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The 10th Khazanah Megatrend Forum and Budget 2015 – A Disconnect? by Dzulkefly Ahmad.

October 31, 2014

Dr Dzulkefly Ahmad, PAS Research Centre | 31 Oktober 2014. (Harakahdaily.com)

Granted, as someone who helms an Opposition party think-tank, I was indeed privileged to be invited to attend the 10th Khazanah Megatrend Forum (KMF) last month. I have no qualms to admit that the two-day engagement was indeed intellectually enriching.

Permit me to quickly revisit pertinent observations from the many very distinguished speakers. Admittedly, I can only be selective. Speeches, forum and events traversed the usual realms of economics and finance, evidently depicting Khazanah’s leadership grasp of what it takes to propel the nation further.

That novel characteristic alone has entitled this year’s KMF to be relatively unique i.e., away from obsession with economic growth numbers to defining the challenges of the nation going forward.

Simply put though, it was a gathering of thought leaders and experts to address the critical malaise of the nation i.e. of why Malaysia is stuck in the middle-income trap and what does it take to transition her to a high-income economy and by logical extension,  a ’truly developed nation’.

For the record again, our history of socio-economic development is arguably one of relative underperformance. While we edged our regional peers like Thailand and Indonesia, we have been out-performed by South Korea, Taiwan, Singapore and Hong Kong.

Going back to basic economics, it has long been observed that the productive capacity of an economy is capped by the availability of inputs i.e. labour and capital, given a set of technological conditions.

The maximum potential level of production or the productive efficiency frontier of an economy is graphically represented by the ‘Production Possibility Frontier’ (PPF) or the Production Proficiency Capacity (PPC).

It was with this backdrop that its theme of “Scaling the Efficiency Frontier: Institutions, Innovation and Inclusion” was indisputably most apt.

In their respective ways all the keynote speakers namely HRH Sultan Nazrin Shah, Professor Ha-Joon Chang and Tan Sri Andrew Sheng and others provided compelling arguments for the need for Malaysia to affect a productivity challenge, moving beyond the “miracle” of input growth.

To develop a different trajectory of growth, Ha-Joon singly provided new insights of what it takes to do things differently. To paraphrase Ha Joon, we are not to rely only on our comparative advantage as it will impede our productivity growth and stifle our further innovative endeavours.

Significantly too, Ha-Joon stressed on the need to embrace the downside of innovation. This is done by instituting legal provisions to provide for a second chance for entrepreneurs in the face of liquidation and other risks of doing new things and getting into unchartered markets.

Other speakers also alluded to the critical need for government to incentivise these risk-taking efforts in an eco-system that would allow for innovation by ‘serial entrepreneurs’, who invariably exhibit ‘dysfunctional personalities’.

Companies are reminded to be more robust enough to diversify in the face of the eventuality and trade-offs of Schumpeter’s creative destruction in the innovative economy. That must surely be worth pursuing, though arguably always easier said than done.

Be that as it may, let us now turn our attention to the recently tabled Budget 2015. It doesn’t take any more reminders that the budget proposals haven’t allowed much fiscal space for the Finance Minister to manoeuvre his way.

This piece however, is not about to comment any further about his arduous task of balancing fiscal prudence with the rakyat’s needs. There have been ample critical comments both from detractors and supporters alike.

But being the last building block in the five-year development blueprint, it is expected to provide an allocation for the creation of the desired structural changes as envisaged by the 10MP. It is from this perspective that this writing is keen to query further.

Simply put, has Budget 2015 laid down the strategic initiatives for the transition to the next Eleventh Malaysia Plan (11MP)? Has the Budget sufficiently addressed the structural issues of getting the nation out of the ‘Middle-Income Trap’?

The premier must take heed that no amount of huge spending of capital in infrastructural projects would take us out of this middle-income rut. A slew of big-ticket infrastructural projects have been lined up as relentlessly as before in this budget.

To cite, seven highways and rail projects are to be built in 2015 at a cost of RM48.2 billion, including the 56 km MRT2 Line from Selayang to Putrajaya at RM23 billion.

Surely this will provide good macroeconomic (input) boost to growth and with it, the attendant debt build-up. We are not against it per se but the issue is always about the ‘opportunity cost’. What should be our priority and what needs doing first, as imperatives to propel the nation into a higher income economy?

What is it that we couldn’t do else, when Najib has committed RM711 million for Permata? For R&D&C, the Finance Minister could only cough up a meagre RM 1.3 billion for the Ministry of Science and Technology and Innovation.

To highlight further, another RM10 million will be allocated for the Business Accelerator Programme under SME. To enhance use of new technology, automation and innovation in the development of SMEs, RM80 million is allocated for a Soft Loan Scheme for Automation and Modernisation of SMEs under Malaysian Industrial Development Finance Bhd.

To further promote industry, a Digital Content Industry Fund will be set up under industry regulator the Malaysian Communications and Multimedia Commission, with an allocation of RM100 million. All this amounting to a mere RM 190 million (let us be generous, RM200 million!), to encourage national innovativeness, against RM75billion (for the combined MRT2 and Pan-Borneo Highway) for infrastructure, which will only lead to more lining of the pockets of crony companies!  The “innovativeness budget” is not even one-seventh of the Permata genius-production initiative.

On a serious note, if the above is not serious enough, we should ask whether upgrading roads, schools, hospitals and providing critical utilities and infrastructure, particularly in Sabah and Sarawak costing even as much as RM27 billion be an imperative, as opposed to the Pan-Borneo Highway which will also cost RM27 billion?

For the record, of the big ideas of the 10MP, when first launched, wasn’t unleashing productivity-led growth and innovation among the central themes? For all that we now come to know at the end of the 10MP, productivity levels have remained flat. Besides, the economy continues to be anaemic on talent and skilled labour availability amply depicted by the total factor productivity (TFP), which evidently suggests a weakening dynamism in key sectors of the economy.

A recent report from The Asia Foundation (TAF) conceded that while Malaysia has effected some positive policy innovation in recent years, the stated reform measures have only been on addressing the symptoms of the ‘middle-class trap’, rather than the underlying causes of the country’s economic ‘incompetitiveness’.

Worse, according to TAF, one of the sore points is that Malaysia’s economic progress had not been accompanied by reforms of the country’s political institutions. The insufficient checks and balances continue to dog the country’s economy, thus leading to increasing concentration of power within the executive branch and persistence in rent-seeking behaviour, patronage politics, opaque governance practices and pervasive corruption.  Is it any wonder then that Malaysia is perceived as among the world’s worst countries on integrity?

Yes, Malaysia’s economy has no option but to transition from an input-led growth model towards one driven by innovation and productivity.

But to be on the trajectory of a high-income and inclusive economy and a truly ‘developed nation’ where growth benefits all, Malaysia must embrace a sea-change in its social, institutional and economic systems and a ‘revolution in the mind-sets’ of all stakeholder, firstly the ‘leadership’ and collectively ‘the rakyat’!

From that perspective, the Budget 2015 is a far cry from realizing the imperative of ‘Scaling the Efficiency Frontier’ where a commitment for Change and Reform must be effected through the ‘3Is’of Institutions, Innovation and Inclusion as mooted by Khazanah.

In this sense, there is a clear disconnect between the 10th KMF and Budget 2015.- ES

This article first appeared in The Edge dated 24th October 2014.

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