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					          CHAPTER



           6
How do we get
       there?
How do we get
there?




                                                                                                CHAPTER 6
Malaysia needs urgent transformation. The        Malaysia’s economy must transform so
Malaysian economy needs to advance               that it becomes fundamentally capable of
and transform into one that is capable           achieving these goals and maintaining its
of delivering high income, of inclusively        position against other economies through its




                                                                                                How do we get there?
sharing the benefits from improved economic      capabilities and strengths. We can no longer
performance, and that is sustainable across      rely on our wealth from natural resources to
multiple dimensions of environment, society      mask our economy’s weaknesses and our
and economic stability.                          inability to generate sustained economic
                                                 growth.


        Figure 29 – The New Economic Model: Enablers and Strategic Reform Initiatives




                                                                                                109
      The NEM will power this profound                 More importantly, experience has shown that
      transformation. Malaysia is in a vicious         partial implementation of reform programmes
      circle of underperformance. Breaking that        usually leaves a country in a more vulnerable
      circle calls for a big push, not incremental     and unstable situation than if the programme
      change.                                          were not implemented at all. Given where
                                                       Malaysia finds itself at this juncture, failure
      For the NEM to succeed, political leadership     to act or to fully implement the needed
      must unite to break the logjam of vested         reforms is not an option.
      interests; it must overcome the scepticism
      and convince the rakyat that Malaysia is         For this reason, the NEAC has dwelt long
      indeed embarking on a path that will improve     and hard on the processes that would be
      their lives and those of generations to come     needed to make the NEM an effective
      (Figure 29).                                     mechanism for turning Malaysia into an
                                                       advanced nation. The NEM defines the
      The heart of the NEAC’s work will centre         eight SRIs to be undertaken by the ETP.
      on the design and implementation of policy       Implementing these initiatives, coupled with
      measures and requirements to deliver the         close monitoring and feedback to review
      objectives of the NEM. International as well     and adjust policy actions, will deliver the
      as Malaysia’s own experience demonstrate         desired objectives.
      that while it is relatively straightforward to
      identify Strategic Reform Initiatives and        6.1    Core enablers for the NEM
      develop their associated objectives, such
      ambitious programmes usually fail because        The most important enablers of the NEM are
      their implementation efforts cannot be           political will and leadership needed to break
      sustained.                                       the log-jam of resistance and preparing the
                                                       rakyat to support deep seated changes in
      Three factors may explain such failures. The     policy directions. With these enablers in place,
      first is insufficient buy-in by stakeholders     a ‘big push’ in policy actions and initiatives
      affected by the required reform measures         is needed to kick start the transformation
      because they were not engaged at the             process. The push must create enough
      policy formation stage. Secondly, reform         momentum to overcome resistance. Once
      programmes have often met with strong            reforms are started, continuous feedback
      resistance from powerful and vested interests,   is necessary to fine-tune policies and stay
      which subsequently forced their derailment.      on course.
      Lastly, the implementing authorities failed
      to stay the course, either due to a lack
      of political will or inherent administrative
      weaknesses.


110
6.1.1 Unwavering leadership and political           n	   Faster connectivity will facilitate further
      will                                               integration into global markets but requires
                                                         greater openness in the telecommunication




                                                                                                        CHAPTER 6
Political will and leadership requires that there        market
be an emphasis on a coherent explanation
of the vision and agenda of the NEM and             n	   Greater decentralisation in decision making
transformation process. This requires the path           will achieve speedier implementation and
of the NEM to be laid out in detail, including           effectiveness but may result in diluting
indications of where actions may negatively              federal government power
affect different segments of society. The aim
is to create an unstoppable wave of support         The government must take prompt action
from all segments of society for this vision.       and stay the course. Resistance is likely to




                                                                                                        How do we get there?
But to start this process, the government is        come from the business community including
aware that it must make extremely tough             protected industries, employers of foreign
decisions in order to meaningfully put in           labour, licence holders, beneficiaries of
place a critical mass of bold measures. The         subsidies, and experts at doing business
political leadership must be clear about the        the old way. Some segments of the rakyat
trade-offs involved in making some of these         who no longer qualify for government
tough decisions, for example:                       subsidies and grants might react strongly,
                                                    and those that have enjoyed secure jobs and
n	   Restoring market prices for goods and
                                                    a stable lifestyle from protected firms may
     services will improve economic efficiency
                                                    feel threatened. Both these groups might
     but may initially raise consumer prices
                                                    then turn to their political representatives
     and costs of doing business
                                                    and politicians may then attempt to lobby
n	   Practices that promote fair and equal          and water down the needed measures. The
     opportunity will inspire market confidence     resistance from these vested interest groups
     and create a competitive economy but           must be dealt with fairly and transparently,
     may lead to political repercussions            following genuine consultation.
n	   Reduced dependence on foreign labour
     encourages firms to move up the value          Each individual player will be tempted to look
     chain or embrace automation while those        at the NEM from the perspective of ‘winners’
     that cannot will exit, costing some local      or ‘losers’. For this reason it is important to
     jobs                                           clearly communicate the vision of the NEM to
                                                    bring everyone on board. Through effective
n	   Flexible hiring and firing reduces entry
                                                    campaigns and consultations, individuals
     and exit costs for businesses while wage
                                                    and firms must be made to appreciate the
     levels will better reflect skills; but the
                                                    benefits that would accrue to them over the
     perception of less job security will irk
                                                    coming period and not just focus on the
     unions

