What Is The New Economic Model Economics Essay

Earlier of 2010, Malaysia government introduces the four pillars of national transformation which the aim is to achieve Vision 2020. The New Economic Model (NEM) is part of the four pillars of national transformation.

The figure above showed the pillars of NEM. NEM consists of several plans and strategies such as Government Transformation Plan (GTP), Economic Transformation Programme (ETP), 10th & 11th Malaysia Plan, and Principle of 1 Malaysia. Combination of these plans can form the NEM which plays the role of shelter to our country. From the bottom, there are 10th and 11th Malaysia Plans. These plans will act as the supported foundation for the NEM. With the aids of GTP and ETP, NEM can be implemented more comprehensive. However, if without the 1 Malaysia concepts, our shelter cannot complete. Therefore, concept of 1 Malaysia will act as the roof to cover all the plans and strategies.

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The NEM is an economic plan in Malaysia which is unveiled on 30 March, 2010 by Malaysian Prime Minister, Datuk Seri Najib Tun Razak’s. NEM will generate benefits for all Malaysians. This economic plan is proposed to gain double income per capital Malaysia by 2020. Besides that, one of the NEM’s propose is to reduce income disparity between the rich and poor in Malaysia, improve the system of affirmative action to becoming more competitive market and investor friendly, and improving workers productivity.

Figure 1.2: Goals of New Economic ModelThe focus of the NEM is to “transform the Malaysian into a developed and competitive economy whose people enjoy a high quality of life and high level of income from growth that is both of inclusive and sustainable by 2020”. The keys to the plan as described unveiling are “high income, sustainability and inclusiveness”, which together will translate into a high quality of life for the rakyat.

The first goal of NEM is high income. NEM aims to bring Malaysia to high income country with per capita income US$15,000 until US$20,000 by 2020. Currently, per capita annual income in Malaysia only worth at $7,000 in US currency; under NEM plan the figure would be double to US$15,000. When achieve this target, Malaysia would be able to escape from the middle income trap.

Inclusiveness is second goal of NEM. Under inclusiveness, all Malaysian include Sabah and Sarawak enables to fully benefit and share the nation wealth. In additional, inclusiveness which can ensure that every citizen right could be preserved and no group could be ignored in the nation. Discrimination and bias will fully prohibited.

The last goal of NEM is sustainability, which it’s refers to current generations meets present needs without compromising the future generations. Because of that, government will safeguard the natural resources that we have now from miss-spent. Furthermore, sustainability of the quality life will be pursuing and government takes action in order to reform the sector so that it achieves efficiency and equity.

To achieve the goals of New Economic Model, there are eight Strategic Reform Initiatives (SRIs) those recommendations by NEAC. First SRI is re-energising the private sector. That because private sector play an important role in enhancing economic growth in the country. So, private sectors are encouraged to involve themselves in investment especially in high value added products and services so that sustained economy growth and high income country can be generated.

Second SRI is developing quality workforce and reducing dependency on foreign labour. Under this policy, government will focus on labour markets and ensure that to work well. Efforts will put on such as workers must work efficiently to increase productivity and wages. Under the adjustment of labour market must be smooth, government need to ensure that workers are doing in the correct jobs which match with their knowledge and skill. Brain-drain problem needs to be solved to attract our skilled labour so that they can contribute in Malaysia economy. Besides that, government also focuses to generating a talented workforce to meet the needs of a high-value knowledge economy. Therefore, wage-restraining labour market distortions, such as excessive and indiscriminate use of foreign labour, will be removed.

Creating a competitive domestic economy is a third SRI in NEM. To create the competitive domestic economy, many distortions such as subsidies, price controls and a myriad of distortion-creating incentives will be removed. Additionally, government also will build entrepreneurship to achieve this policy. Therefore, the ETP will help the vulnerable groups with an enhanced social safety net such as health care, education and etc, and a special transformation fund for them.

The fourth of SRI is strengthening of the public sector. Public sector must be re-engineered. The reform programmes will continue to improve and speed up decision making processes using the “whole-of-government” approach and others. Government also focuses to improve the service delivery to rakyat. One main point in this policy is government want to reduce the “friction costs”. That means government wants to zero tolerance for the corruption.

