Three Problem Malaysia

Three most troubling economic issues facing Malaysia today

Persistent and endemic fiscal imbalance, growing income disparity and overdependence on foreign workers top the list. Malaysia lacks fiscal discipline. In the last 54 years since Independence, Malaysia has had budget surplus only in 7 years. Fiscal prudence demands counter-cyclical fiscal policy with surplus in good times and deficit in lean times, which allows fiscal stimulus during economic downturns to be financed by the accumulated surpluses without borrowing. As this has not been the case with Malaysia, the nation’s public debt has been growing.

National debt has risen to RM430.2bil in the first quarter of 2011, roughly 55% of gross domestic product (GDP), up from 41% in 2008. To balance the books, the government must rein in its operating expenditure and introduce tax reforms. The government’s reliance on oil and gas which accounts for about 40% of total revenue is simply untenable.

Federal revenue growth has failed to keep pace with GDP growth, so much so that the revenue/GDP ratio has fallen to 22% from the 10-year average of 34%.

The growing income disparity is also worrisome. The bottom 40% of the households account for only 14% of national income, while the top 20% of the households account for roughly 50% of aggregate income. Income inequality in Malaysia hovers at levels higher than that in Indonesia, the Philippines and Thailand.

Regional disparity is equally striking. Sabah is the poorest with 20% of the households living below the poverty line. Sabah accounts for 43% of the country’s poor, trailed by Sarawak (12%) and Kedah (9%). These three states jointly account for nearly two-thirds of the poverty in the country. To fix the problem, the government must revisit and review its affirmative action plans so that the benefits accrue directly to the poor and the marginalised, regardless of ethnicity.

While one must thank foreign workers for their contributions to the economic growth and development of the country, their numbers have grown far beyond “optimal” level. This overdependence on guest workers has contributed to the middle-income trap, as their over-presence tends to suppress wages. In the early 1990s, it was thought that Malaysia could stay competitive internationally by keeping wages low and hence the opening of the floodgates to foreign workers.

Experience has shown that such input-driven growth is unsustainable. High wages backed by high productivity can translate into low labour costs. Malaysia needs to ensure that the locals have the necessary skills as the economy moves up the value-chain.

Vision 2020

The long-term Vision 2020 was both laudable and feasible. It was like running a marathon. The mistake we made was to run it like a sprint at maximum speed right from the start, pursuing input-driven high growth single-mindedly. In the