STILL LUCKY?
09/11/2019 08:52 am MYT
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The Malaysian prime minister says he will not step down until he has solved the problems facing the country. Translated into simple terms, this means he will not be stepping down for a very long time to come, if ever. Why? It will take exactly that for any political leader to solve Malaysia’s problems: a very long time, possibly forever. That is how dire things are.



i Capital has written a lot about Malaysia’s middle-income trap and how worrying it is. The problem is that Malaysia’s economic mess is much more than just that. Let us take a step back and watch the silent and steady decline that Malaysia has been experiencing over the last 4 to 5 decades. In the past, many observers would often comment that Malaysia is a lucky country, a phrase that younger Malaysians nowadays are not familiar with. Here is what it meant.



 Immediately after 1957, the Malaysian economy was heavily reliant on two items – natural rubber and tin. These two globally traded commodities provided the bulk of export revenue and employment opportunities. During the time of Tunku Abdul Rahman, thanks to numerous favourable factors, including a world-class rubber research institute and favourable government policies, production of natural rubber skyrocketed (figure 1). Malaysia was the world’s largest producer of natural rubber and there were no foreign workers. The policies of the Sixties placed Malaysia in an extremely favourable position. In the Seventies, there was a massive global commodity boom, thanks in part to the two crude oil crises.

 



 




 




"During the time of Tunku Abdul Rahman, thanks to numerous favourable factors, including a world-class rubber research institute and favourable government policies, production of natural rubber skyrocketed. "


 




 



Crude oil price skyrocketed in the Seventies, which handsomely benefitted the price of natural rubber as it made it dififcult for its petroleum-based competitor, synthetic rubber, to compete. With the surge in rubber price (figure 2), Malaysia’s export revenue from rubber surged even though rubber output was already plateauing. Plantation companies enjoyed bumper profit, year after year.


 


 

 



The global commodity boom also benefited the tin industry. Thanks to generally favourable government policies, tin production in Malaysia increased steadily and Malaysia became the world’s largest tin producer (figure 3). However, tin output peaked much earlier than natural rubber although this structural decline was camouflaged by the spectacular rally in tin price in the Seventies.  The rise in tin price more than offset the decline in tin output.

 





 



Another precious commodity where Malaysia was a world leader was in the production of tropical timber. In the Seventies and Eighties, Malaysia was the world’s largest producer of tropical hardwood, catering to the voracious appetite of the Japanese market. The production of logs rose year after year, especially in Sabah and Sarawak (figure 4). Those who remember those cowboy days will know that this rise in timber output came with an extremely heavy price for Malaysia’s environment and political destruction in East Malaysia.



 



 

 



Back then, these three key commodities were already peaking. Low cost tin deposits were growing scarce. The primary forests of both East and West Malaysia were being destroyed at a horrifying pace and reforestation could be found only on the lips of government officials and industry players. Rubber tapping was a manual process in which mechanisation failed to take place. By the late Seventies and early Eighties, the Malaysian economy was in a crucial phase. What would replace these three vitally important industries?



First, the nascent Malaysian palm oil industry came to the rescue (figure 5). Thanks to the balanced economic development strategy of Tunku Abdul Rahman, Malaysia had already been experimenting with palm oil in the Sixties and Seventies and its production was already climbing steadily. By the Eighties, as the rubber and tin industries slumped, the palm oil industry came into the picture.



 



The palm oil industry was more amenable to mechanisation and automation. The rubber industry struggled to improve on this front and continues to do so even in the present day. In the Sixties and Seventies, Malaysia implemented an industrialisation process based on a labour-intensive, assembly type of manufacturing. This was the right policy to undertake as the urgent task then was to absorb the increasing number of surplus labour, which the resource and agriculture sectors could not do. This meant that the low wage labour-intensive rubber industry was losing its attractiveness. With the rubber price plunging in the Eighties, existing rubber estates were converted to palm oil estates and new plantings were monopolised by oil palm.



Secondly, oil was discovered in Malaysia; for a small country, its reserves were decent. An agreement between Malaysia and Indonesia, signed in 1969, settled disputes about each country's claims over territorial waters and offshore resources at a time when both economies were heavily indebted to the IMF, the World Bank and the OECD governments and banks. Malaysia was just six years old then. The settlement allowed exploration activities to expand. Esso made its first discoveries of natural gas in 1974 and then rapidly made Terengganu the biggest producer of oil in Malaysia. By 1974, Malaysia's output of crude oil stood at about 81,000 barrels per day. With the setting up of Petronas in 1974 and the oil boom in the Seventies, oil production expanded fast and was able to replace the losses from the traditional tin, rubber and timber industries (figure 6). 

 




 


 

 



Hence, Malaysia was described as lucky since she lost three key industries but found two major ones to replace them in the nick of time. However, as we can see, it was more than just luck. Malaysia in the Sixties had a government that believed in a performance-based society and had good and capable people to manage and plan for the whole country’s long-term future.