SRI 5 is transparent and market friendly affirmative action. Government will encourage equal and fair economic opportunities, and ensure that affirmative action programmes will continue in order to achieve the objectives, rent-seeking and market distorting features which have limited their effectiveness of the programme should be eliminate. Furthermore, this policy also emphasize in narrowed the gap between rich and poor. The real intention to reduce the income disparity is because in Malaysia still have the bottom 40 percent of households earn an average lower than RM1,500 per month. Besides that, government want make sure that all Malaysian get equitable and fair opportunities through the transparent process.

The sixth SRI is building the knowledge base infrastructure. The key focus here is to promote an economic transformation in the industrial, agricultural and services sectors for innovation by strengthening the delivery of high quality education that nurtures innovation and technology. The aims of this policy are to create an ecosystem for entrepreneurship, promote an environment for innovation and lastly establish stronger enabling institutions.

SRI 6 is enhancing the sources of growth. Malaysia will control its natural resource endowment and made sectors of comparative advantages as the main sources of high value added growth. From that, government can maximize spillover effects into new areas of activities. The aims from this policy are to create value from first mover and other comparative advantages, develop greater integration between the product and etc.

Lastly, SRI 8 is ensuring sustainability of growth. Our country is rich in natural resources. So the purpose of this policy is to preserving our natural resources from the wasting. At the same time, government focuses to safeguarding the interest of future generations. The safeguarding interest of future generations will be complemented by sustainable public finances through stringent fiscal discipline.

2.0 Why we need NEM?

Figure 2.1: GNI Per Capita (1990-2008; USD Thousand)

Source: The World Bank

The figure had shown the gross net income (GNI) per capita for nine selected countries which are Korea, Czech Republic, Slovakia Poland, Poland, Chile, Argentina, Malaysia, Thailand, Indonesia that at the middle income boundary in 1990. This figure reveals the position of the Malaysia had reached a middle income boundary since 1990. Malaysia had performance well in the early 1990 and able achieved 9 percent growth rate of gross domestic product (GDP) in the mid 1990. However, Malaysia stood at middle-income position for three decades and unable to break up the middle-income trap and achieve to high income nation despite its achievement in the past few decades (Abdullah, 2010). The figure show that Korea, Slovakia, Czech Republic and Chile had cross over middle-income trap and achieved as a high income nation especially Korea with the GNI per capita USD 19,830 in 2009 which is high than the goal of NEM that USD 15,000 targeted for Malaysia.

NEM report states that economic engine is slowing due to the absence of the private investment, difficulties of doing business, low value added industries, low-skilled jobs and low wages, stagnating productivity growth, insufficient innovation and creativity and lack of appropriately skilled human capital. Malaysia trapped in a low-cost, low-value economic structure; persistent low wages too are not attracting and retaining domestic and foreign talents, making it more difficult to move up the value chain (Teoh, 2010). The figures 2.2 have shown the private and public investment conditions in Malaysia, Thailand, and Singapore:

Figure 2.2: Private and public investment as share of GDP (1989-2008; %)

Source: BNM, CEIC, Bank of Thailand

The GNI per capita of Malaysia was seriously affected by Asian financial crisis 1997 when Malaysia had a good performance in the investment in mid 1990 which occupied 40 percent of GDP in Malaysia. However, the investment in Malaysia had fallen to 20 percent of GDP in 2008 (NEAC, 2010). This was implied that Malaysia was facing difficulties in recovery from the economic recession after 1997. Besides that, the foreign direct investment (FDI) and foreign portfolio investment (FPI) were the main reasons that Malaysia suffers in capital flight due to the financial crisis. This had supported with the figure above which Malaysia had experienced rigorous declined in private investment due to the government and Government Linked Company (GLC) presence has discouraged the private investment and the barriers of the regulation for foreign company entries Malaysia domestic market (NEAC, 2010). Importantly, Thailand was recovered from the economic recession quickly compare to Malaysia that stagnated in private investment. Moreover, Malaysia’s competitiveness in term of attracting foreign direct investment also show a declining trend which Malaysia global competitiveness index has dropped to 26th in the 2011 show that Malaysia was less attractive compared to other countries such as Singapore are closely related with Malaysia (World Bank, 2011).

