Tue, 12 Dec 2023


When all the visions and policies fail
Published on: Sunday, March 19, 2023
By: Dr Nungsari A Radhi
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The Vision 2020 of Dr Mahathir (left) and New Economic Model of Najib both fell short of their intended objectives
VISION 2020, launched by then prime minister Mahathir Mohamad in 1991 at the start of the Sixth Malaysia Plan, was a comprehensive and ambitious development policy document. 

Positioned as a vision — an outcome to be achieved in a 30-year time frame — it was simple enough to be widely understood and it had the deliberate play with words, where 2020 was both a date and connotes clarity and perfection.

Ultimately, Vision 2020 aspired to obtain “a mature, liberal and tolerant society which is at peace with itself, a united Malaysian nation and a Bangsa Malaysia”. This sentence alone contains words and concepts that many would find objectionable today — a measure of how far off-target we are. 

On the economic front, it sought for Malaysia to become a dynamic and competitive economy that is also equitable, again largely off-target. Far from the Bangsa Malaysia envisioned in Vision 2020, we have instead become a fractured society. Perhaps we were always divided, but we are certainly less united now than we were in 1990. 

Being “liberal and tolerant” today is actually abhorrent among some circles, not a small part of Malaysia. It was not just the missed economic numbers but, more importantly, the capacity of the economy and the strength of the country’s institutions that were off-target. 

We continued with the dual-track economy — an indigenous resource-based sector and a foreign direct investment (FDI)-driven manufacturing that was dominated by electrical and electronics that started in the 1970s. 

Both these sectors formed the backbone of the economy, as both are export-oriented, but there are few linkages, if any, between the two. They are two separate engines. There were downstream resource-based industries in both oleo- and petro-chemicals that contributed to the economy but, over time, all these export-oriented industries became a smaller part of the economy as the domestic-based services sector grew larger.

This inability to develop more skill-based, hence more human capital-based, industries explains both the domestication of the economy as well as the skewed yet low median income, as the enlarged domestic services sector is basically made up of low-income businesses. We never substantively made the move towards a knowledge-based economy.

We distilled a broad development objective into a single number, the GDP growth number, which is the consequence of many other prerequisites that are also part of the development objectives. 

Objectives such as sustained growth that is also equitably distributed can only be the result of so many other things being right. The issue of inequality cannot be handled ex-post, as a consequence of growth; it should be a part of the growth story itself. 

The biggest lesson learnt here is that the pursuit of growth simply measured by output as captured by the GDP is a reason sustainable growth was not obtained and that the accumulated growth, while lifting all boats, did so in a very unequal, inequitable and unsustainable manner.

Data shows that, over the last two decades, the share of investments to GDP has been steadily declining, which speaks to the lack of new or additional productive capacity. 

If not for the heavy capital investments of the oil and gas sector, that number would have been even smaller. Any economy that does not invest in new capacities, new technologies and new capabilities will not generate sustained growth. 

This needs to be properly understood — why did it happen? Was it driven by supply-side factors or was it a demand failure? 

Understanding well the answers to these questions will go a long way towards better policy formulation for the future.

Was it the lack of human capital or weaknesses in the innovation systems that contributed to our inability to produce firms with new products while also being competitive selling them? Why cannot we see more new small firms that made it big with innovative products? 

What were the distortions that prevented risk-taking in developing firms with such products? Is our education system churning out the right kinds of talent? The questions have to go beyond the usual tax or fiscal incentives that have largely failed to effect the transformation.

The Najib administration, recognising that the economic engine then did not have what it took to get to Vision 2020’s destination, came up with the New Economic Model in 2010 at the beginning of the 10th Malaysia Plan. 

Mahathir had envisioned the Multimedia Super Corridor to be the economic engine for Vision 2020; though it was well ahead of other countries, that too failed to materialise. 

Najib’s New Economic Model (NEM) correctly identified the three pillars of sustainability, inclusiveness and high income, but it made the “high income” income level the policy target. It embraced the idea of reforms, making nine reform initiatives the centrepiece of the blueprint.

The NEM recognised the need for more openness and the removal of distortions in the economy to have the right incentive structures for investments, and took a serious hard look at the problem of inequality, but the ensuing Economic Transformation Plan, driven by an economically dubious methodology of implementing projects that collectively generate the “GNI targets”, derailed the NEM. 

Notwithstanding the methodology, the emphasis on projects involving public funds had the usual issues of lobbying and private captures of rents, the same affliction that derailed earlier policies. It illustrated the worst of central planning and unfettered private interests when they coincide.

Visions and policies fail for many reasons. One can assume that not all vision statements and policy objectives are bad. So, visions do not fail because of the outcomes they wanted to achieve. One can quibble about completeness or even consistency of the overall vision or policy, but those represent contestations of good objectives, not bad objectives per se.

Visions that do not have a clear overarching outcome that engender a common understanding may fail because such lack of clarity gives rise to too broad an interpretation that it fails to provide a true north to focus on. 

When trade-offs are required, and there will be all kinds of trade-offs required, these decisions need clear metrics that prioritise the true north. Otherwise, there will be misallocation of resources. 

Another lesson from the past is that while we spent massive fiscal resources over the last two decades, accumulating huge debts, we did not obtain the right outcome — inducing private investments, for example. The main reason is inefficiencies from misallocation of resources, which explains why we also have not been very productive.

I would recommend a policy objective that is clear and easily understood and addresses multiple other objectives at the same time. For example, a policy objective of increasing median household income; say, a 10-year median income doubling plan, which implies a median household annual growth of just over 7%. 

The focus on doubling median income endogenises distribution within the growth story. It is also easily measured; for example, by tracking the distance between mean and median income. Such an objective captures both the issues of growth and how that growth is distributed.

A subsidiary objective that is clear is increasing the size of the tradable sectors of the economy; for example, targeting a trade-to-GDP ratio of 150% in the same 10-year period. 

The outward-looking perspective and being competitive in external markets become the norm and also align all policies from foreign affairs to trade to human resource development towards this simply defined objective, that being a vibrant economy is about being competitive.

As for the required fiscal consolidation, hard constraints need to be set and complied with. These constraints should therefore be legislated, then the budgeting process is really about constrained optimisation, which, if properly done and is therefore growth generating, will be self-correcting. Any changes to the constraints will require rigorous debates in parliament.

Finally, the planning and budget cycles. Are the five-year plans still relevant as a policy tool? The time horizon coincides with the political term of five years, but are such plans necessary? 

Policies will have to be embedded into the legislative agenda of an elected government — a government legislates its policies throughout its tenure, and uses the annual budget to achieve the legislative objectives. It no longer makes sense to have five-year plans within a 10-year outline perspective plan. Such plans are the instruments of a state-controlled economy. Malaysia should not be a state-controlled economy, and even if it wants to be one, the prevailing political environment does not allow it to. 

A government has five years to introduce its policies via legislation and use executive powers to implement them. The more permanent constant in this new environment are laws passed by parliament and not the executive, as was the case in the past. That is not a bad thing.

- Dr Nungsari A Radhi is an economist. This appeared in the Edge.


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