The 10th Malaysia Five Year Plan : Old Wine in New Bottles – Part 1Introduction
Malaysia faces formidable
economic and social challenges. Both domestic and external. These are greater than those faced in the past. These have been acknowledged by Ministers, the World Bank and other analysts. Some of these challenges can be attributed to changing global economic circumstances whilst others are due to policy failures, an approach to governance founded upon rent-seeking, and abuse of power and processes that deny accountability and transparency. Overwhelmingly, implementation of policies associated with the NEP has contributed to the many distortions and a loss of competitiveness, dismal private sector performance, a virtual collapse in the flows of FDI, and sizable capital flight. Overall growth rates are now far below those needed to lift Malaysia out of the middle income trap that it finds itself in. Vision 2020 has become a fast fading dream.
The political Tsunami of March 2008 sent shockwaves across the political landscape. The BN, after an initial state of shock, embraced the rhetoric of change and indulged in notional reforms but the entrenched warlords and power brokers resisted much needed economic reforms as these were seen hurting the self-centered interests of those in power. The timid attempts by the then Prime Minister were resisted and he was chastised and ridiculed and eventually driven from office. In the 15 months from the time he assumed the offices of Prime Minister and Ministry of Finance, Datuk Seri Najib has proclaimed on more than one occasion for Malaysia to embrace a New Economic Model to regain competitiveness and strive to attain the status of a developed nation. He has in these statements indicated the need to move away from the constraints of the NEP, to direct assistance to the disadvantaged on a need based approach rather than one that is race based. He has argued that this is central to his vaguely defined 1 Malaysia concept. A second theme that has featured in his pronouncements is related to the need to reduce subsidies and to broaden the revenue base by adoption of a Goods and Services Tax. These measures, he has argued, are essential to eliminating the public sector deficit that has reached an unsustainable level of 7 percent of GDP in 2009.
At the end of March 2010, he launched with great fanfare the NEM proposals. Although the full range of policies and detailed measures were absent from the document, hopes were raised that long awaited economic reforms were on the way and would be incorporated in the 10th Malaysia Five Year Plan. These hopes were rapidly dashed as various Ministers in a divided Cabinet hedged their commitment to the NEM. Indeed, it would appear that the power brokers in UMNO opposed to these reforms outsourced opposition to the NEM to PERKASA. PERKASA then mounted a vociferous campaign opposing the NEM and the reduction of subsidies. It is worthy of note that the Prime Minister retreated and indicated that the NEM was a set of recommendations yet to be adopted and that the Government’s position would be incorporated in the 10th Five Year Plan. A similar ludicrous retreat took place on the issue of subsidies. In passing, it must be noted that the right hand does not know what the left hand is up to. Witness the dispute over the size of the subsidy bill – Datuk Seri Idris Jala claiming it to be of the order of RM 74 billion whilst the Ministry of Finance claims that the total is in the region of RM18 billion.
The much awaited and anticipated 10th Malaysia Five Plan unveiled on June 10 is a gross disappointment as it contains none of the reforms that the Prime Minister had paraded. It represents a retreat from what was momentarily dangled before the public. It shows that he is not a master in his own house and that he leads a divided Cabinet. It further testifies to the fact that powerful extraneous reactionary forces led by PERKASA are in a domineering enough position to set the agenda. These forces are committed to preserving at all costs their privileges and positions even as these conflict with the nation’s interests and it’s very future. It is indeed most sad that the Prime Minister is unable to deliver upon what he led the country to believe. It is also regrettable that he is now presiding over and implementing policies that put the country on a path to economic decline and stagnation. This is not a Plan that will take us on to developed country status but is almost certain to ensure that Malaysia remains trapped as a third world middle income country. It is pertinent to ask if the Prime Minister realizes that the Plan that he has unveiled may well mark the turning point in his political fortunes and shorten his tenure in office.
Professor Datuk Dr Mohamed Ariff, the highly respected former executive director of the Malaysian Institute of Economic Research (MIER) commenting on the Plan said that the NEP which ended in 1990 appears to have mutated into new policy incarnations including the Najib administration’s New Economic Model (NEM) and is distorting the Malaysian economy. He went on to say: “Malaysia’s markets are highly distorted. The distortions are related to the NEP and the NEP remains the backbone of the 10MP document. The NEP looks like it is mutating to the NDP and NEM and stands in the way of bringing about serious reforms.” He further argued that the NEP would have to be rejected wholesale.
The 10th Malaysia Five Year Plan : Old Wine in New Bottles – Part 2 (Overview)
An Overview of the Plan
The Plan that has been unveiled, when stripped of the rhetoric and clichés, represents nothing more than a reaffirmation and continuation of past and present policies. To begin with, the Plan is built upon a number of highly questionable assumptions. These include:
GDP growth rate of 6 percent as against 4.2 percent between 2006 and 2010
Exports are projected to expand by 10.1 percent as against 3.6 percent recorded during the 9th Plan period.
Private investment is projected to grow at 16.2 percent during the period of the 10th Plan versus 6.2 percent during the 9th Plan
Per capita income in 2015 is estimated at RM 38,845, increasing from RM 23,841 in 2009. This is based on a growth rate of 8.0 percent per annum for the Plan period. No explanation is offered as to why there is a sizable discrepancy between the projected GDP growth rate and the per capita income growth figure. The Plan anticipates that in US dollar terms per capita income will almost double between 2009 level to US$ 12,139.