In public investment context, Malaysia had more reliance on the public investment rather than private investment which the private and public investment share are occupied almost same percentages of share in GDP in recent year even high than private investment after the economic recession. The averages annual growth of three components contributed to Malaysia’s economic growth from 1991 until 2006 was shown as below. The figure 2.3 implies that Malaysia more focus on the public investment which government expenditure relatively increase compared to other two components. In contrary, the contribution of investment toward economic growth was declined from 14 has dropped to 3 implied that Malaysia is reliance on the consumption to driving economic growth rather than investment after post-crisis.

Figure 2.3: Average annual growth from 1991 to 2006 of Malaysia

Whilst NEM emphasize on pushing Malaysia toward a high income nation, the inclusiveness also highlight in this model to reduce the income disparities of Malaysia. According NEM reports, there are only top 20 percent of Malaysian income earners shown the strong of income growth as presented in the figure 2.4. The bottom 40 percent of households have experienced the slowest growth of average income, earning an average of RM1,222 in 2008 (NEAC,2010). This one of the factor needed to concern in Malaysia in order to assist Malaysia achieves the Vision 2020.

Figure 2.4: National household income (Average by segment, 1980-2008;RM)

Source: MDI

Thus, the NEM is needed as bold approach that provided policy measures derived from the SRIs in order to pushing Malaysia economic cross over the middle-income trap and provide the equitable and fair opportunities to Malaysian in order to reduced the gap between poorer and richer widening. However, the success of the NEM is significantly reliance on the steadfast commitment by government to implement NEM, the preparedness of the rakyat to comprise the difficult changes and a ‘big push’ of strategic policy measures but not incremental changes (NEAC, 2010).

3.0 Conflict between first part and second part of NEM

The affirmative action policy had been implemented for a long period in Malaysia which granting special status and privileges schemes to Malays aims to reduce bumiputera poverty and special scheme were adopted to reallocate corporate assets in Malaysia from Chinese-Malaysians and Indian-Malaysians to the benefit of bumiputeras (Lee, 2011). This is because bumiputera only occupied 2.6 percent of ownership in the corporate sector in 1971 which relatively lower than other community. This policy also focuses on bumiputera’s contribution toward national wealth and 30 percent equity of company reserve to the bumiputera in the certain selected sectors that rise up the government expenditure which the total government debt is 41.5 percent of GDP is relatively high for a regime that provide few social services (Lee, 2011). Importantly, these schemes had encouraged the rent seeking bumiputera elites dependent on government assistance and requested the continuation of affirmation action.

In this context, the NEM incorporates a new approach which can be summarized as inclusive growth. Inclusive growth is pro-poor growth and is concerned not only with the level but also the effect of persistent inequality on economic growth and poverty alleviation (NEAC, 2010). A key challenge for inclusive growth is to attain a balance between the special position of Malays, the natives of Sabah and Sarawak and legitimate interests of other group (Abdullah, 2010). Hence NEM’s market-friendly affirmative action programmes in line with the principle of inclusiveness had revised from the past affirmative action will discontinue past practices that gave rise to unhealthy and pervasive rent-seeking and patronage activities; ensure equitable and fair opportunities through transparent processes; provided the assistance to the bottom 40 percent of households which 77.2 percent are bumiputeras and many are located in Sabah and Sarawak; allow right to use to resources on the basis of needs and merit to enables improvement in capacity, income and well-being; have sound institutional frameworks for better monitoring and effective implementation(The Star Online, 2010).

In SRI 5, NEM proposed that the revised affirmative action policy should be based on the bottom 40% of households. An affirmative action policy based on the low income group such as giving preferential treatment to the relatively disadvantages group proposed in NEM would be in the interest of distributive justice. Affirmative action will reflect on all ethnic groups equally as long as they qualify for access to resources under affirmative action. Moreover, an Equal Opportunity Commission (EEC) is proposed with the responsibility of monitoring and considering cases of discrimination and unfair treatment in the economy to cover both the public and private sectors (NEAC, 2010).