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      possible negative effects on their immediate      the ETP. The NEAC will be fully involved
      well-being. In this regard, it is important to    in drawing up an execution framework in
      explain that the NEM will put in a stronger       collaboration with the respective implementing
      and more comprehensive social safety net          authorities.
      to mitigate the negative effects.
                                                        Political and intellectual leadership must
      The NEAC assigns a large measure of               demonstrate the necessary commitment to
      importance to the government’s proper             the NEM. Public communication must be
      management of the political situation. Peace      compelling and convincing on why change
      and harmony must be preserved in Malaysia         is urgently needed. At the same time, the
      in the midst of the likely disruptions from       NEM must have both rational and emotional
      the NEM. This might involve not only close        resonance with the rakyat, and must clearly
      consultations within the political partners of    articulate their roles in the transformation
      the government but also conscious efforts to      process.
      forge bipartisan interaction. Special efforts
      must be devoted to explaining the impact of       But even as public communication proceeds,
      the NEM to the international audience. This       the same team tasked with monitoring the
      will help to portray Malaysia in a favourable     implementation of the ETP must put in
      light abroad and generate a positive perception   place a rigorous technical process to gather
      of the country among potential investors.         information for reporting on the progress of
                                                        the ETP to all stakeholders.
      Above all, the government must put in
      place a strong team made up of technical          We envision a constant process of feedback
      experts and other professionals who will be       and adaptation to changes in the Malaysian
      empowered to monitor the implementation           economy. We anticipate responses from
      of the ETP, interact in close consultations       the population. At the same time, it will be
      with the rakyat, and manage the fallout from      important to remain steadfast on the goal
      resistance of vested interests.                   of transforming Malaysia into an advanced
                                                        nation.
      6.1.2 Getting the rakyat to drive change
            together                                    Engagement with all stakeholders is important
                                                        for two reasons: first, to foster buy-in through
      Garnering the support of stakeholders and         clear communication; and second, to see
      ordinary Malaysians for the NEM is a political    refinement and improvement in policy actions.
      process, one best understood by the political     At the same time, the political and intellectual
      leadership. However, the NEAC envisions           leadership must continue to be at the forefront
      a number of critical steps in this national       of this transformation process.
      engagement to prepare for and to implement


112
6.1.3 A ‘big push’ of synchronised policy          implementation effectiveness and allow
      measures and initiatives                     for adjustment measures. Often, while a
                                                   policy or strategy is being implemented, the




                                                                                                     CHAPTER 6
With the leadership and rakyat on board, a         circumstances for achieving the objectives
big push of new policies must be announced.        may have changed and rendered earlier
This big push would consist of a critical          policy actions less viable. Without a formal
mass of policy measures supporting the             feedback mechanism, policy adjustments
SRIs. Due to the cross-cutting nature of the       may become ad hoc and uncoordinated,
Strategic Reform Initiatives, the sequencing       resulting in diffused implementation with
of policy actions is crucial for achieving         little accountability and limited channels
impact and results. Some policy actions            with which to address public complaints.
could be immediately implemented. Others           The result is reform failure, which in turn




                                                                                                     How do we get there?
may be introduced at a later date because          affects credibility and gives rise to questions
they require a longer preparation period.          about accountability of the implementing
However, this preparation must commence            institution.
immediately.
                                                   Given an ever-changing environment and
Piecemeal and incoherent introduction of policy    the growing bottom-up trend in governance,
would be inconsistent with the cross-cutting       the ETP must have a rigorous feedback
nature of the SRIs. The policy measures            mechanism to monitor its progress, its
supporting these SRIs must move in tandem          acceptability by the public as well as the
to deliver high income in an inclusive and         need for adjustment and fine-tuning. This
sustainable manner.                                view implies that while the goals of a high
                                                   income, inclusive and sustainable nation
A big push event will leave a lasting impression   remain unchanged, the means and tools for
and foster buy-in. Without a big push, the         achieving these goals need to be aligned
task of monitoring and the benefits of a           with practical realities and changing times.
feedback mechanism run the risks of being
compromised. This may eventually lead to           6.2    Managing adjustments – Aligning old
implementation fatigue and, ultimately, derail            expectations to the new reality
the NEM.
                                                   The NEM paves the way for more opportunities
6.1.4 Measuring our performance and                for advancement across the spectrum
      adjusting as we go                           of society, especially the private sector.
                                                   Nevertheless, the path forward also requires
Most reform efforts have strategies and            major adjustments producing both winners
implementation plans but often lack a              and losers. Losers will be those firms whose
rigorous feedback mechanism to assess              viability depended on subsidised commodities,


                                                                                                     113
      notably energy and those with privileged          do not impede requisite reforms. Moreover,
      access to controlled imports or contracts.        by allowing firms and households to seek
      These firms and individuals will have to          higher but often riskier economic returns
      cope with the new market realities. Many          and reducing the need for precautionary
      companies will either have to restructure         savings, such programmes help spur a more
      or be phased out. Workers in these firms          dynamic economy. The general objective is
      may need to find other positions and in the       to build a more competitive but also more
      process retool their skills to become more        compassionate society. With a well structured
      employable. Moreover rapid growth is often        social safety net, economic reforms become
      spatially unbalanced with some regions            politically more acceptable, thus improving
      benefiting more than others – increasing          the chances of effecting real change.
      pressures for social services to rectify
      differing regional needs.                         Building a stronger safety net is urgent

      Globalisation also has increased the stakes       Malaysia’s social protection system, as
      for each country to have efficient labour         in many Asian countries, is still evolving.
      markets. Rapid technological progress, trade      While it is relatively well-developed, there
      in goods, mobility of labour, and international   are major gaps and inefficiencies. Poverty is
      sourcing of services have combined to create      less widespread but there remain selective,
      new openings for economic players and a           vulnerable groups and pockets of intractable
      more integrated global market for labour.         poverty. Inequality remains a pressing issue.
      The impact is tempered by differences in          Despite substantial subsidies available to
      skills, technology, and know-how available        the population, the disadvantaged are still
      to workers. Although globalisation widens         not getting access. Safeguards are needed
      the breadth of export markets and improves        to protect individuals from catastrophic
      access to a wider range of cheaper imported       outcomes and to soften income shocks for
      products (thereby boosting productivity and       the most vulnerable. Some have suggested
      average living standards), it can also impose     that a formal minimum wage might be helpful
      adjustment costs on certain groups within         to cushion workers against such shocks or
      countries, primarily by influencing wages         downturns. The NEAC strongly believes
      and job security, and triggering the need         this would be a wrong approach and in fact
      for retraining.                                   could exacerbate the situation by reducing
                                                        competitiveness and reducing employment
      To cushion these adjustment costs, some           opportunities.
      phasing of the reforms may be advisable, but
      experience has shown that reforms which are       Existing weaknesses in the social safety net
      carried out too slowly are often ineffective or   need to be addressed. An evaluation of the
      even reversed. Thus it is far better to have      current social safety net raises a number of
      in place social protection systems which can      these issues:
      cushion adjustment costs but in ways which