 

"Hence, Malaysia was described as lucky since she lost three key industries but found two major ones to replace them in the nick of time. However, as we can see, it was more than just luck."




However, the long-term prospects of palm oil and crude oil production in Malaysia are not what they used to be. Crude oil production peaked more than 20 years ago. No new major oil discoveries have been made. With the global crude oil industry under severe and credible threats from renewable energy, crude oil price has seen better days. Why explore for crude oil anymore? The palm oil industry in Malaysia has also peaked. As i Capital has explained previously, the country has run out of land for palm oil planting and the whole industry is facing a severe shortage of workers.



Once again, “lucky” Malaysia has natural gas to thank for. While Malaysia is a small oil producer, she is still a decent-sized natural gas producer. A few years ago, Malaysia was even ahead of Australia as a natural gas producer and behind Algeria. After increasing steadily from 1980, Malaysia’s natural gas production peaked in 2010 (figure 7).

 




 



The Malaysian leaders of her early days recognised the situation Malaysia was in early on and the policies needed to overcome them. Leaders like Tunku Abdul Rahman and Tun Lim Chong Eu had the foresight to implement policies that took care not only of Malaysia’s shorter-term needs but also promoted her long-term socio-economic growth. An excellent example was the Free Trade Zone Act of 1971, which led to the development of industrial parks for export-led industries. Aug 1972 saw the opening of Malaysia’s first Free Trade Zone (now known as Free Industrial Zone) in Bayan Lepas, Penang. Eight multinational companies (MNCs) - that is, Advanced Micro Devices, Agilent Technologies, Clarion, Fairchild Semiconductor, Hitach Semiconductors, Intel Malaysia, Osram and Robert Bosch - set up base there. The presence of these MNCs formed the nucleus of the electronics industry in the country.

 




"Leaders like Tunku Abdul Rahman and Tun Lim Chong Eu had the foresight to implement policies that took care not only of Malaysia’s shorter-term needs but also promoted her long-term socio-economic growth."
 


 




 



These factories focused on simple assembly operations to absorb the abundant low-cost female workforce available then. In 1980, Bayan Lepas FIZ attracted RM57.4 mln in foreign investments in 10 projects. From 1980 until the end of 2005, Bayan Lepas FIZ had recorded some RM5.3 bln in FDI. Penang added another three phases in Bayan Lepas and, by end 2008, the four phases of the zone had attracted foreign investments of RM14.6 bln, of which over 90% were attributed to the electrical and electronic industry. (Source : The Development of Free Industrial Zones - The Malaysian Experience by Yeow Teck Chai and Ooi Chooi Im).



While Malaysia got to an excellent start in the Seventies and early Eighties, the subsequent socio-economic policies were exercises in self-sabotage, hindering Malaysia from moving forward. Particularly noteworthy is the gross failure of most of the policies implemented by the 4th prime minister. It was not just the failure of the national car industry or the Multimedia Super Corridor, or that of badly planned grand schemes like the heavy industrialisation policy, which saw the start and collapse of HICOM, Perwaja Steel, Kedah Cement and many more ill-designed manufacturing plants, for which Malaysia paid a hefty price, and the whole Malaysian economy either got stuck in low-value-added assembly-based manufacturing activities or moved backwards.




 




"While Malaysia got to an excellent start in the Seventies and early Eighties, the subsequent socio-economic policies were exercises in self-sabotage, hindering Malaysia from moving forward"
 



No less damaging than these many economic failures were policies that led to many Malaysians migrating. Besides the divisive New Economic Policy, what was also damaging was the deterioration in the country’s education system. The result of these two trends meant that Malaysia was soon fresh out of luck. When your natural resources like tin, rubber, timber, crude oil and so on ran out or are running out, what do you have left? The most important of all resources available to any country: human capital.



Since the ousting of Tunku Abdul Rahman, Malaysia’s education system has gone downhill, affecting the quality of Malaysia’s human capital. i Capital has written about this many times before and will not repeat ourselves here. What we want to emphasise in this issue is Malaysia’s brain drain.



Together with a poor education system, brain drain, which is the migration of talent across borders, has mired Malaysia in stagnation, in some cases even pushing her backward. The availability of quality human capital is the foundation of any successful economy. For Malaysia to escape from the middle-income trap and in order for her to stay lucky, she will need to develop, attract and retain talent. To quote Philip Schellekens, who wrote on 27 Apr 2011, “Malaysia needs talent, but talent seems to be leaving.”



 

"The availability of quality human capital is the foundation of any successful economy."

 



Malaysia’s brain drain is severe but few studies or research has been conducted to investigate this phenomenon in the Malaysian context. The Malaysian government hardly ever talks about it. This is not surprising as the bulk of the people leaving are non-Bumiputera. The more of these people who leave, the better it is, so goes the Malaysian racist mind-set, which people like Malaysia’s 7th prime minster is embedded with. The Malaysian diaspora, which is the group of skilled and unskilled Malaysian-born individuals living overseas, was estimated at more than 1 mln worldwide as of 2010. A third of them have tertiary education. The brain drain problem is not alleviated by compensating inflows; in fact the problem has been worsened, as migration into Malaysia is mainly low-skilled.