Interestingly, in the NEM concluding part, targeted programmes for the bumiputera Commerce and Industry Community (BCIC) is one of policy measures for income disparities which contradict with the market-friendly policy. In the targeted programmes, market friendly, transparent and granted on the basis of needs and merit was emphasized on the special programmes in order to allow beneficiaries to adapt with the impetuosity competitive business environment to become self sufficient although weaning them away from prolonged dependence on such special programmes (NEAC, 2010). The NEAC recommends that Government and GLC procurement reservation for BCIC should continue but be targeted for bumiputera SMEs only. This was obviously implied that there is conflict between the reservations for BCIC with the market-friendly affirmative action that purposed in the first part of the NEM.

According Asia Views, 34 years after implement New Economic Policy (NEP), official statistic states that bumiputera held equity in Malaysia stood at 18.7 percent or close to 11 percent below the target (Teoh, 2011). Moreover, there are a small layer of people (and it is a multi-ethnic group) have used the policy of affirmative action for the bumiputera to improve themselves through rent seeking, over-priced contracts and naked corruption. The majority of the bumiputera have only received a minor portion of the economic assistance that they were supposed to have received, and a large number of them are still stuck in poverty (Devaraj, 2010).

However, NEM does not advocate the removal of the special position of bumiputera and the legitimate interests of the other communities (Abdullah, 2010). There are some arguments that support the retention of 30 percent bumiputera equity. In the targeted programmes for BCIC, open tenders for government and GLC procurements which are reserved for bumiputera small-medium enterprises will foster greater inter-racial unity (Khoo, 2010).

4.0 Issues facing by NEM

In NEM, it is an economic model where it promises to bring Malaysia escape from the middle income trap and promote to high income level. The targeted income level will be USD 15,000 to 20,000 per capital in year 2020. Inclusiveness and sustaining are the considered factors in making policy. There are three important issues will be highlighted through NEM. There are:

Education

Entrepreneurial Skills

Institutional Reform

First issue that will discuss is education. Why education will be an issue in NEM? The most probably answer is that education is a persistent factor and it was also the root to Malaysia economy problems. Besides that, it is also the one of the factor that cause Malaysia’s investment growth one step behind if compares to our neighbour countries such as Singapore and even Thailand. Another significant reason is because NEM highly depends on technology upgrading, creation of a knowledge-economy and the development of a highly skilled workforce. In these three perspectives, high quality of human capital, innovation and effective R&D is needed. To fulfill the requirements of NEM, education system plays an important role.

The problems behind of education are education reform and brain-drain problems. First of all, education reform is an effort to change the present education system. When people talk about the education reforming, tertiary education will be the focus. University will be the root of blame because graduates unable to performing in their workplace. However, the blame should not only go to university. This is because students only spent three to four year time in university according to their course taken. Primary school and secondary school were occupied most of their time. Interest, intellectual curiosity, and creativity should be cultivated from younger period. Besides that, basic knowledge should be instilled from young to promise for the future understanding. When students are weak in the basic knowledge, they may find difficulty in their future study.

Cannot be denied, universities have responsibility too. The most probably problem is graduates cannot speak and write proper English. Lectures and professors in university should teach in proper English. Foreign student exchange programme can encourage students speak and write better English. Not only the quality of the teachers in primary school and secondary school should be improves, however, the quality of lectures and professors need to be improved too.

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Another problem related with education in Malaysia is Brain-drain problem. Brain-drain problems can be defined as the loss of skilled intellectual and technical labour through the movement of such labour to more favourable geographic, economic, or professional environments. In Malaysia, brain-drain problems reach a critical stage where within the past nine years; only less than one percent of Malaysian who work overseas are willing to return to their mother land (Chua, 2011).

The questions come out with why the professional are not willing to return to their mother land? Is that they will achieved greatness in performing their speciality, social status even prosperity if they develop their talent and skill overseas? Certainly, there must be several reasons why this happened. The first and the most, attractive wages in overseas encourage local professionals not dong their speciality in their mother land. For example, in United Kingdom, a fresh graduates from a degree of law can average earn £36,500 a year in a law firm whereas in Malaysia fresh entrance only pay RM 21,600 a year.