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n	   The portion of social spending targeting      n	   Labour markets also need to minimise
     poor households is quite limited;                  the costs of job loss and associated
                                                        risks. The international experience is that
n	   Targeting criteria should be refined to




                                                                                                      CHAPTER 6
                                                        effective unemployment insurance can
     achieve more equitable and consistent
                                                        provide a short-term solution and usually
     outcomes; and
                                                        does a better job than strict reliance on
n	   The structure of systems and programmes            severance payments.
     differs across agencies and needs to be
     made more consistent.                         Training programmes can help but need to be
                                                   linked to market demand. During adjustment
More generally to overcome obstacles to            periods, revamped training programmes are
subsidy reform, social assistance programmes       often helpful in enhancing employability in
will have to be more efficiently structured. An    a shifting labour market.




                                                                                                      How do we get there?
important step in the government’s reform
effort should be to catalog all existing social    Is a special transformation fund needed?
assistance programmes to identify their
policy objectives, eligibility criteria, benefit   Financing costs for augmented social safety
structure, administrative costs, and target        nets and related needs will be significant
beneficiaries. To improve targeting, proxy         in the coming years, especially for new
measures of a household’s consumption              initiatives, such as unemployment insurance
per capita could be constructed to create          or revamped welfare programmes. Some
better means-test benefits. Other measures         options can be designed with built-in partial
could be implemented to avoid the current          or full cost recovery mechanisms – such
vertical inequity in the system by gradually       as with firm or employee contributions for
phasing out eligibility and reducing horizontal    insurance or training. But these funding
inequity by restructuring certain benefits to      mechanisms will not be enough.
make them less lumpy.
                                                   A special transformation fund may be needed
Making labour markets more efficient is part       to cover the additional but often temporary
of the solution                                    costs involved. Malaysia’s fiscal situation will
                                                   be tight in the coming years as the stimulus
Pressures on the social safety net are reduced     programme is phased out and budgetary
if the labour market functions well:               deficits are scaled back to more sustainable
n	   In an efficient labour market, workers        levels. Within a tighter fiscal envelope, a
     are likely to find jobs quickly that match    transformation fund, designed like a special
     their skills. At the same time, upward        “holding account” to support the cushioning
     movements in wages must not outstrip          of adjustment costs, would provide tangible
     labour productivity, otherwise no firm        recognition of the government’s intent to
     could survive.                                foster more inclusive outcomes. This holding


                                                                                                      115
      account or fund would initially be the recipient   2. Inspiring the workforce to draw out their
      of the potentially large savings which would          best. Labour markets must work well: jobs
      arise from cutting back wasteful subsidies,           and workers must be matched efficiently
      such as those for energy and food products,           to increase productivity and thus raise
      and rationalising other public expenditure            wages for all. Labour market adjustment
      programmes.                                           must be smooth: the right workers
                                                            need quickly to find the right jobs; the
      6.3    A close look at the Strategic Reform           right jobs must rapidly attract the right
             Initiatives                                    workers, including those from abroad.
                                                            Simultaneously, Malaysia’s talent base
      The NEAC believes that it is critical to              must improve. A quality education system
      seek stakeholder buy-in of the detailed               which nurtures skilled, inquisitive, and
      implementation plans for each of the Strategic        innovative workers to continuously drive
      Reform Initiatives (SRIs). At this time, the          productivity forward is the foundation of
      NEAC only sets forth the broad parameters             sustained economic growth. High income
      under each SRI, which over the coming period          emanates from skilled people applying
      will be further refined following consultations       their talents to successfully meet the
      and engagement with all stakeholders.                 economic challenges faced by society.
                                                            Malaysia cannot miss the opportunity to
      We have identified eight SRIs at the core             put its most valuable resource to work.
      of the ETP. The NEAC fully recognises                 Therefore, Malaysia must remove barriers
      that many of the policy measures derived              preventing its brightest people from gaining
      from the SRIs are either being planned or             skills, while enticing these gifted people
      have been initiated by the government. The            to remain within its borders.
      NEAC recommendations aim to add value by
      augmenting and supplementing ongoing policy        3. Vibrant markets and greater choices.
      work. These initiatives are as follows:               Many distortions would be removed and
                                                            the economy will experience greater
      1. Firing up the private sector. The private          competitiveness from the elimination of
         sector needs to step up and assume                 subsidies, price controls and a myriad of
         a heightened profile in the nation’s               incentives which have lost their original
         transformation. Throughout recorded                objectives. The ETP will help individuals
         history, economies have experienced                and firms to cushion the impact of such
         self-sustained, long-term growth primarily         a bold measure by putting in place an
         through the entrepreneurial initiatives of         enhanced social safety net and a special
         the private sector, guided by economic             transformation fund.
         incentives which encourage individuals
         to take the long view and refrain from          4. A lean and customer-focussed government.
         short-term opportunism.                            Public institutions must be re-engineered.


116
   Public institutions must not duplicate          6. Innovating today for a better tomorrow.
   functions better provided by the private           Economic transformation in the industrial,
   sector but instead should seek to                  agricultural and services sectors is a




                                                                                                    CHAPTER 6
   undertake those tasks that the private             process requiring continuous innovation
   sector cannot perform. The delivery of             and productivity growth with significant
   government services must be efficient and          technological advancement and
   effective, using a ‘whole of government’           entrepreneurial drive. The adoption of
   approach to facilitate the operations of           processes in line with best practices and
   the private sector. Fiscal management              international standards will improve the
   must be strengthened to include greater            chances for Malaysian firms to succeed
   transparency and to provide the right              in the global market place.
   incentives. The government’s revenue