 




"Malaysia’s brain drain is severe but few studies or research has been conducted to investigate this phenomenon in the Malaysian context. The Malaysian government hardly ever talks about it."
 



As of 2000, there were some 184,000 tertiary-educated Malaysians that at some point left Malaysia. Ten years before that, there were more than 99,000 Malaysians. Singapore and Australia have been the main magnets for skilled Malaysian migrants. Malaysia’s brain drain intensity is high. The World Bank computed that “For every ten skilled Malaysians born in Malaysia, one of them elects to leave the country. This is double the world average.”



On almost all counts, Malaysia continues to face a very tight labour market for skills, which is affecting firm productivity. It is not just the World Bank studies - as we have written before, every Malaysian company that Tan Teng Boo talks to, every single one complains about the lack of skilled workers. The findings by the World Bank (figures 8 and 9) may be many years old but the present situation is not exactly all that different. Malaysian universities continue to produce the wrong type of graduates.




 



 




Malaysia needs to tackle the underlying determinants of brain drain. Brain drain is only a symptom - an outcome of fundamental problems. What are these? Economic incentives and social injustice, eg: racial discrimination matter most (figure 10).


 



"Malaysia needs to tackle the underlying determinants of brain drain. Brain drain is only a symptom - an outcome of fundamental problems"

 


 




 



Discontent among the non-Bumiputeras, who make up the bulk of the diaspora, continues to smoulder, but it is interesting to note that even the Malays want to get out of here. A 2017 survey by Malaysia’s CIMB Foundation found that 15.5% of Malays reported a stronger than average desire to migrate from the country. The desire to leave was higher among those who had completed their secondary or tertiary education: 17.3% for the Malays. Among the Malaysian diaspora in the US, 10% speak Malay.


 



 



As lucky Malaysia runs out of her precious natural resources, her human resource is also depleted. The consequences are there for all to see. In the 2011 World Bank Report titled “Brain Drain”, it warned : “There is ample evidence to suggest that Malaysia’s economic structure over the last few decades has remained largely centered on low- and semi-skilled production modes (assembly-based manufacturing), which has dampened the demand for skilled labor. We also see that the services sectors remains highly protected, removing the incentive of firms to innovate and upgrade along the value chain, reducing the need for skills further.i Capital has been giving the same warning and, as far as we can see, there has been no improvement since the Pakatan Harapan government came into power.



Whether she relies on foreign talent or local talent, Malaysia can only move ahead with a performance-based society. We do not see any signs of this happening. As Malaysia runs out of her precious natural resources, as her human resources dwindle away, lucky Malaysia is running out of luck. The Shared Prosperity Vision 2030 will be a Shared Poverty Vision. By 2030, “lucky” Malaysia may still have the same 7th prime minister. He will still weave an illusion of solving Malaysia’s problems, the very same he created many decades ago.




"As Malaysia runs out of her precious natural resources, as her human resources dwindle away, lucky Malaysia is running out of luck. The Shared Prosperity Vision 2030 will be a Shared Poverty Vision."


 




 




THE KLSE



The KLCI rose above 1,600. We are surprised and see very limited upside. i Capital revises its immediate-term outlook of the KLCI to a range of 1,500 to 1,615. i Capital retains its bearish short-term outlook at a range of 1,100 to 1,500. The bearish medium-term outlook of i Capital is retained with a target of 700/800. As i Capital has explained many times before, Malaysia faces a fluid and uncertain political landscape for the next 5 to 10 years, even after the 2018 general election. We are now even more convinced that this period will be a difficult but crucial phase for Malaysia as she approaches the point of no return. i Capital is retaining its long-term outlook as highly uncertain.


 



 

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Note from Publisher
Although India pulled out at the last minute, the 15-member Regional Comprehensive Economic Partnership (RCEP) agreement will be ready for signing next year. RCEP is a free trade agreement among the 10-member ASEAN, China, Japan, South Korea, Australia and New Zealand. It is to be the world’s largest free trade bloc. The 15 participating countries make up nearly a third of the world’s population and GDP. With the protectionist Trump administration terrorizing every country in the world with tariffs, a successful conclusion of RCEP is of utmost importance.

In addition, it is the first time that China, South Korea, and Japan are in the same free trade bloc, potentially paving the way for the illusive free trade agreement among the three East Asian economic powerhouses to be realized. i Capital has written many times about the immense potentials of a China-South Korea-Japan economic alliance. It would provide a real counter balance to the US and Europe, which have dominated the world since the first industrial revolution.

The world will definitely be more peaceful when no single super power is allowed to bulldoze its way through the rest of the world. Check and balance would promote justice, responsibility, and transparency.
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