittances, and so on). It also counts multiple earners in the same household. This highly aggregated calculation can mask the effects of wage growth and asset accumulation, and other factors that affect inequality.

The full Household Income Survey datasets are also not available, meaning research in this field must assemble data from other sources.

One of these sources is data from the Employees’ Provident Fund (EPF), which allows us to calculate wage inequality over time. Formally employed private sector workers maintain accounts with the EPF, which had 6.5 million active members in 2013. Members regularly contribute to their accounts from basic wages and receive dividend payments, at uniform rates regardless of the size of the account. So changes in the distribution of EPF accounts will likely reflect changes in the distribution of wages. And the Gini coefficient of EPF savings accounts has been rising, giving us grounds to believe that wage inequality has increased in the past decade or so.

Other sources concur with a broad picture of steadily rising inequality. In the public sector, the number of managers and professionals at the upper regions of the wage distribution has grown disproportionately faster. Luxury cars constitute an increasing share of passenger vehicle sales, while property sales show rising concentration at the upper end.

Popular perceptions of rising inequality, it turns out, are supported by empirical evidence. Household inequality may be falling, as the data suggests, but other forms of inequality are rising.

Malaysia needs to pay more attention to wage distribution and labour market dynamics as well as wealth inequality. There are indications that wage inequality is rising, as well as widespread concerns over wage growth, household livelihood and housing affordability.

And the rich Household Income Survey datasets need to be made available for exploration — again, to investigate earnings and wealth, and to disaggregate personal and household dimensions. Only then can we really begin to untangle the complexities of inequality in Malaysia.

Hwok Aun Lee is Senior Lecturer in the Department of Development Studies at the University of Malaya. This article draws on a working paper co-written with Muhammed Abdul Khalid.

Read More »

Malaysia’s ASEAN chairmanship priorities all in order

Author: Daniel Wu, Pacific Forum CSIS

ASEAN needs a ready and capable steward in 2015 and Malaysia looks to be in the right place at the right time. Malaysia has made clear that realising the ASEAN Economic Community (AEC) by the end of the year will be its main goal for its 2015 chairmanship of ASEAN. In this regard, a recent essay by Malaysia’s Minister of International Trade and Industry Mustapa Mohamed provides subtle but significant indicators of the government’s leadership objectives and the approach to accomplish this. While the essay by no means represents a definitive official policy statement, it provides an encouraging affirmation of the growing need to address non-tariff measures (NTMs) and to galvanise the concept of an ASEAN identity.

 Former Malaysian Prime Minister Mahathir Mohamad presents a souvenir to visiting Indonesian President Joko Widodo as Malaysia's Prime Minister Najib Razak looks on at the head office of automaker Proton Holdings Bhd. in Shah Alam outside Kuala Lumpur on 6 February 2015. (Photo: AAP)

First, Minister Mustapa makes clear that Malaysia will not avoid the crucial and politically sensitive task of addressing protectionist measures imposed by other ASEAN members. If successful here, Malaysia’s effort could help set expectations for a new standard of behaviour. This would help mitigate and nullify the most significant challenge that stands in ASEAN’s way to realising a region characterised by ‘free movement of goods, services, investment, skilled labour, and freer flow of capital’.

Protectionism in ASEAN — such as local content requirements, mandatory product standards and import restrictions — is rampant, and this is most remarkable for the trade in goods. Binding tariff elimination commitments under the ASEAN Trade in Goods Agreement (ATIGA) has resulted in duty-free treatment for more than 90 percent of tariff lines. ASEAN members generally have little recourse to shield unprepared or nascent local manufacturing industries from exposure towards the AEC.

Consequently, the number of NTMs imposed has grown even though they contravene the goals of the AEC and distort intra-regional trade. Despite commitments under the ATIGA to identify and eliminate NTMs, little to no progress has been made. Malaysia’s plans to prioritise this issue can help set the tone and momentum for ASEAN to conduct a serious and honest examination on NTMs.

Second, as Minister Mustapa rightly highlights, misinformation means there is persistent scepticism — especially from industry — about the tangible benefits (and costs) of liberalisation measures under the AEC. Consequently, Malaysian Prime Minister Najib Razak has stated that under Malaysia’s leadership, ‘the people must understand what actually ASEAN is and what ASEAN is doing’.