                                                                                                    How do we get there?
   base must be diversified and expenditure        7. Finding the economic sweet spots.
   streamlined to foster better utilisation of        Malaysia must build on its strategic
   revenue.                                           location together with the comparative
                                                      advantages arising from its natural
5. Escaping low income. A key component               resource endowment to establish
   of inclusiveness is the fostering of equal         production platforms which drive high
   and fair economic opportunities. Existing          value added growth with spillover effects.
   affirmative action programmes and                  There must be a focus on economies of
   institutions will continue in the NEM but, in      scale through growth corridors to energise
   line with views of the main stakeholders,          promising expansions into new markets
   will be revamped to remove the rent                such as downstream agricultural outputs,
   seeking and market distorting features             eco-tourism, alternative energy generation
   which have blemished the effectiveness             and climate change mitigation.
   of the programme. Affirmative action
   will consider all ethnic groups fairly and      8. The future is bright. The future is
   equally as long as they are in the low             Malaysia. Preserving our natural resources
   income 40% of households. Affirmative              and safeguarding the interest of future
   action programmes would be based on                generations must be facilitated by applying
   market-friendly and market-based criteria          appropriate pricing, regulatory and
   together taking into consideration the             strategic policies to manage non-renewable
   needs and merits of the applicants. An             resources efficiently. Sustainability of
   Equal Opportunities Commission will                public finances through stringent fiscal
   be established to ensure fairness and              discipline, which necessitates reduction
   address undue discrimination when                  of wastage and cost overruns, is the
   occasional abuses by dominant groups               cornerstone to maintaining macroeconomic
   are encountered.                                   balance and financial stability.


                                                                                                    117
      Active management of policies supporting            both domestic and foreign sources, would
      the SRIs is essential through a continuous          experience a revival because investors would
      feedback mechanism that allows for the              be confident that they will benefit from a
      timely adoption of corrective actions as            stable, productive environment supported
      required. Many additional benefits flow from        by efficient public institutions and highly-
      this confluence of changes. Investment, from        capable workers.

      6.3.1 SRI 1: Re-energising the private sector to drive growth

                                Table 13 – Firing up the private sector

        Policy Purpose                               Possible Policy Measures
       Target high value     n	Align  incentives to foster investment in high value added activities
       added product             which generate spill-over effects
       and services
                             n	Tailor    incentives to meet the needs of each firm
                                        FDI and DDI in emerging industries/sectors
                             n	Facilitate
       Remove barriers       n	Remove distortions in regulation and licensing, including replacement
       and cost to doing       of Approved Permit system with a negative list of imports
       business
                             n	Introduce a ‘Single-Window’ licensing process through e-Government
                                 portals to include local and state governments

       Create eco-           n	Reduce      direct state participation in the economy
       system for
                             n	Divest    GLCs in industries where the private sector is operating
       entrepreneurship
                                 effectively
       and innovation
                             n	Economy-wide       broadband roll-out
                             n	Ensure GLCs operate on a strict commercial basis free of government
                               interference
       Encourage             n	Implement efficient and transparent process for government
       efficiency              procurement at all levels
       through healthy
                             n	Level   the playing field for the private sector through transparent
       competition
                                 standard settings
                             n	Support     a stronger competitive environment with competition law
       Promote SME           n	Provide     support for SMEs in innovative and technologically advanced
       growth                    areas
                                       timely access to funding for business activities
                             n	Facilitate
       Creating regional     n	Encourage GLC partnerships with private-sector companies
       champions
                             n	Pursue    aggressive regional networking – ASEAN, China, India,
                                 Middle East
                             n	Improve     leverage of FTAs

118
Raising the private sector profile is a bold         The NEM calls for several actions to raise
attempt to redefine the relationship between         the profile of the private sector and to make
the government and the private sector.               Malaysia globally competitive for investors.




                                                                                                       CHAPTER 6
The government will encourage the private            These actions seek to: (i) reform the complex
sector to take the lead in identifying areas         array of incentives made available to the
of future growth. The government will no             private sector; (ii) boost private investment
longer compensate the private sector for all         through improving the business environment
the risks it takes or provide incentives simply      by removing distortions and the high costs
for doing normal business. Instead it will           of doing business; and (iii) rebalance the
try to reduce the level of risk by providing         roles of the public and private sectors, giving
the private sector with a stable, rules-based        greater prominence to private firms.
business-friendly environment.




                                                                                                       How do we get there?
                                                     Rationalising business incentives
The thrust of the proposals under the NEM
serves to address several realities of the           The old business model used tax incentives
current situation:                                   to spur private investment, which over time
                                                     has grown in variety. Government proactively
n	   Distortions and other barriers in the           sought to affect the level and direction of
     economy have resulted in an elevated            domestic and foreign private investment
     cost for doing business in Malaysia, and        by the use of tax incentives, special zones
     this is reflected in the very low levels of     and other preferences. These strategies
     private investment.                             worked well in the past but they are now
                                                     ineffective and insufficient for generating
n	   A recognition that vested interests in the
                                                     higher income.
     private sector have become powerful
     forces seeking to maintain the status
                                                     Private investors have become dependent on
     quo of concentration in low value added
                                                     incentives as a major driver of profitability.
     output.
                                                     This is not sustainable. Under the NEM,
n	   A need for a big push to reinvigorate a         these incentives will be consolidated and
     private sector that appears to be losing        rationalised to focus more on the new
     its dynamism and willingness to invest,         priorities of the economy. Fiscal and other
     innovate and take risk.                         incentives for low value added industry and
                                                     services will be phased out and not renewed.
n	   A desire to encourage labour to realise
                                                     The Approved Permit (AP) system will be
     their full potential to add value to society,
                                                     replaced by a negative list of imports. A
     not to divert efforts to protect jobs in
                                                     dynamic ecosystem for entrepreneurship and
     outmoded businesses or in the public
                                                     innovation will be created, where priorities
     sector.
                                                     for incentives will focus on firms developing