The Plan calls for development expenditure of RM 230 billion. Of this, RM126.5 billion or 55% is allocated for the economic sector,RM69.0 billion or 30% for the social sector,RM23.0 billion or 10% for the security sector and RM11.5 billion or 5% for general administration. This allocation includes a Facilitation Fund of RM20 billion to promote private sector investment in strategic priority areas including infrastructure, education and health.
It is most significant that there is no full discussion or presentation within the main document of how the Government plans to finance the projected expenditures. This is a departure from established and prudent planning principles. Financing the projected expenditure will inevitably demand massive borrowings, both domestic and foreign. This is evidenced by the sharply increase in debt servicing – increasing at 9.4 % during the Plan period. The rhetorical and inconsistent ministerial statements on the need to reduce subsidies on the one hand and to broaden the tax base via the introduction of a regressive GST are hardly mentioned in the Plan document. Significantly, the Table laying out the fiscal numbers indicates that the estimated subsidies paid out in 2010 amount to RM 18.3 billion and these are projected to decline to RM 15.7 billion by 2015. The reduction of RM 2.6 billion is a paltry sum in an Operating budget of over RM 200 billion. There are indications that the Plan has been crafted in an irresponsible manner and the true resource needs have been ignored; an alternative interpretation would be that the underlying fiscal policies will be driven by a combination of an increase in the tax burden on consumers via a new GST and massive borrowings. These actions will inevitably have devastating consequences for fiscal responsibility. Furthermore, living standards will be affected and contribute to a higher the incidence of poverty. Both consumer subsidies and consumer taxes have a larger than proportionate impact on the lower income groups, the every groups who are ironically the supposed target groups for upliftment.
Significantly, both in the current ongoing debate about subsidies and in the Plan document there is no mention of the billions of dollars that are channeled to corporate cronies and GLCs by way of tax rebates, grants, toll concessions, loan guarantees and write offs of losses and other obligations. It is legitimate to ask as to why there is no mention of an intention to review these calls on the national budget. Equally significant is the absence of any discussion of potential cost savings by trimming the size of the bloated public sector now employing 1.2 million employees despite privatization of many services; nor is any mention made of the potential savings were the government to adopt competitive bidding processes in its multi-billion procurement of goods and services.
The new Five Year document shows a lack of intellectual rigor. Its overall incoherence, its clichés and stereotyped phraseology give the impression that the Cabinet, the Economic Planning Unit of the PM’s Department, and the other authors (foreign and domestic) assembled the Plan from the boilerplate of bureaucratic discourse and business school jargon with contempt for Malaysians to whom it is addressed. It is long on the so-called achievements backed up by some dubious and selective statistics. It reveals the administration’s response to the nation’s need for an agenda by offering a convoluted rojak of discredited ideas with some rhetorical sops to segments of the population mixed in.
The Plan’s only visible purpose is to lay out a program of spending some RM 230 billion over the next five years. The only actual “strategy” that can be deduced from it is that the administration wishes to continue doing what it has done but with a greater vengeance. The measures outlined are unlikely to enable Malaysia attain the highly inflated projected GDP growth rates and achieve developed nation status by 2020. This goal is unachievable by way of the mere proclamations and many assertions lavishly embedded in the Plan. To achieve this goal, the Malaysian economy would need to grow at 6 percent per annum, a rate well above the rate attained during the 9th Plan period. The projected private investment growth rate of 12.8 percent per annum in the 10th Plan period versus the 2 percent achieved in the recently completed 9th Plan is clearly unattainable. Serious readers and analysts, including potential investors, will inevitably conclude that the Government is not serious about addressing the real issues and concerns. They will further conclude that past ruinous policies will continue and the main beneficiaries will be the well connected, the cronies, and the chosen few that will receive lucrative contracts, licenses to collect rents and thus corruption will be fed new grease to move along unabated. The poor, the vulnerable and disadvantaged segments of the Malaysian population will continue to bear burdens. Good governance and transparency will remain distant rainbows.
Although no details are given, the Plan proposes a new round of privatization. It would appear that public assets will be turned over to the rentier class aligned to the regime. If the past is any guide, these transfers will be done in less than transparent ways. The question arises as to why it is necessary to embark upon a new round of privatization given the disastrous past track record of abuse. Equally troubling is the silence on the issue of how the Government proposes to tackle and control loss making GLCs that require bailing out. How many billions will the Government deploy to save entities such as Sime Darby and the Pos Malaysia? Is it the intention of the Government to start granting interest free loans such as to the private water utility company Syabas that had cost the government RM250 million as it had to borrow the money in order to lend it interest free?
The Plan document makes a radical departure from past Plans by not incorporating the amounts that are to be expended on individual programs and projects. These details are to be revealed at a later date. This is tantamount to requesting Parliament to provide a virtual blank check.
The 10th Malaysia Five Year Plan : Old Wine in New Bottles – Part 3 (Unlearnt lessons from the past)
Unlearnt Lessons from the Past: Where have we come from?
A brief review is in order to understand how the nation got to the precarious point best amplified by a Minister sternly warning that Malaysia is heading towards bankruptcy by the end of the decade.