There has already been an effort to address the information gap. In November 2014, ASEAN foreign ministers launched the ASEAN Communication Master Plan (ACMP) to provide a framework for communicating the character, structure and overall vision of ASEAN to its stakeholders. While the publication sets a useful baseline, Malaysia’s Ministry of International Trade and Industry (MITI) could help upgrade this effort. It could push for precise and actionable information to all of ASEAN, particularly concerning market access opportunities and preferential treatment from the AEC. Leading by example, MITI’s ‘Promoting Trade’ webpage is arguably one of the most updated and comprehensive sources of public information on trade agreements available today.

Malaysia will also seek to lead ASEAN in overcoming the rising backlash of nationalism against liberalisation under the AEC. The AEC has a public relations problem that has arisen not from the nature of free trade but from the way ASEAN member states have packaged it. Citizens feel disenfranchised and overlooked by the AEC.

Governments need to apply narrative that registers with the public and leads to a sense of ownership. In the near term, ASEAN will need to carefully assess and methodically build popular support for the next phase of the ASEAN integration process. Success will be essential for the ASEAN members to build support for greater economic integration under AEC 2025, which envisions an emphasis on a green economy, greater connectivity and common positions on global issues.

Finally, referring to the institution’s longstanding consensus-based and non-confrontational working style, Minister Mustapa stresses that the ASEAN processes will continue in the ‘ASEAN way’. This principle, which effectively grants veto power to each ASEAN member state, has met numerous criticisms. But it has helped ASEAN pursue regional liberalisation and integration, while ensuring that less-developed economies have an equal opportunity to participate in and benefit from them.

It is worth noting that Article 21(2) of the ASEAN Charter allows a sub-group of ASEAN member states to move forward on a regional effort if there is consensus to do so. While applications have been limited, the risk of creating a fragmented two-track, two-speed system remains. Certain ASEAN member states have continually lagged behind and have no capacity to participate in or debate different approaches. Malaysia’s back-to-basics approach through the ‘ASEAN way’ may reflect the interest in ensuring all ASEAN members are fully on board for future major regional integration efforts. More importantly, they will have the roadmap and resources to do so at the outset.

It would be unrealistic to expect Malaysia to overcome several years’ worth of delays and disagreements over non-compliance in the AEC implementation process. But MITI’s clear perspective on the leadership ASEAN needs provides a basis for optimism that ASEAN can focus its will and resources to implement the ‘last mile’ integration measures the region needs in 2015.

Daniel Wu is an international trade analyst based in Bangkok and a Non-Resident WSD-Handa fellow with Pacific Forum CSIS. All views expressed here are his own.

Read More »

Political preference crowding out enterprise in Malaysia

Author: Hwok-Aun Lee, University of Malaya

Malaysia’s government-linked companies (GLCs) are, relatively speaking, among the most extensive and powerful in the world in terms of capitalisation, market presence and socio-political mandate.

GLCs reportedly comprise 36 per cent of the Malaysian stock exchange’s capitalisation and 54 per cent of the entities that make up the Kuala Lumpur Composite Index. The Malaysian government controls GLCs through its government-linked investment companies (GLICs) — gargantuan and powerful investment arms including Khazanah Nasional, Permodalan Nasional Berhad — and the Ministry of Finance.

GLC market presence varies by industry, as measured by share of value-added. Based on data from publicly listed companies, Asian Development Bank lead economist Jayant Menon estimates that in 2012 GLCs accounted for 93 per cent of income in utilities, 80 per cent in transportation and warehousing, and over 50 per cent in agriculture, banking, formation and communications, and retail trade. Menon further notes that GLCs invest at a higher rate than private companies due to their superior reserves and political connections, which give them added leverage and privilege. Menon argues that GLCs crowd out private capital, significantly accounting for Malaysia’s anaemic private investment rate since the 1997–98 Asian financial crisis.

The statistical finding that GLCs crowd out more investment than they stimulate makes sense intuitively. It also appears to be consistent with the economic situation in Malaysia. But Menon’s data limits his empirical analysis to publicly listed companies. The omission of privately held businesses, especially in manufacturing and in service industries such as retail, probably leads him to overstate the dominance of GLCs.

Yet the Malaysian government cannot deny the crowding-out phenomenon. As part of its GLC Transformation Program the government has committed itself to divesting certain GLCs. But, as expected, the divestment project targets smaller entities within its massive portfolio and has progressed behind schedule.

The durability of GLCs as a domain of government policy underscores the need for reform prescriptions to be informed by historical and political economy perspectives and to acknowledge GLCs’ socio-political mandate. Developing the Bumiputera (ethnic Malay) Commercial and Industrial Community (BCIC) has been at the forefront of policy since the New Economic Policy was launched in 1971. The BCIC passed through various phases, from reliance on state development agencies, to heavy industry, then to privatisation from the late 1980s until the Asian financial crisis, which saw the renationalisation of many failed companies.