                                                                                                       119
      high-value activities with spill-over benefits    competing with each other within the same
      to the rest of the economy. They rely on          location. Firms in such clusters are less
      attracting innovative firms that introduce new    prone to move to new locations abroad.
      business products, processes and techniques
      to Malaysia in a transparent way. Often these     The NEM focus will be on new firms, which
      firms are new start-ups. They require grants      will likely be SMEs. Those firms investing
      and matching funds for specific start-up costs,   in innovative and technologically advanced
      unlike traditional investors who exclusively      production and services with spill-over effects
      sought tax incentives.                            across economic sectors will be supported
                                                        by the government. Such new start-ups
      Creating a conducive environment for private      will need help with specific problems,
      investment                                        especially distortions and restrictions in the
                                                        licensing and regulatory environment. To
      The logic of providing good infrastructure        ease such problems, the Malaysian Industrial
      and logistics in industrial zones in order        Development Authority (MIDA) should be
      to attract multinational export activities has    empowered to take decisions and coordinate
      brought many international firms to Malaysia,     among the many government departments
      including major players in the E&E industry.      to facilitate start-ups and licensing. It must
      But this approach is not enough to encourage      become a real and effective one-stop agency,
      such firms to move to higher value added          not only one in name and aspiration.
      activities within Malaysia. At the same time,
      many firms, especially those engaged in           Rebalancing public-private sector role
      assembly operations, are gradually moving
      offshore to cheaper regional competitors,         Malaysia’s economic development has been
      as distortions and barriers in Malaysia drive     heavily influenced by the government. The
      up costs. Malaysian industry is otherwise at      government, through GLCs, has directly
      risk of becoming hollowed out.                    championed growth of some sectors. The
                                                        sectors in which government companies
      Many manufacturing firms in Malaysia have         dominate have shown the lowest rates of
      the potential for moving to higher value added    growth of productivity in recent years. Public
      products and services in R&D, design, testing,    investment has become larger than private
      global procurement and other areas. As a          investment. The private sector’s role has
      chief executive of a Malaysia-based foreign       receded. This trend must be reversed if the
      firm has remarked, “We came for low cost          private sector is to be the engine of growth
      labour, we stayed for talent”. Such firms         to high income status.
      should be encouraged to stay and move
      up the value chain into new activities. The       GLCs dominate many sectors in Malaysia.
      NEM approach is to form clusters of firms         The government as both business owner
      that find opportunities in collaborating and      and regulator of industries faces conflicts of


120
interest that can result in decisions which      nurturing healthy private sector competition.
give GLCs an unfair advantage over private       A dynamic ecosystem for entrepreneurship
firms. This effect discourages new private       and innovation will be created.




                                                                                                   CHAPTER 6
investment in market segments where GLCs
are strong. Such market segments could           In sectors where the private sector is
well be the ones which could attract private     operating effectively, GLCs will be privatised.
investment in high value added products          Remaining GLCs will be required to operate
and services.                                    on a commercial basis free of government
                                                 interference and without government
A more competitive environment can be            preferential treatment. The government will
facilitated by legislation. The proposed Fair    not seek to use its regulatory powers to
Trade Practices Act will be the first step       protect GLCs from competition by the private
in establishing an explicit competition law.     sector. Instead, it will encourage competition




                                                                                                   How do we get there?
This Act is the culmination of five years        from all quarters, secure in its belief that
of consultation on state ownership, on the       competition will only encourage firms in both
treatment of GLCs and on other competition       the public and private sectors to improve
issues. This change would demonstrate            their efficiency and provide new value added
the government’s commitment to raise the         services. Reduced direct participation of
profile of the private sector. A Competition     government in the economy would minimise
Commission to be established thereafter          the crowding out of the private sector.
will be able to uphold a level playing field
and fair business environment. In addition,      Competition aside, there is room for GLCs
government will review all regulatory and        to partner more effectively with the private
licensing requirements with the objective        sector. In particular, collaboration between
of allowing greater flexibility and removing     GLCs and domestic companies could take
barriers resulting in additional financial and   advantage of scale economies and symbiotic
time costs. Regulation must be streamlined       networking, and could be especially worthwhile
and proportionate while being transparent.       when they venture abroad. This outcome would
Regulatory bodies charged with oversight must    be positive for turning Malaysian companies
be supportive of industry and contribute to      into regional and global champions.




                                                                                                   121
      Box 2: Targeted actions needed for micro-enterprises and SMEs



      Actions to re-energise the private sector must be accompanied by programmes which are based on needs
      and merit, and which build up the bottom segments of the domestic private sector. Some common problems
      faced by these segments, and the possible approaches to tackling the problems, can be found in Appendix
      3.

      Both informal businesses and micro-enterprises are at the bottom of the economic pyramid and likely
      constitute enterprises, existing and potential, that reside among the bottom 40% of income earners. These
      segments include the rural population and also those who migrate from the rural to the urban environment
      seeking to better their lives. It also includes the wide range of women in the rural and urban areas who seek
      work opportunities. These are motivated individuals who, but for the lack of knowing how, wish to better their
      lot in life.
      While there are some 30 government programmes to help the micro-enterprises and SME segments, the
      effectiveness of the outreach for the bottom 40% of the economic pyramid is wanting. It requires greater
      awareness of their needs and facilitation to bring them to the table of opportunities.

      While not exactly at the bottom of the economic pyramid, SMEs – accounting for 35% of GDP, 57% of
      total employment, and 20% of exports – should be given more support and assistance as well. Many SME
      operations remain low-tech and exhibit low growth rates – due to lack of capital, lack of entrepreneurial skills
      and management capacity, and high illiteracy rates.




122
6.3.2 SRI 2: Developing a quality workforce and reducing dependency on foreign
      labour




                                                                                                     CHAPTER 6
                    Table 14 - Inspiring the workforce to draw out their best


   Policy Purpose                               Possible Policy Measures

 Increase local           „	 Review the education system – shift educational approach from
 talent over time            ‘rote learning’ to ‘creative and critical thinking’
                          „	 Increase emphasis on reintroducing technical and vocational training
                             colleges
                          „	 Identify and nurture talent through a demand-driven process




                                                                                                     How do we get there?
                          „	 Improve autonomy and accountability of educational institutions
                          „	 Encourage R&D collaboration between institutes of higher learning
                             and industry
                          „	 Enhance English language proficiency
                          „	 Deliver high quality education, within reach of all localities

 Re-skill the             „	 Upgrade skills of the bottom segment of the Malaysian labour force
 existing the labour         through continuing education and training
 force
                          „	 Establish a labour safety-net for displaced workers
                          „	 Industry to partner with government in encouraging ‘Continuous
                             Employment Training’ (CET)
                          „	 Formalise international quality standards and certification of skills
                          „	 Allow wage levels to be reflective of the skill level