Second reason for brain drain in Malaysia will be the job opportunity. Especially for those job are unavailable in Malaysia, they are force to move to overseas to found the place where they have chances to performing. For example, in the political field, Penny Wong, who born in Kota Kinabalu, is a first openly gay and at the same time she is one of the members in Australian Commonwealth cabinet. Besides that, she is also the Australian Minister for Finance and Deregulation. In Malaysia, she might not have chance to step in political field just because of she has unique preferences.

The other example will be the famous shoes designer Jimmy Choo who is expert in fashion line. He is also a Malaysian but contribute lots in London through fashion line. If he remains his expertise in Malaysia, he might not that successful because Malaysia has less market and demand in fashion line. In science and technology sector, although Malaysia has motif to join in this sector, however, resistance is still especially in the technology that we have might loss behind.

Pua Khien Seng, who born in Selangor, was the first in the world who invented the USB pendrive that we widely use today. He is now currently own a listed company worth RM4.3 billion in Taiwan. Among the example, they are not return to Malaysia maybe is because they cannot perform their expertise in Malaysia, but not because of they are not willing to return to their mother land.

The second issue that been emphasize is the entrepreneurial skill. Entrepreneurship can be defined as the recognition and pursuit of opportunity without regard to the resources you currently control with the confidence that you can succeed, with the flexibility to change course as necessary, and with the will to rebound from setbacks according to Bob Reiss, in his book “Low-Risk, High-Reward: Starting and Growing Your Small Business With Minimal Risk (Hupalo, 2004).” The reason why entrepreneurial skill is highlighted is because of it is close concern with SRI1 in NEM where its core has the re-energisation of the private sector as its goal. When the private sector as the targeted sector to growth, entrepreneur will be the focus because small and middle enterprise are highly depends entrepreneurship.

However, the issue behind is that bumiputera entrepreneurs are less representation is nation wealth. Since the New Economic Policy, bumiputera entrepreneurs are given special treatment where there are 30% of the equity ownership are been given. According to a journal article, bumiputera entrepreneurs are less successful is due to several factors. The factors include inability to compete, lack of competency and capital, customer-related problems, employee-related problems, unfavourable economic conditions, bureaucracy, supplier discrimination, and negative community attitudes were found to be crucial (Abdullah, Hamali, Deen, Saban, & Abdurahman, 2009). This meaning that among the bumiputera entrepreneurs, they must sharpen their skills to flourish without any dependence on government handouts. Of course, if NEM want to achieve successful, the equity ownership issue should be adequately address.

The third issue will be discuss is the institutional reform. Institution reform can be defined as the changes to transportation organizations’ policies and practices to support government implementation. Institution reform should in term of norm, habits and convention in society must support efficiency and competitiveness of a country. Civil liberties and more liberal political do helps in promote economic development.

Therefore, the issue behind is that how much of our government do given the liberty? It is suppose to have institution reform to gain fully freedom of speech, freedom assembly and demonstration. Unluckily, in NEM, it is lack emphasis on the state capture. State capture can be defined as the efforts of firms to shape the laws, policies, and regulations of the state to their own advantage by providing illicit private gains to public officials. It is always referring to corruption. Although there are zero-tolerance for corruption been mention in NEM, however, it just a list of it. There are no proper and effective strategies being introduce to reduce the corruption problems in our country.

According to Corruption Perceptions Index (CPI), Malaysia corruption score is getting lower from year 2008 to 2010. This ranking is based on data from independent institution such as World Bank, Economist Intelligence Unit and World Economic Forum. The score of CPI have the scale from zero to ten. The lowest score zero show it is high corruption and low transparency. When the score is ten, it is high transparency and lowest corruption. Malaysia corruption scores as follow show that corruption problem is getting serious from year to year.

Table 3.1 Corruption Perception Index (CPI) of Malaysia from 2008 to 2010.

2008

2009

2010

Malaysia’s CPI

5.1

4.5

4.4

Source: (Rogers, 2009)

Therefore, more and more effective policy and strategies should be draw up to cure this problem in our country.

5.0 Challenges in NEM

NEM is about to change Malaysia’s current economic condition to the better economic in 2020 through the NEM goals. “Change” is the buzzword in order to reach the goals. However, in order to change, Malaysia faces challenges in terms of:

Mindset

Political will

Labor force

Satisfying all quarters?