These entities, rebranded as government-linked companies, have become the primary agents for the BCIC agenda, which remains, like it or not, an unfinished business and political imperative. In other words, affirmative action, through managerial development and preferential procurement, is deeply embedded and cannot be drastically rolled back.

Interestingly, criticisms of the BCIC never oppose the policy objective of Bumiputera participation and ownership. Instead arguments typically assume that scaling down GLCs, divestment and privatisation, and rolling back preferential treatment will jolt Bumiputera entrepreneurs and capitalists into emerging as a competitive, innovative force. Competitive Bumipitera capitalists, it is argued, should be the true beneficiaries of affirmative action. But this argument is invariably asserted as an article of faith, unsupported by evidence. Logically, the shortfalls of the BCIC agenda drive the conclusion that privatisation would diminish Bumiputera participation.

If the policy has failed to produce a critical mass of competitive Bumiputera entrepreneurs — as it was widely supposed it would — wouldn’t sudden removal almost definitely cause a downturn in Bumiputera participation? This would be a politically unpalatable outcome regardless of any boost it might bring to private investment rates. Failure or reluctance to openly acknowledge these eventualities and their political consequences often precludes robust examinations of GLC performance and their preparedness for phasing out their role in supporting the BCIC.

Malaysia’s GLC policy, on the other hand, preserves its role in promoting the BCIC, but also introduces its share of equivocation. The GLC Transformation Program articulates merit-based selection as a key feature of the new government policy, implicitly distinguishing the current regime from former practices that bred inefficiency. This is only partly correct: ‘merit-based’ means selecting more capable Bumiputera managers, subcontractors and vendors over less capable Bumiputera managers, subcontractors and vendors.

Amid the misinformation, the program lacks a clear plan on how to move away from overt Bumiputera preference. The government needs to come clean and acknowledge that ‘merit-based’ selection remains exclusive to Bumiputera participations. A fuller transformation would entail ensuring that these Bumiputera business empowerment programs are conducted effectively, so that transition plans can also be developed to phase out overt ethnic preferences.

The GLC Transformation Program, under the oversight of the government investment agency Khazanah, involves the 17 largest and most strategically important GLCs, including Tenaga Nasional (power), Telekom (telecommunications), Malaysia Airlines, diversified conglomerate Sime Darby, CIMB Bank and Maybank.

Market conditions and the business performance of these GLCs vary. Some, such as CIMB, Maybank and Axiata (under Telekom) are expanding to be regional players, while others are confronted by structural challenges or, like Malaysia Airlines, beleaguered by recent tragedies.

Internal reviews of GLCs have written glowing reports. It is not surprising that GLCs generally outperform private companies, given their structural and political advantages. Also, GLCs have not, in the past decade, been engaged in the pervasive profligacy and profiteering seen in the 1990s.

GLCs continue to serve key roles providing services, generating profits for GLICs and other stakeholders, serving as training grounds for managers, directors and entrepreneurs through the employment they offer, and by providing linkages through procurement and subcontracting. But the efficacy and integrity of these programs has not been rigorously and independently analysed. Too much of the GLCs’ and GLICs’ operational performance, financial flows and pursuit of their socio-political mandate remain under-researched.

Hwok-Aun Lee is Senior Lecturer in Development Studies at the University of Malaya.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’.

Read More »

The tricky economic tasks facing Najib Razak

Author: Shankaran Nambiar, MIER

After a year of solid achievement on the economic front, Malaysia’s leaders will face difficult circumstances as they implement reform in 2015.

One of the more impressive achievements of the Malaysian government in 2014 was the resolve it demonstrated in trying to balance the budget. Prime Minister Najib Razak inherited a budget situation characterised by a lack of fiscal discipline from previous administrations, and he made a concerted effort to address this problem .

Malaysia army personnel loading food and goods inside a boat in the Kuala Krai district of Kelantan, Malaysia, 28 December 2014. (Photo: AAP)

He has implemented policies that will see a reduction in the fiscal deficit from 3.5 per cent of of GDP in 2014 to 3.0 per cent of GDP in 2015. The government has also rationalised subsidies. It cut petrol and diesel subsidies by about 20 sen (about 6 US cents) per litre on 2 October. Fortuitously, the global price of oil has been falling, lending a fine sense of timing to the subsidy cuts which are best executed when market prices are declining, as they are now.