Malaysia is more integrated into the global economy than many other countries of a similar size and at a comparable stage of development. Globalization is a fact of life. It has contributed both positively and negatively to Malaysian development. On the upside, integration with the global economy permitted the nation to prosper through trade and flows of FDI in the years prior to the East Asian Crisis of 1997. There was rapid economic growth, rising income levels, declining poverty and unemployment and a somewhat more egalitarian distribution of wealth. A contributing factor was the fact that Malaysia was blessed with a rich resource base – its forests and oil and gas. It had reasonably well functioning institutions in the form of an established public service, a modestly independent judiciary and institutions that measured well against those in other developing countries. The nation progressed despite creeping corruption, growing race polarization, authoritarianism and a general deterioration in the delivery of public services. The early 1990s saw a degree of deregulation and the privatization that gave momentum to modest reforms. The economic fundamentals were essentially sound with the budget largely balanced, and low inflation and robust growth. These outcomes occurred despite the constraints and distortions imposed by the NEP.
The 1997 East Asia crisis provided a rude awakening. Absence of accountability, lack of transparency and the growing cronyism, nepotism and the megalomaniac obsession with mega projects contributed to the creation of conditions that left Malaysia vulnerable to external forces. Capital flows that had sustained Malaysian growth reversed; the currency plummeted; the banking system was near collapse because of the portfolio of bad loans; confidence in the Government fell. The markets recognized these flaws and punished Malaysia. Compounding these factors was the adoption of authoritarian measures to silence dissent. The show trials of Anwar Ibrahim resulted in increasing the loss of confidence, both globally and domestically. The abuse of human rights and the destruction of judicial independence earned Malaysia the odium of the global community, to the extent that the Government had to resort to getting the private sector to bribe unscrupulous lobbyists in Washington DC to “buy” an entry ticket for the Prime Minister to visit the White House in an attempt to gain respectability. To boot, payments were made to third rate columnists to write op-ed pieces to create a synthetic image for Malaysia. Confidence declined and FDI flows began to plummet.
Malaysia survived and partially recovered from the East Asian crisis. Much of this was at a heavy cost. That cost included the adoption of an exchange rate that carried the seeds for the loss of competitiveness and the eventual importation of inflation to Malaysian shores. It included massive bail outs, a resort to unsustainable fiscal deficits, a growing debt burden for future generations to bear, and the diversion of resources away from the provision of public services and the effort to reduce poverty to feather the nests of a band of robber barons. To the extent that economic growth returned, credit must be given to the favorable trading environment. Yet the favorable circumstances were dissipated: Malaysia lost competitiveness over the past decade; FDI flows were reduced to a trickle; the stock market has under-performed virtually every other stock exchange in the region. Capital flight has reached levels that cause alarm. Outward FDI from Malaysia was RM 50.2 billion in 2008 and RM 27.9 billion in 2009 far exceeding the inflows. These numbers only reflect part of the capital flight. In addition to these, the sizable errors and omissions figure in the Balance of Payments incorporates an element of other parts of capital flight. The Human capital stock has been eroded as thousands upon thousands of Malaysian youths have left these shores to seek a living in distant lands in the face of discriminatory employment policies in both the public and private sectors. Paradoxically, while Malaysia is in need of a better skilled labor force to sustain growth, it is losing talent.
This then is the lost decade of the opening years of the new millennium. The rather bleak portrait painted above is not in dispute. There is some belated acknowledgement of these adverse trends on the part of the Government. Nor are the remedies difficult to find. What is wholly lacking is the political will to seek solutions by moving away from the distorting effects of the NEP. The Plan misses an opportunity to put right past missteps and to change course from the policies set in place by Tun Dr Mahathir in the aftermath of the East Asia crisis of the late 1990s.
The poisoned chalice that Tun Abdullah Badawi inherited when he took office in 2003 as the fifth Prime Minister has been passed on to Datuk Najib. It is disheartening that he is unable and unwilling to discard failed policies by matching his rhetoric to bold new policies. The launch of the 10th Five Year Plan is a missed opportunity. It is tragic that he has demonstrated his inability to exercise true leadership and to move the nation forward.
The 10th Malaysia Five Year Plan : Old Wine in New Bottles – Part 4 (5 Thrusts of TMP)
The Five Thrusts of the 10th Malaysia Plan
The Prime Minister stressed that the 10th Malaysia Plan is oriented around five key strategic thrusts, namely:
* Stimulating Economic Growth – implementing a policy framework that will galvanize the private sector and promote trade and investment;
* Moving towards Inclusive Socio-Economic Development – focusing government support on those most in need and reforming affirmative action policies;
* Developing and Retaining a First-World Talent Base – improving schools, providing skills training to those in the workforce and implementing important labour market reforms;
* Building an Environment that Enhances Quality of Life – investing in housing, transport, healthcare, utilities, crime prevention and the environment to support economic activity and improved living standards; and
* Transforming Government to Transform Malaysia – building on the success of the Government Transformation Program to continue to improve government performance and transparency to best serve the people
The question that arises is: How different are these in comparison with the corresponding thrusts that were outlined in the 9th Five Year Plan?
In the so-called National Mission the five thrusts were:
* To raise the value added of the national economy; * To raise the country’s capacity for knowledge, creativity and innovation and nurture “first class mentality”; * To address persistent socio-economic inequalities constructively and productively; * To improve the standard and sustainability of the quality of life; and * To strengthen the institutional and implementation capacity of the country.