Sustaining the change

Mindset is refers to the way of how people thinking. The people mindset as well as the politician’s mindset must be ready to the changing in Malaysian economy through the NEM policy. Most of people in Malaysia are not aware that Malaysian economies are lagging behind some of the countries that now experience the emerging economies such as China and India. This mindset changing is the biggest challenge for the NEM to achieve its goals, because the operationalization of NEM is requiring the whole nation’s contribution. If they are not willing to change their mindset, then there is a big potential for the NEM policy to not work smoothly or it might fail in achieving its goal. As the Malaysian Prime Minister speech on March 30, 2010, he said that the process of changing the nation’s mindset is not easy and while the process, there will be a painful moments. This is because in the short term, there will be entrenched opposition and some of economic sectors may experience adverse effects. But in the long term, the mindset changing will bring lots of benefit to the nations.

Political will is one of the key and important enabling factors for the NEM in supporting changes in this new policy. Without the political will, it is hard for the government to achieve the goal in NEM. In NEM report, it has mentioned that the political will and leadership needed to break the log-jam of resistance and preparing the peoples. In other words, the government must have the determination to break the log-jam of vested interest and beneficiaries of rent-seeking. If the log-jam of vested interest and beneficiaries of rent-seeking is still exists during the operationalization of NEM, it will cause to only some party gained the benefit of NEM and this result to inequality and lead to the failure in achieving the NEM goals which is inclusiveness. To achieve the NEM goals, political together with the intellectual leadership must demonstrate the necessary commitment to the NEM besides the political will and leadership need an emphasis on a coherent explanation of the vision and agenda of the NEM and transformation process (The Star, March 301, 2010). Furthermore, after the government spending about RM40 billion to came out with the policy, it is a big loss if the political will is not willing to operationalize this new policy.

There must be a mindset changing and political willingness in order to successfully transforming to the NEM and achieved its goal while facing these challenges ( November 12, 2010, Dato’ Dr Mahani Zainal Abidin, Institute and International Studies, Malaysia):

Getting the needed in investment but this will require restoring investor’s confidence via accommodating business environment.

Undertake restructuring prices for goods and services will improve economic efficiency but may initially raise consumer prices and costs of doing business.

Transforming the education system as a medium and long term task but requires policy consistency.

Reduced dependence on foreign labor encourages firms to move up the value chain or embrace automation while those cannot, will exit and this also costing some local jobs.

Moving towards green economy and promoting energy efficiency but this will require expensive initial investment and may erode price competitiveness.

Reducing inequality between income levels and between rural and urban areas while striving for high economic growth.

Addressing problem of urban poverty and improving infrastructure while maintaining a balance with achieving high investments in urban areas.

One of the NEM intentions is making Malaysia entering the new phase in the industrialization process, moving away from a low-cost, export-oriented strategy to a higher value-added capital intensive and high technology-based industrialization where it is requiring a highly-skilled labor force. Comparing a knowledge-based economy or k-economy, NEM is an advance economic structure which requires a huge number of knowledgeable and high-skilled labors in new and emerging fields such as robotic engineering, information and communication technology and bio-technology and this development requires a high percentage of knowledge workers which would become the backbone of the Malaysian economy (February 18, 2011, Blog Rasmi Jabatan peguam Negara). High-skilled workforce not only needed in industrial sector but in service sector as well. Without the existing of high-skilled labor, it is impossible to entering the new phase besides high-skilled labor also one of the factors that attract foreign direct investment (FDI) to invest in Malaysia. But then, Malaysia is now facing the ‘brain-drain’ problem where most of the talented, knowledgeable and high-skilled labor force moves to the more developed country such as Singapore. This matter becomes one of the challenges in NEM because in order to fulfill the requirement of high-skilled labor force, they have to attract back those Malaysian who work outside from Malaysia to work back at their motherland. Not only to attract them back but also find a way on how to eliminate the ‘brain-drain’ problem and to reduce the number of high-skilled labor force that move away from Malaysia. They have to recognize what the factors that make all the high-skilled labor work out from Malaysia and develop some policy or law to prevent them work out from Malaysia.

Since Malaysian people is consist of various races and religion, when making a policy it must satisfying