Equally commendable was the decision to introduce a goods and services tax (GST) in April 2015. The announcement for this plan was also cleverly timed. With the elections safely behind him, and with the 14th general elections not for another five years, Najib can undertake unpopular reforms in 2015, like introducing the GST, and then work to improve his political goodwill in the next few years, with the hope that the GST will be forgotten by the time the elections are due. Timing is again in Najib’s favour, since, although low oil prices will slash government revenue, this will be compensated to some extent by the broad ranging GST revenue collection that will begin in the months to come.

Concerns about public and household debt have haunted Malaysia last year. Household debt currently stands at about 87.1 per cent of GDP and government debt is about 53 per cent of GDP. Government spending needs to be further scrutinised and reviewed, the size of the public sector (a vote bank though it may be) has to be reconsidered, and the worthiness of large projects have to be questioned with the circumspection of a fussy accountant.

There are undeniably many good targets from which to cut. The Auditor-General’s report on government spending in 2013 documents enormous cost blowouts: computers worth RM3,000 (US$850) being procured for RM 8,400 ($2400), facilities costing millions not being used, and a whole plethora of items whose inflated prices suggest gross mismanagement. If the Auditor General’s report is any indication of the extent of public sector mismanagement, then the government should be tackling issues of project management, transparency in procurement and efficiency and productivity in the public sector even before it rolls out the GST.

Inflation rates moderated in the last few months of 2014. Early last year inflation was running at about 3.4 per cent and softened to about 2.7 per cent  towards the end of 2014. Though these rates appear reasonable, actual inflation as it is experienced by the Malaysian people (or felt inflation) is higher; and  public perception of the rising cost of living is, indeed, critical.

At any rate, the official inflation rate can be expected to spike in May 2015 with the introduction of the GST, possibly as high as 4.5 per cent. This is to be expected. International experience suggests a one-time price spike of anything from an additional 1 to 2 per cent following the implementation of the GST. In the case of Malaysia, household spending in 2015 will be constrained both because of limited disposable income and eroded purchasing power due to the GST-induced price hikes.

The external sector does not seem ready to lend any solace. The Malaysian ringgit is taking a beating against the US dollar. Declining confidence in the ringgit, mainly because of the decline in oil prices, could stretch for the next few months. That might do Malaysian exports, particularly those from the electrical and electronics sector, some good.

But there are dark clouds hanging over the markets for Malaysian exports. China, Malaysia’s biggest trade partner, is set for more domestic reforms that are more inward-oriented. The anticipated lower growth rate in China, forecast to be 7 per cent or slightly less, will lower demand from China, which in turn will have an impact on Malaysia’s economy.

The forecast for Japan’s growth next year is not terribly encouraging at 1 per cent and the European Union is expected grow at about the same rate, touching perhaps 1.2 per cent. The IMF has downgraded its global growth forecast for 2015 to 3.8 per cent from 4 per cent. The saving grace will come from stronger US markets. While the improving US market will help Malaysian exports, it will result in higher interest rates in the US, and the resulting interest rate differential will see funds flow out of Malaysia. All these factors in combination could cause the growth rate in Malaysia to weaken, perhaps within the range of 4.8 to 5 per cent.

All of these factors will combine to produce a tough political environment for Najib’s government to navigate as it pursues reform.

The last days of 2014 were tragic. The Air Asia crash followed two other crashes. Then there were the massive floods that have affected several states, displacing more than a 100,000 people and resulting in over 20 lost lives. The cost of compensation, resettlement and redevelopment will be a huge burden on the government, but one that will necessarily have to be borne.

On the external front, Najib will also have to be decisive about the Trans-Pacific Partnership agreement, since little has been done politically to allay fears on the agreement, particularly for the potential losers who would constitute a small but powerful group. Then there is the ASEAN Economic Community agenda and the Regional Comprehensive Economic Partnership agreement which have to be managed while Malaysia holds the chair of ASEAN. The chairmanship will be a demanding task in its own right.

Thus 2015 is set to be a busy year for the Najib government.

Dr Shankaran Nambiar is a Senior Research Fellow at the Malaysian Institute of Economic Research. He is author of the recently published book, “The Malaysian Economy: Rethinking Policies and Purposes” All views in this article are his personal views.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

Read More »

Will falling commodity prices bring down Malaysian growth as well?

Author: Nurhisham Hussein, Malaysia

World oil prices are falling precipitously. For an oil exporter like Malaysia, that’s definitely bad news. Unless the country can diversify its economy, it may find it difficult to navigate its way through the economic challenges it faces on its way to higher income status.