There is a remarkable similarity in the two sets of general propositions. Thus, to claim that the 10th Plan incorporates a true New Economic Model is stretching the truth. The reality is that the 10th Five Year Plan is old wine in new bottles. The approach taken raises deep and troubling questions about the competence of the Government in being able to formulate and implement policies that genuinely are in the national interest.
The Plan proposes total outlays of RM 230 billion. It incorporates a return to the era of mega projects to be financed by massive borrowings that were a hallmark of the Mahathir era. The characteristics of the earlier Plans represented by privatization, channeling of funds to crony corporations, emphasis on the Bumiputra equity ownership targets, and massive State interventions while paying lip service to the pivotal role of the private sector are once again at centre stage. The notion of a New Economic Model incorporating critical reforms that was floated as recently as March of this year was indeed stillborn. It has been aborted by the forces of reaction which place narrow interests ahead of national needs.
The macro economic framework used in framing the Plan is built upon rosy assumptions. Growth is projected at an average annual rate of 6 percent against a rate of 4.2 percent achieved during the 9th Plan. Private Consumption is projected to grow at 7.7 percent against an achieved rate of 6.5 percent; Public Investment is expected to grow at a slower pace of 5.0 percent against 6.2 percent; Private Investment which registered a rate of 2.0 percent is to rebound by a hefty 12.8 percent per annum. Increased in flows of FDI are assumed to grow although no amounts are indicated. The Plan further assumes that inflation will remain modest thus providing price stability.
Based on the past track record for projections, these projections are rosy and over optimistic. The down side risks of a global slowdown brought about by inevitable corrective measures to tame US and EU budget and external deficits which could prolong the current financial crisis do not appear to have been factored in despite obvious linkages to the Malaysian economy. Additionally, the loss of competitiveness and the growing attraction of China and India as destinations for massive capital flow diversions are largely ignored in the Plan framework.
The Plan framework asserts that domestic price stability will be maintained. The case made is far from compelling. The Plan framework is wholly silent on the inflationary impact of the planned outlays of RM 230 billion under the 10th Plan. Expenditures on this scale will undoubtedly contribute significantly to inflation in the domestic economy. Yet no account appears to have been taken. Prudence and caution appear to have been jettisoned as the Government goes on a spending binge. Irresponsible policies if pursued will be catastrophic.
How does the Government propose to finance this spending spree? Table 8 offers some indications.
Optimist assumptions are made about Revenue growth at 6.1%. – only likely if GDP growth of 6.0 percent is achieved. Revenue is projected to grow from RM 158 billion in 2008 to RM216 billion in 2015. Similar optimistic assumptions are made with regard to Operating Expenditure, projected to grow at a lower rate of 6.5% in the next five years compared to the increase of 8.6 % during the 9th Plan. Given the larger borrowings and higher interest rates, debt service will increase sharply by 9.4 % as against the already high rate of 8.6 % during the 9th Plan period. This is unlikely to be countered by cuts in other operating expenditures.
Taking these highly optimistic projections together, the Plan forecasts that the Overall Public Sector Deficit as reported in Table 9 will move from a deficit of RM29.9 bill in 2009 to a surplus of RM.12.7 billion over the next five years. This is a turnaround of almost RM 43 billion. It would appear that optimism has no bounds. Or are these the outlines of the iceberg of intentions to raise taxes in a sizable manner?
The Federal Government, which ran a cumulative deficit of RM 97.8 billion during the period of the 8th Plan, (initially projected at RM 29.9 billion) will see a deficit of RM 163.1 billion in the 9th Plan. As only partial figures are provided for the period of the new 10th Plan, it is difficult to estimate the cumulative deficit in the next 5 year period. On a crude basis, an extrapolation of the deficit would indicate a figure of approximately RM 180 billion, a figure almost double that recorded during the 9th Plan.
Taken together, Total Debt increases from RM 362.4 billion at the end of 2009 to RM 593.9 billion by 2015 ( an increase by 64 percent) with the Domestic component increasing from RM 348 billion to RM 562 billion by 2015 and the foreign component increasing from RM 14 bill to RM 32.
It is patently clear that the Government’s commitment to reducing the deficit rings somewhat hollow. In absolute ringgit terms the deficit will grow and will lead to borrowing on a large scale thus adding to the mountain of debt. Deficit financing is no longer a means for pump priming to counter cyclical downturns; it is now a permanent feature of Malaysian fiscal policy. Datuk Idris Jala was right on the mark when he made the point that Malaysia was headed towards bankruptcy.
These forecasts and projections are indicative of the adoption of highly irresponsible and high risk fiscal policies and an abandonment of fiscal prudence. While past prudence has been rewarded by the markets with good ratings, this turning away and the pursuit of a devil may care reckless policy will not go unnoticed by markets and rating agencies. In a globalized world, countries, more so open and vulnerable economies such as Malaysia, cannot afford the luxury of going against conventional norms. If they so chose, markets take corrective steps and mete out devastating punishment. This was one of the critical lessons from the current financial crisis which is taking a devastating toll on some of the member states of the European Union e.g. Greece, Spain, Portugal etc. It would appear that the BN Government has either not drawn lessons or is bent upon following a course in open defiance of fundamental fiscal principles.