 Retain and Access        „	 Review existing programmes to attract highly-skilled Malaysians
 global talent               overseas to return home
                          „	 Offer permanent residence for ex-Malaysians and their families
                          „	 Centralise oversight of foreign labour and expatriates to enable
                             coherent practice
                          „	 Build up critical mass of skilled professionals through simpler work
                             permit and immigration procedures
                          „	 Liberalise professional services through mutual recognition
                             arrangements



                                                                                                     123
         Policy Purpose                                Possible Policy Measures

       Remove labour           „	 Protect workers, not jobs, through a stronger safety net, while
       market distortions         encouraging labour market flexibility
       constraining wage
                               „	 Revise legal and institutional framework to facilitate hiring and
       growth
                                  firing

                               „	 Raise pay through productivity gains, not regulation of wages

       Reduce reliance on      „	 Enforce equal labour standards for local and foreign labour
       foreign labour
                               „	 Use a levy system to achieve targets for unskilled foreign labour in
                                  line with sectoral needs


      Education driven by growth priorities                A more flexible and autonomous environment,
                                                           backed by a strong research culture and
      Malaysia’s future education system must              funding at all levels of education, is conducive
      be driven by national growth priorities to           to innovation and creativity. This environment
      nurture the talent needed for an advanced            must be supported by a sustainable, critical
      nation, while at the same time, serve as the         mass of talent. Many universities in developed
      platform to imbue national unity. The national       economies have engaged entrepreneurs
      schools should become the schools of choice          through setting up incubator laboratories and
      where students of all races can interact             ‘technology transfer’ offices. In this regard,
      freely. The education system should focus            although Malaysia’s allocation for education
      on achieving international quality standards         has been large, its R&D spending is well
      by adopting best practices. A creative and           below that of our neighbouring countries.
      critical thinking pedagogical approach should        Promoting the growth of knowledge and
      replaced ingrained outmoded practices of rote        innovation parks with links to local universities
      learning processes. Students should have             is one way to boost R&D investment.
      strong language competencies especially
      in English. The education system should              A key indicator of success of the concentrated
      take into consideration industry needs and           efforts to strengthen education will be when
      produce students with the requisite skills.          firms no longer cite shortages of skilled
      Building the national talent base will need to       workers as a key adverse feature of the
      cover the entire education system – involving        investment climate. Today we have the worst
      primary, secondary, vocational and technical         of both worlds, as the education system
      as well as tertiary education.                       has been unable to produce the requisite
                                                           talent and the labour market is ineffective in
                                                           conveying information on the type, quantity
                                                           and quality of skills needed for employers.


124
Training and reskilling the labour force         upgrade themselves through continuing
                                                 education and training (life-long learning).
Besides the provision of education, training     The government should facilitate the




                                                                                                   CHAPTER 6
and the reskilling of workers to take on         establishment of a joint council between
higher value jobs are an integral part of        employer and employee representatives to
expanding the national talent base. In           expand continuing education and training. At
particular, the skills of the lower segment of   the same time all stakeholders should agree
the Malaysian working population must be         on the standardisation of competency levels
upgraded through life-long learning. When        so that skilled workers can become more
this goal is achieved, Malaysia can reach its    productive. Upon completion of training, the
full potential as a high income and advanced     new skills acquired should be recognised
country. It is estimated that some 60% of        by employers in the form of better wages,




                                                                                                   How do we get there?
the Malaysian population or about 80% of         which would help with staff retention. In
the Malaysian workforce have education           addition, wage increases should be based
only up to SPM level or equivalent. This         on productivity gains reflecting skill levels,
relatively low level of educational attainment   not on the regulation of wages.
is a major barrier to leveraging on human
capital as the key factor to spur growth.        Retaining and attracting global talent
Therefore, it is imperative to improve access
to quality training and reskilling courses,      The government and private sector must
especially in rural areas and marginalised       work together to improve the conditions
urban centres, with the objective of meeting     that are driving Malaysian and expatriate
the needs of industry. More technical and        talent to locate abroad. This effort should
vocational schools should be built to cater      be complemented by a review of existing
for the non-academically inclined students.      programmes to attract high skilled Malaysians
                                                 overseas to return home and to attract
Training and skills development is key to        foreign talent. A key consideration drawn
expanding the talent base as it allows workers   from lessons of other high income countries
to undergo a continuous improvement,             is the offer of permanent residence to these
particularly those that may be displaced         workers and their families, including ex-
from low value added jobs in the course of       Malaysians. Better management of talents
the economic transformation. By supporting       will require a centralisation of oversight over
training programmes undertaken jointly with      foreign labour and expatriates to enable a
the private sector, the government will ensure   coherent practice. To facilitate a move up
that the skills mix meets industry needs.        the value chain there needs to be a build-
                                                 up of a critical mass of skilled professionals
Employees should be provided with incentives     through simpler work permit and immigration
including those from the government to           procedures.