Storm clouds gather over the Patronas Towers in Kuala Lumpur, Malaysia. The recent drop in world oil prices will hurt the exporter. (Photo: AAP).

Of course, the drop in the world price of crude oil, as much as it has hogged the headlines, is just the most visible manifestation of a larger movement. Many commodity prices have been hit over the last six months. While the price of a barrel of Brent Crude has dropped 45 per cent since June 2014, both soybean and iron ore prices have dropped over 25 per cent. Taken from the beginning of the year, the drop in iron ore, at 49 per cent, has actually been steeper than crude oil, at 43 per cent. This is in some portion a reflection of the stronger US dollar, but only partly explains the commodity price collapse. In truth, it could be said that the high commodity prices over the last decade or so was an exceptional break in a longer term trend of declining commodity prices.

It’s well established that commodity prices tend to decline over the long run relative to the prices of manufactured goods. This fact has formed one of the foundations of economic development strategy: to achieve stable, higher incomes, emerging economies need to actively foster the development of secondary and tertiary sectors.

That piece of wisdom has now been underscored with a vengeance. While oil-producing economies have hit the headlines, the impact is being felt across a swath of commodity producers, from Australia (iron ore) to Brazil (soybeans) to Chile (copper). Demand for commodities tends to be inelastic — an increase in supply will lead to large falls in price rather than large increases in volume, meaning lower revenues. For commodity producing economies, changes in the world prices of the commodities they export have immediate consequences for trade balances, GDP growth, and government finances.

Malaysia’s position as a net exporter of oil and gas is a case in point. Malaysia’s exposure to global primary commodity prices remains uncomfortably high, although it is well down from the very high exposure of the 1980s, when agriculture and mining accounted for over a quarter of the Malaysian economy. Efforts to diversify the economy away from the primary sector have been for the most part successful but incomplete.

To take one example, despite a quarter of a century of extracting crude oil, Malaysia still lacks the capacity to refine all the oil it extracts. Malaysia’s palm oil industry, another major export earner, is similarly stuck in mostly upstream production. The relative failure to move downstream into higher value added production, a problem masked by the high prices prevailing over the last decade, leaves Malaysia vulnerable to global price swings in the notoriously volatile commodity markets.

The immediate consideration for Malaysia going into 2015 in this environment is in sustaining growth and maintaining macroeconomic stability. The impact on the oil and gas industry is probably manageable, except for those involved in marginal field production. Given the long gestation period for these kinds of projects, oil companies are understandably conservative in their investment decisions.

A secondary consideration would be the impact on fiscal sustainability. The oil and gas sector directly contributed a third of the government’s revenue in 2013, and an even higher proportion indirectly through corporate taxes on downstream production of commodities like liquefied natural gas (LNG). A decline in oil and gas revenues would also have secondary effects on other sectors, such as transportation and finance.

Under threat is the Malaysian government’s target of cutting the 2015 budget deficit to 3 per cent of GDP, and of maintaining the soft cap on government debt at 55 per cent of GDP. Falling commodity prices could also damage Malaysia’s prospects of achieving high income status by 2020, because of a decline in the growth rate of nominal GDP as well as the depreciation of the ringgit.

There exist longer term threats to Malaysia’s external and internal balance. The LNG market is of far greater importance than crude oil to Malaysia, and here two developments do not augur well: Japan is slowly reviving its nuclear industry (Malaysia currently supplies a fifth of Japan’s LNG demand) and the export potential of US shale gas (natural gas prices in the US are half the equivalent Asian prices). If either or both of these come to pass, it would undercut Malaysia’s export revenues.

Malaysia needs to accelerate the diversification of its economy, either by moving further into downstream production or by fostering a swifter expansion of the manufacturing and services sectors. Another priority must be reducing the dependence on oil and gas revenue in the budget. If Malaysia doesn’t take action to limit its vulnerability to lower commodity prices, it may find 2015 marks the start of a much more difficult economic story.

Nurhisham Hussein is a Malaysian economist.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

Read More »

Managing Malaysia’s education crisis

Author: M Niaz Asadullah, University of Malaya

The Malaysian government should look to civil society for support in strengthening the nation’s education system.