The Federal Government deficit, it should be noted, is only the tip of the iceberg as the huge deficits of the off-budget agencies are excluded from the calculations. The GLCs have weak balance sheets. Some have been bailed out several times. The hidden contingent liabilities of the Federal Government are like a dormant volcano waiting to explode. Illustrative of these are the contingent liabilities of the Government ; the PKFZ saga is a reminder.
Any discussion of Government finances must take account of the distorted allocations of expenditure. Some key distortions are:
• A large subsidy bill: The real size of the bill is hard to fathom given the less than transparent way in which the Federal budget is detailed. Witness the dispute between Datuk Idris Jala and the Ministry of Finance as to the exact size of the subsidy bill. Moreover, the broader issue has been distorted as the focus has been on consumer subsidies which are a smaller part of the overall subsidy bill which channels billions to corporate entities.
• Debt servicing of public debt which has mushroomed over the past decade: Debt service now consumes well over 10 percent of recurrent expenditure.
• A bloated and inefficient public service: For a country of the size of Malaysia (28 million) well over 10 percent (over 1.2 million) of the labor force is on the public payroll. Low productivity and inefficiency are legion. This distortion of the labor market can only be removed via a radical downsizing of the public service. The Government must answer the question: when was the last time that an overall review of the public service, its structure, and its functions last carried out? It should launch an Independent Commission to look into the workings of the public service leading to radical reforms, and the introduction of safeguards that correct the most egregious processes that are in place. The Public Service Commission has to play its due role and become more than just a home for senior level pensioners.
• The cost of goods and services acquired by the Government are high because of non-competitive bidding practices employed by the Government. These practices also contribute to corruption. The additional “rents” generated represent a cost to the Government and ultimately to the nation.
• Tax fraud and lax enforcement contribute to unmeasured revenue losses.
• The regulatory regime now in place, highlighted and personified by the system of licenses, approved permits for importing a range of goods, (motor vehicles being only one) contribute in a variety of ways to reducing the role of competitive forces and provide the means for price distortions. Other practices that merit attention are the manner in which utility prices are set. The granting of toll increases and the secret agreements governing independent power generation are yet other examples of flawed policies having an impact on price levels.
On the issue of subsidies, it would appear that the generous subsidies that Petronas extends to independent power producers (IPPs), which built a string of gas-fueled electricity generating plants in the 1990s remain in place whilst those on consumer goods are likely to be removed. Since the 1997 crisis, Petronas has supplied heavily subsidized processed gas not only to Tenaga but also to the IPPs. According to Petronas, these subsidies have totaled RM25 billion. These special arrangements enrich a handful of well-connected, wealthy tycoons. The Edge identified Genting Sanyen Power, YTL Power, Malakoff Bhd and Tanjong Plc/Powertek Bhd, as the beneficiaries.
It is legitimate to ask: Why this favored treatment? Why are subsidies still being paid? Why are these agreements a secret? It is time for answers. It is time that the Government comes clean. A saner policy would be to review all subsidies and to develop a comprehensive plan for the reduction and eventual elimination of all distorting subsidies over an extended time frame.
Approvals and licenses are required for a host of things. They create opportunities for corruption and abuse. It is time for an in-depth look at all regulatory arrangements, with a view to eliminating those that impede freedom of commerce, investment and opportunities for entrepreneurship. Achieving the goals of Vision 2020 – becoming a developed country – will demand more than fine infrastructure, high per capita income levels, broad based manufacturing industry and the use of technology. It will demand better governance, greater accountability, and institutions that are efficient and deliver public goods effectively. Thus, addressing the appalling state of public services must be high on the agenda, lest we fall short of developed country status in all aspects of that status. The License and Permit Raj must make way for a system that is service oriented. . Reducing the deficit will demand a comprehensive review of all expenditures, a fresh look at the overall tax regime and greater attention to the cost-benefit calculations on future government investment projects. Particular attention needs to be directed at:
• A review of all subsidies and their gradual elimination over time • More rigorous enforcement of tax laws and closing of loop holes • Competitive bidding for the purchase of goods and services by the Government through transparent tender procedures leading to reduced procurement costs • A freeze on hiring in the public service and targeted reductions in the size of the service over the next three years; • A review of all tax rebates and exemptions to the business sector;
The 10th Malaysia Five Year Plan : Old Wine in New Bottles – Part 5 (Poverty)
Poverty
Chapter 4 of the Plan document together with several Tables dealing with Thrust 3 in the Appendices present fairly detailed statistics on poverty and income distribution.
In a somewhat self-congratulatory tone, the Plan proclaims that hardcore poverty was reduced from 1.2% in 2004 to 0.7% in 2009 and that the incidence of overall poverty fell from 5.7% in 2004 to 3.8% in 2009. These claims are questionable because of the underlying methodology employed in deriving these estimates.
In the first place there is no indication as to how the Poverty Lines were estimated. Assuming that the methodology used mirrors that used in the 9th Plan, the bar to define poverty is set at far too low a level.
In the second place, the use of “households” rather than “persons” distorts the measurement.
On the flawed basis, 228,400 households were categorized as poor. It is most significant that of these 99,100 were in Sabah with another 27,100 in Sarawak. Thus, there were a disproportionate number of the poor in these two states highlighting gross neglect by the Federal government of Malaysians in these two states.