                                                                                                   125
      Greater use of foreign talent will increase         usually foreign labour. There are also serious
      demand for Malaysians with similar                  problems with the mix of skills available.
      qualifications and send strong signals for          In some sectors, workers are performing
      nationals to upgrade their skills. The end          tasks that do not match their training. In
      result of an aggressive policy to tap global        others, many positions remain vacant due
      and domestic talent coupled with better             to lack of qualified candidates. When faced
      managed inflows of the semi-skilled would           with a skill shortage, a firm should be able
                                                          to either hire expatriates or retrain existing
      be a virtuous cycle that would maintain
                                                          workers. However, retraining workers can
      profits, encourage higher productivity activities
                                                          be costly. At the same time, Malaysia has
      and pave the way for more robust future
                                                          lost its attractiveness to expatriates due
      increases in wages.
                                                          to cumbersome immigration policies. Even
                                                          programmes to encourage skilled Malaysians
      Another barrier that has to be addressed is         to return home have failed to meet their
      the regulation of professional associations         targets.
      which prohibit domestic employment of foreign
      professionals. This is a critical issue since       Excessive use of foreign labour undermines
      Malaysia’s policies are unusually restrictive       high income objective
      compared with other East Asian countries.
      Without substantial inflows of foreign talent,      Up to the late 1990s, inflows of foreign
      firms do not have the incentive to move up          workers served the country well in moving
      the value chain but still have to cope with         from low to middle income status. Since then,
      wage cost pressures.                                Malaysia’s policies on foreign workers have
                                                          become incoherent and run counter to the
      Removing labour market distortions                  national objective of achieving high income
                                                          status. Firms’ obsession with the pursuit of
      The labour market does not perform well             short-term profits makes them focus solely on
                                                          keeping costs down. This obsession makes
      in Malaysia. There are insufficient high
                                                          them prefer to tap into the large pool of
      wage jobs and skilled labour is not well
                                                          low cost workers available in neighbouring
      remunerated. Use of low wage foreign labour
                                                          countries, leading to excessive use of foreign
      has become excessive, contributing to low
                                                          labour in Malaysia (Figure 31).
      wage levels. Rigid labour laws inflate dismissal
      costs, reducing incentives to invest in new         Government policies should work to correct
      businesses and pay higher wages.                    the excessive use of foreign labour in ways
                                                          which would enhance Malaysia’s longer-
      Due to outdated regulatory burdens on the           term growth objectives rather than feed
      hiring and firing of local workers (Figure          into the short-term cost considerations of
      30), firms become overstaffed because it is         firms. Existing policies, however, are doing
      costly to shed labour or they seek to avoid         the exact opposite. Foreign workers are
      such burdens by using contractual staff –           not subject to the same labour standards

126
                 Figure 30 – Hiring and firing index (1=Rigid, 7=Flexible)




                                                                                                CHAPTER 6
                                                                                                How do we get there?
            Source: World Bank

as nationals. Foreign workers have access       Reports of firms recruiting foreign workers
to social services like health but the cost     for jobs which do not exist is one glaring
is borne by the government. Thus, they are      example.
less costly to hire than nationals – giving
foreign workers an unintended advantage         Reforms should begin with rationalising
in the domestic labour market.                  the use of the levy mechanism, subjecting
                                                foreign workers to the same labour standards,
Moreover, the large differential in wages       granting them access to a comparable social
between Malaysia and labour-originating         service as nationals. It would also address
countries has created a recruitment and         international concerns about Malaysia’s poor
outsourcing industry that thrives on rent-      treatment of foreign workers. A more rational
seeking. Recruitment fees now generate          system of levies and the utilisation of the
huge profits for private agencies, which in     proceeds to fund social services for migrant
turn spawns a range of abusive practices.       workers would address equity concerns. In

      Figure 31 – Inflows of low skilled foreign workers and outflows of expatriates




             Source: World Bank


                                                                                                127
      addition, funds could be used to finance             disability and old age. A stronger safety
      programmes that drive innovative practices           net would provide support to cushion the
      among Malaysian firms, thus reinforcing              adjustment costs for employees and facilitate
      pressure to move up the value chain.                 the restructuring of firms. Current weaknesses
                                                           include the absence of unemployment
      Stronger safety net for the unemployed               insurance, limitations in the eligibility and
      needed                                               adequacy of the EPF, as well as the narrow
                                                           reach of health insurance programmes for
      Before hiring and firing is made more flexible       the poor. While strengthening such services
      across the board, the safety net for the             could be costly, the problem can be eased
      unemployed must be strengthened. The current         through improved targeting and reduced
      system does not protect workers from the             fragmentation of services across multiple
      risks associated with unemployment, illnesses,       agencies and levels of government.


      6.3.3 SRI 3: Creating a competitive domestic economy

                             Table 15 - Vibrant markets and greater choices

         Policy Purpose                                Possible Policy Measures

       Improve economic        n	   Strengthen the competitive environment by introducing fair trade
       efficiency through           legislation
       competition             n	   Improve competition law to safeguard the interest of domestic firms
                                    before liberalisation of sectors to foreign firms
                               n	   Set up an Equal Opportunity Commission to cover discriminatory
                                    and unfair practices
                               n	   Review remaining entry restrictions in products and services
                                    sectors
                               n	   Adoption of international best practices and standards for local
                                    industries to become highly competitive

       Build                   n	 Revamp the seed and venture capital funds to support budding
       entrepreneurship           entrepreneurs
                               n	 Simplify bankruptcy laws pertaining to companies and individuals to
                                  promote vibrant entrepreneurship
                               n	 Provide financial and technical support for SMEs and micro
                                  businesses, to move them up the value chain

       Remove market           n	 Phase out price controls and subsidies that distort markets for goods
       distortions leading        and services
       to misallocation of     n	 Apply government savings to a wider social safety net for the bottom
       resources                  40% of households, prior to subsidy removal
                               n	 Create a Transformation Fund to assist distressed firms during the
                                  reform period


128
Substantial financial resources are being         and expensive to administer. Such support
allocated to subsidies – the bulk of which        by the public sector to the private sector
goes to petroleum products – representing         is not leading to innovation and high levels
a considerable burden to the government.          of private investment. As a result, domestic
Subsidies for fuel and various price-controlled   and foreign investors have a vested interest
items account for a large part of the             in maintaining low value added production.
government’s operating expenditure and            Adding to that burden are the numerous




                                                                                                      CHAPTER 6
contribute to rising fiscal deficit. The large    tax incentives granted by the government.
government outlay on subsidies – mostly           While tax incentives are necessary measures
funded by petroleum proceeds – is not             to encourage private investment, they
sustainable. The pricing of essential goods       contribute to foregone tax revenue if used
and services in Malaysia does not reflect         indiscriminately.
market prices. Price controls and subsidies
distort price signals, often resulting in         The NEM recommends a steady removal
overconsumption and waste.                        of subsidies and price controls, with a
                                                  rationalisation of tax incentives. Removing




                                                                                                      How do we get there?
Globally, prices are constantly rising, making    subsidies and price controls can reduce
subsidies and price-controlled items more         operating expenditures over time and restore
costly. The subsidies were meant to support       a better balance to fiscal deficits. Furthermore,
the vulnerable groups but it has benefited        savings from the removal of subsidies will
a wider group, including the well off. It is      be used to fund a social safety net scheme
time for a more targeted approach of direct       targeted at beneficiaries from poor households
financial assistance for the poor rather than     and vulnerable groups. This savings can
broad based subsidies which often are of          also be applied to a Transformation Fund to
most benefit to the well-off, who consume         help firms displaced by the reforms to adjust
more of the subsidised goods.                     to the new market environment. With this
                                                  solution, price distortions will be removed,
At the same time, the private sector is           allowing for the restoration of market signals
becoming ever more reliant on government          to regularise the demand and supply of
subsidies which are numerous, complex             products previously controlled.