Evidence can be seen in the 2014 UNESCO Global Monitoring Report on teaching and learning. According to this report, there is an ongoing global education crisis that is costing governments US$129 billion a year. For Malaysia, which has consistently allocated a very large proportion of its national budget to education, this finding is worrying. Results from recent assessments such as the Programme for International Student Assessment (PISA) and the Trends in International Mathematics and Science Study (TIMSS) confirm that Malaysia remains stuck at the bottom third of the international league table of schools.

Malaysia’s performance in TIMSS slipped to below the international average in Mathematics as well as Science by 2011. In PISA 2009 and 2012, Malaysia ranked in the bottom third of 74 participating countries. A comparison of PISA scores suggest that an average Malaysian 15-year old would take at least 3 years of extra schooling to catch up with her peers from high-performing East Asian economies such as Singapore and South Korea. Poor results, despite high government spending, indicate that return on educational investment in Malaysia is not as high as expected.

The government has responded positively to the emerging evidence by launching the Education Blueprint. Malaysia aims to move into the top third of countries in PISA and TIMSS in 15 years. But developing the right institutional framework to assess progress in learning is essential if Malaysia is to overcome the ongoing educational crisis. Assessments like PISA and TIMSS are undertaken only at certain time intervals and assess a single group of students. In the case of TIMSS, Malaysia participates only with older students. And only a small number of schools participate in the assessment exercise. For these reasons, knowledge of Malaysia’s performance in PISA and TIMSS, while extremely useful, is not adequate to guide the national reform agenda. Overall, the factors causing low level of student learning remain poorly understood.

The UNESCO report therefore emphasises that national assessments of the level of learning are indispensable for informing and guiding policy to reverse the decline in student learning. Yet there is a lack of effective mechanisms that allow policymakers and school managers in Malaysia to assess school performance and measure student achievements on a regular basis. Current mechanisms do not allow for systematic examination of progress in learning across different cohorts of students.

Every year, children throughout Malaysia participate in examinations at the end of their schooling cycle such as primary, lower secondary, forms 5 and 6. But the public examination system is not the same as a national assessment system. It is hard to ascertain from exam pass rates whether students are attaining minimum competency in key areas of learning. Unsurprisingly, published national examination records appear to show absolute improvement in grades over time in English, Mathematics, and Science while TIMSS and PISA data suggest the opposite. We do not know how much a Malaysian child learns (against what is expected) after one full year in school. The true extent and nature of the country’s education crisis remains unknown. It is likely to be very severe if schools participating in PISA and TIMSS are the country’s best.

In this context, Malaysia should not hesitate to learn from experience of other developing countries. The UNESCO report highlights the case of Brazil where a national assessment system has been used creatively to inform educational policymaking and planning. In India, the government has partnered with a national NGO, Pratham, which publishes a very detailed Annual Status of Education Report (ASER) to help the Indian government independently monitor progress in learning outcomes. Pratham works in collaboration with academics in India and abroad to ensure that the data collected is analysed correctly to generate policy-relevant insights. Inspired by the Indian model, Pakistan has also introduced a similar citizen-led initiative to generate reliable evidence on the schooling and learning status of children.

According to the UNESCO report, ASER’s findings contributed to India’s 12th five-year plan (2012–2017), helping to place emphasis on basic learning as an explicit objective of primary education, and on the need for regular learning assessments to make sure quality goals are met. Pratham has also used ASER results to influence education policy and practice at state level. In Rajasthan, for example, ASER results have led the state government to focus on improving instruction in early grades.’

Clearly government action is not the only route to an effective assessment system for informing national policy. Civil society organisations in Malaysia can also play an important role. Civil society needs to bring important issues to the government’s attention as well as get local communities to voice their demands for quality education. This can help parents obtain valuable information about the usefulness of schooling and the quality of locally provided education. This will help the poor improve their choice when deciding on their children’s education.

At the same time, a repository of longitudinal records on students and schools should be created and made available to academics for independent and complex analysis of the relationship between learning outcomes and education inputs. Without a reliable evidence base, social debates on education issues can neither have a meaningful policy impact nor lead to the development of a mechanism that can aid choices of poor households. Alongside state-sponsored initiatives, the government should actively encourage wider participation in the evaluation process. Partnership between the state and local research bodies should not only complement the government’s own efforts to improve educational governance. It could also go a long way in creating a more inclusive and sustainable approach to educational development.

M Niaz Asadullah is Professor of Development Economics at the Faculty of Economics and Administration and Deputy Director of the Centre for Development Studies (CPDS), University of Malaya. He is also a visiting fellow at the ESRC Centre on Skills, Knowledge and Organization Performance (SKOPE), the Department of Education, Oxford University.

Read More »