Converting the number of households to a “persons” basis, (228,400 households X 6.4 persons per person) the number in poverty is a staggering 1,462,000 persons representing some 5.2 percent of all Malaysians. It is a sobering thought that after almost four decades of the NEP, poverty exists in our midst even when a low bar is used to define it. It is a telling indictment of the failure of the NEP to deliver upon the promise of development. That absolute poverty remains despite the billions expended, points to policy failures, incompetent implementation, and failure of the political will to make adjustments.
A new beginning is needed. To sincerely and fully address the issue of poverty, it is imperative that we apply the internationally accepted concepts and methodology employed to derive the various Poverty Line Income (PLI) measures and the estimates of poverty incidence. The current methods are deeply flawed. To the extent these are flawed, they fundamentally affect the analysis and conclusions. In turn, this leads to the advocacy of policies that are patently wrong.
In both the 9th and presumably in the 10th Plan the concept of HARDCORE poverty defined as “…. Income less than the food PLI which is based on nutritionally based diet” has been used. The very term “Hardcore” is not in international use. The World Bank and UNDP, two global agencies in the forefront on analyzing poverty, use the concepts of “Absolute” and “Relative” poverty. There are no valid reasons why Malaysia deviates from standard international terminology.
The internationally accepted and applied poverty measurement concepts developed by the World Bank are clear and precise. Rural poverty rate is defined as the percentage of the rural population living below the national rural poverty line. Urban poverty rate is the percentage of the urban population living below the national urban poverty line. National poverty rate is the percentage of the population living below the national poverty line. National estimates are based on population-weighted subgroup estimates from household surveys. Population below US$1 a day and population below US$2 a day are the percentages of the population living on less than $1.08 a day and $2.15 a day at 1993 international prices.
It would appear that these methodologies were rejected by the EPU in favor of its own definitions and methods with the sole main of producing low “feel good” estimates of the poor. This is an insult to the poor in that we are unable to generate true and accurate estimates. It cannot over-emphasis the importance of getting the numbers right as these underpin the need policy responses and ultimately the allocation of resources to alleviate the scourge of poverty from Malaysian society.
What of the future?
Beyond the rhetoric, it is clear that fundamental policies will continue. It is no consolation to the poor. The spending proposed on poverty in the Plan is a small fraction of the total size of the Plan. These numbers are more telling than the rhetorical speeches and applause of a compliant media. The reality for the poor is that subsidies are likely to be eliminated and new taxes piled on to finance grandiose projects such as yet another convention center, more roads to nowhere and large transfers to the powerful and well connected corporations and tycoons. If the truth be told the BN are obsessed with creating more infrastructure even though much of what has been created remains underutilized.
The issue of restructuring employment is not questioned. It has been a long pursued policy from the 1970s. However, this is not just a responsibility of the private sector. It must be noted that the public sector continues to be the largest single employer with almost 1.2 million workers. It has however failed dismally to follow the policy of eliminating or reducing ethnicity as a criteria in employment in the public sector. Ministerial statements offer lame explanations that non-Bumiputras are unwilling to enter the public service. This assertion can be challenged given the human resource management policies pursued by the responsible departments and agencies. It is indeed most disappointing that the Plan is silent on the entire issue of balanced employment in the public sector.
It is time for the Government to state in categorical terms that it will take steps to correct the imbalance in the employment pattern in the public sector. It must put its money where its mouth is. It cannot demand of or compel the private sector until it implements an employment policy that is embedded in the national compact under the NEP when it was introduced in the 1970s.
The solutions to the issue of income disparities between groups cannot be resolved through setting targets and postulating restructuring and broad notions of human capital development in the manner proposed. There can be no denying of the fact that reform of the educational system at all levels is a first and fundamental step. The Plan throws out some tentative and meek proposals. These are insufficient. Standards must be improved, merit in selection must be a factor; the curriculum reformed, our institutions of tertiary learning need to be urgently restructured (including the pattern of employment). The focus on quantity must stop and be replaced by quality. It is most telling that our educational institutions are producing graduates to swell the ranks of the unemployed and the unemployables.
A nation’s competitiveness is in part determined by the quality of its human resources. That in turn is determined by the excellence or lack thereof of the knowledge and skill levels of the work force. For a generation or more, Malaysia has had the misfortune to have pursued educational policies that have impacted negatively on the creation of a dynamic, motivated, and skilled labor force. Our institutions of secondary and tertiary education have become sausage factories producing graduates unfit and unemployable in fields that hold a key to our future. The consequent loss of competitiveness is beginning to manifest. Despite the clear and present danger signals, the BN administration continues to ignore actions that are needed. Meritocracy in the selection of those that are taught and those who teach cannot be substituted with less than open and transparent processes. It must be recognized that upgrading the educational system demands more than money; throwing money at the problems will not resolve matters. There is an urgent need to move resolutely towards reforms that will improve the quality of the system, produce graduates that are equipped to meet the challenges of a harshly competitive world.
These issues are hardly addressed in the Plan.
The 10th Malaysia Five Year Plan : Old Wine in New Bottles – Part 6 (Equity Restructuring/Ownership)
Equity Restructuring and Ownership
The Plan restates that the target of attaining at least 30% Bumiputra corporate equity ownership at macro level remains. It goes on to indicate that the focus will be on promoting genuine economic participation, consistent with the objective of sustainable high growth, rather than corporate equity allocation.
The Plan proclaims that this will be achieved through more transparent, market-friendly and merit-based instruments, focused on:
• Strengthening Bumiputra entrepreneurship to help create competitive businesses in high impact sectors;
• Increasing wealth ownership beyond corporate equity to include other properties and business assets such as retail space landed properties, commercial buildings, intellectual properties and other services through pooling of funds and institutional investment; and
• Promoting Bumiputra representation in high paying jobs through enhanced capability building and demand-side incentives.
These statements can be cautiously welcomed as they represent a nuanced shift. However, if the past is any indicator, this shift may be no more than illusionary and a mutation of the NEP.
Furthermore, as the past demonstrates, it is the manner in which policies are implemented that matter. It must be recalled that at the end of the day it is the Little Napoleons that determine how policies are implemented. Furthermore, the emergence of powerful pressure groups such as PERKASA, are in the forefront with demands for a tightened and radically rigid set of policies that reinforce the NEP. These groups will clearly be vocal now that they have seen the Prime Minister retreat. Ominously, they have succeeded in forcing the Prime Minister to retreat from the key elements of the NEM. The NEM balloon was pricked no sooner than it was floated. There is every indication that these groups will vigorously pursue their agenda and the 30 percent equity target will symbolically remain central to their demands. These demands will continue to be a distraction and impact on the investment climate both domestically and in terms of foreign investors. It is in that context that attention needs to be paid to the issue of the extent to which the 30 percent target set in the early 1970s has been attained or is close to being attained.
The current Plan follows up on the 9th Plan by repeating the need to view the attainment of the 30 percent target as a long term goal, to be achieved by 2020. The 10th Plan takes on a new dimension. It expands the scope of wealth to beyond share equity by including other assets.
The 9th Plan attempted to correct one aspect of the misunderstanding of the NEP target concerning ownership of share capital. For the first time, the 9th Plan indicated that these share valuations are done on the basis of taking the par value of the shares of all limited companies, both public limited and private limited companies, distributed by ethnic origin. Thus, the total stock of share capital is valued in nominal ringgit terms.
The calculations take no account of the true asset or equity values which are a correct measure of wealth. Par valuations are notional and equate a single share in a small private family owned business with a single share in a large asset rich public limited company listed on the stock exchange. The resulting aggregate values (at par values) understated the net worth of asset rich companies whilst exaggerating the value of shares in private companies. The total par value of shares as measured is a gross under-estimate of the value of all corporate assets/equity or the net worth of corporate entities.
This same methodology has been applied consistently since 1970. According to the Table in the Appendix of the 10th Plan, the total par value of share capital in 2008 amounted to RM 581.8 billion as against RM 621.8 billion in 2004. It is most intriguing as to why there was a decline. Of the total share value in 2008, the Bumiputra percentage was 21.9 percent; 36.7 was owned by Non-Bumiputra Malaysians and Foreigners owned 37.9 percent. Many analysts have argued that the holdings of Nominee companies owning 3.5 percent should be aggregated with Bumiputra holdings to give an overall Bumiputra ownership of 25.4 percent, a figure close to the NEP target of 30 percent. These commentators have contended that Nominee companies are mainly Bumiputra owned. Be it as it may, the figure of 21.9 percent can be viewed as an under-estimate for other reasons beyond those cited above.
The total value of RM 581.1 billion, it must be recalled, represents the total par value of all shares in both public and private limited companies. It is significant that the 10th Plan, does not report data on Listed Companies on the Kuala Lumpur Stock Exchange. At the end of 2002 there were a total of 865 listed companies with a market capitalization of RM 481.6 billion, a figure that exceeded by RM 171.8 billion the total share capital of all companies (both listed and unlisted) in par value terms. This is clearly an inconsistency. No published figures are available about the ethnic distribution of the capitalized value of RM 481.6 billion. It can however be reasonably argued that all listed companies on the KLSE are companies that have been restructured, resulting in a minimum 30 percent Bumiputra ownership. It must be recalled that restructuring is a pre-condition for listing on the KLSE. On this basis, it would not be erroneous to assume that 30 percent of the capitalized value of listed shares belongs to Bumiputra. To this extent then, Bumiputra ownership is close to or even exceeds the NEP target. It should also be observed that ownership is but one dimension. Control matters. In terms of control, even through minority holdings, Bumiputras and Bumiputra controlled entities are likely to be in control of corporate wealth well in access of 30%. On this basis, the data presented in the Plan is moot and anomalous.
Be that as it may, the broader debate can easily be settled by applying a more transparent and diligent methodology than is the case at present. It is fundamentally important that this be done to dispel misperceptions about share ownership in the Malaysian economy. An independent and impartial study should be commissioned to get at the truth. This is vitally important to help avoid the adoption of radical policies, such as a return to the emotionally charged and divisive policies associated with the NEP. It is important that the nation take stock of where it stands and does not march in a backward direction towards policies that have failed and, if readopted, could result in grave consequences for the nation’s future.
The 10th Malaysia Five Year Plan : Old Wine in New Bottles – Part 6 (Equity Restructuring/Ownership)
Equity Restructuring and Ownership
The Plan restates that the target of attaining at least 30% Bumiputra corporate equity ownership at macro level remains. It goes on to indicate that the focus will be on promoting genuine economic participation, consistent with the objective of sustainable high growth, rather than corporate equity allocation.
The Plan proclaims that this will be achieved through more transparent, market-friendly and merit-based instruments, focused on:
• Strengthening Bumiputra entrepreneurship to help create competitive businesses in high impact sectors;
• Increasing wealth ownership beyond corporate equity to include other properties and business assets such as retail space landed properties, commercial buildings, intellectual properties and other services through pooling of funds and institutional investment; and
• Promoting Bumiputra representation in high paying jobs through enhanced capability building and demand-side incentives.
These statements can be cautiously welcomed as they represent a nuanced shift. However, if the past is any indicator, this shift may be no more than illusionary and a mutation of the NEP.
Furthermore, as the past demonstrates, it is the manner in which policies are implemented that matter. It must be recalled that at the end of the day it is the Little Napoleons that determine how policies are implemented. Furthermore, the emergence of powerful pressure groups such as PERKASA, are in the forefront with demands for a tightened and radically rigid set of policies that reinforce the NEP. These groups will clearly be vocal now that they have seen the Prime Minister retreat. Ominously, they have succeeded in forcing the Prime Minister to retreat from the key elements of the NEM. The NEM balloon was pricked no sooner than it was floated. There is every indication that these groups will vigorously pursue their agenda and the 30 percent equity target will symbolically remain central to their demands. These demands will continue to be a distraction and impact on the investment climate both domestically and in terms of foreign investors. It is in that context that attention needs to be paid to the issue of the extent to which the 30 percent target set in the early 1970s has been attained or is close to being attained.
The current Plan follows up on the 9th Plan by repeating the need to view the attainment of the 30 percent target as a long term goal, to be achieved by 2020. The 10th Plan takes on a new dimension. It expands the scope of wealth to beyond share equity by including other assets.
The 9th Plan attempted to correct one aspect of the misunderstanding of the NEP target concerning ownership of share capital. For the first time, the 9th Plan indicated that these share valuations are done on the basis of taking the par value of the shares of all limited companies, both public limited and private limited companies, distributed by ethnic origin. Thus, the total stock of share capital is valued in nominal ringgit terms.
The calculations take no account of the true asset or equity values which are a correct measure of wealth. Par valuations are notional and equate a single share in a small private family owned business with a single share in a large asset rich public limited company listed on the stock exchange. The resulting aggregate values (at par values) understated the net worth of asset rich companies whilst exaggerating the value of shares in private companies. The total par value of shares as measured is a gross under-estimate of the value of all corporate assets/equity or the net worth of corporate entities.
This same methodology has been applied consistently since 1970. According to the Table in the Appendix of the 10th Plan, the total par value of share capital in 2008 amounted to RM 581.8 billion as against RM 621.8 billion in 2004. It is most intriguing as to why there was a decline. Of the total share value in 2008, the Bumiputra percentage was 21.9 percent; 36.7 was owned by Non-Bumiputra Malaysians and Foreigners owned 37.9 percent. Many analysts have argued that the holdings of Nominee companies owning 3.5 percent should be aggregated with Bumiputra holdings to give an overall Bumiputra ownership of 25.4 percent, a figure close to the NEP target of 30 percent. These commentators have contended that Nominee companies are mainly Bumiputra owned. Be it as it may, the figure of 21.9 percent can be viewed as an under-estimate for other reasons beyond those cited above.
The total value of RM 581.1 billion, it must be recalled, represents the total par value of all shares in both public and private limited companies. It is significant that the 10th Plan, does not report data on Listed Companies on the Kuala Lumpur Stock Exchange. At the end of 2002 there were a total of 865 listed companies with a market capitalization of RM 481.6 billion, a figure that exceeded by RM 171.8 billion the total share capital of all companies (both listed and unlisted) in par value terms. This is clearly an inconsistency. No published figures are available about the ethnic distribution of the capitalized value of RM 481.6 billion. It can however be reasonably argued that all listed companies on the KLSE are companies that have been restructured, resulting in a minimum 30 percent Bumiputra ownership. It must be recalled that restructuring is a pre-condition for listing on the KLSE. On this basis, it would not be erroneous to assume that 30 percent of the capitalized value of listed shares belongs to Bumiputra. To this extent then, Bumiputra ownership is close to or even exceeds the NEP target. It should also be observed that ownership is but one dimension. Control matters. In terms of control, even through minority holdings, Bumiputras and Bumiputra controlled entities are likely to be in control of corporate wealth well in access of 30%. On this basis, the data presented in the Plan is moot and anomalous.
Be that as it may, the broader debate can easily be settled by applying a more transparent and diligent methodology than is the case at present. It is fundamentally important that this be done to dispel misperceptions about share ownership in the Malaysian economy. An independent and impartial study should be commissioned to get at the truth. This is vitally important to help avoid the adoption of radical policies, such as a return to the emotionally charged and divisive policies associated with the NEP. It is important that the nation take stock of where it stands and does not march in a backward direction towards policies that have failed and, if readopted, could result in grave consequences for the nation’s future.
Ibrahim Ali wants Idris Jala out of Cabinet
In a statement issued immediately after the announcement, the first-term MP questioned the rationale behind the direct awarding of the contract.
You have a situation, where your measure of what it is to move about Malay progress, is a measure which is bound to fail given of a policy, he pronounced during a press discussion during a Parliament run currently after briefing Pakatan Rakyat MPs upon a 10th Malaysia Plan. 