                                                                                                      129
      6.3.4 SRI 4: Strengthening the public sector

                          Table 16 - A lean and customer-focussed government

        Policy Purpose                                 Possible Policy Measures

       Improve decision-      n	Use   “whole-of-government” approach to provide integrated services
       making processes
                              n	Empower        state and local entities to perform their tasks locally
                              n	Encourage greater local input and authority in economic development
                                  to support regional differences and needs
                              n	Develop    a process for effective implementation, monitoring and
                                  evaluation of policy measures
                              n	Empower      MIDA to become an effective one-stop-agency to facilitate
                                  foreign investment
                              n	Revamp MPC to be more effective in driving productivity and efficiency
                                  improvements

       Improve service        n	Reform    the government to be lean, consultative, and delivery-
       delivery                   focussed
                              n	Upgrade       skills of staff to enable them to multitask
                              n	Modernise       human resource management to match qualifications
                                  with jobs

       Reduce ‘friction       n	Have    zero tolerance for corruption
       costs’
                              n	Address       underlying weak governance structures
                              n	Codify   best practices
                              n	Implement  an open, efficient and transparent process of government
                                  procurement at all levels

       Provide a safety       n	Retain   a residual role for safety nets to stabilise and correct periods
       net to facilitate a        and instances of market failure
       smooth transition
                              n	Apply  government savings to a wider social safety net for the bottom
                                  40% of households prior to subsidy removal
                              n	Create   a Transformation Fund to assist distressed firms during the
                                  reform period

       Strengthen             n	Widen    the tax base (e.g. GST)
       public finance
                              n	Lower    personal and corporate income tax rates
       management
                              n	Implement       standardised criteria for state revenue receipts
                              n	Use   results-based budgeting
                              n	Implement       programme-based, medium-term budgeting
                              n	Adopt    international standards for fiscal transparency
                              n	Use   technology for efficient collection of duties and taxes

130
Improve the decision making process                Work in this area has started with the
                                                   launch of the Government Transformation
National governance worldwide is becoming          Programme (GTP). Cumbersome regulations,




                                                                                                                       CHAPTER 6
less top-down and more decentralised as            processes and procedures must be simplified
the complexities of business and society           to improve their effectiveness and reduce
exceed the capability and effectiveness            rent-seeking.
of traditional top-down management. Civil
society is playing an increasingly important       Achieving the outcomes of the NEM
and influential role in public policy matters.     critically depends upon the ability of public
Communication technology and the internet          institutions to effectively implement the
are used widely to promote transparency and        policies underlying the SRIs. Quality public
discourse. Effective partnerships between the      institutions staffed with committed civil servants
state, market and society are gaining ground.      are needed to create the big push of policy




                                                                                                                       How do we get there?
Various measures have been implemented             measures to boost growth and accelerate
to integrate and improve public service            transformation.
delivery. One such measure was the
establishment of e-government portals, but         Strengthen public finance management
all measures in general have produced
limited results. Government agencies               The central issues in reform of fiscal
are still perceived to be bureaucratic,            management are diversification of revenue
operating in silos and very much patronage-        sources as well as improved expenditure
based.                                             management. Better accountability for
                                                   government outlays should target reducing
Re-engineering of public institutions requires     waste and preventing cost-overruns. The
a revamp of the administrative system and          specific areas of concern that need to be
the governance structure with greater efforts      addressed are: 1) diversifying government
to combat corruption. Urgent initiatives to        revenue base; 2) strengthening revenue
restructure the key agencies are critical for      collection; 3) rationalising subsidies, price
the success of ETP implementation. The             distortions and tax incentives; 4) improving
duplication of agencies undertaking similar        budget management; and 5) greater fiscal
functions needs to be eliminated. In this          transparency.
regard, immediate attention is needed for
strengthening oversight on policy development      Diversifying government revenue
and implementation, in particular for the
services sector due to its increasing importance   H i s t o r i c a l l y, M a l a y s i a ’s d e v e l o p m e n t
for generating growth.                             expenditure has depended greatly on revenue
                                                   from natural resources. Export duties on tin,
The government should become leaner,               palm oil and rubber, for example, substantially
delivery-focussed and more consultative.           financed the early five-year plans. From the


                                                                                                                       131
      mid-1970s, the contribution from oil and gas          NEM advocates a shift away from line item
      rose and now accounts for about 40% of                budgeting to results-based and programme
      total government revenue.                             budgeting. In addition, a medium-term
                                                            budget framework should be introduced. This
      The NEM recommends a number of reforms                framework should incorporate the results
      in the sources and distribution of revenue.           from debt management analysis.
      A wider tax base is an important part of
      reforms, where the introduction of the Goods          The annual budgeting process should also
      and Services Tax (GST) is a key component.            be improved to accelerate programme
      A more diversified tax base is needed to              implementation. Consultations with the
      compensate for an expected future reduction           private sector should be more focussed
      in the share of revenue from oil and gas.             on the implementation of tax measures to
      Overall, another aim of the fiscal reform is          ensure sufficient understanding and more
      to lower the rates of personal and corporate          rapid implementation.
      taxes, which will incentivise individuals and
      firms to increase their income and profits.           Greater fiscal transparency

      Under the fiscal reform, distribution of revenue      Public finance management must be made
      in the forms of loans and grants to states            more transparent. The current culture of
      should be reviewed to align them better               confidentiality must be replaced by timely
      with state requirements. At the same time,            dissemination and disclosure of assessments
      the criteria for revenue sharing with states          of fiscal outturn. There should be greater
      should be standardised. In particular, royalties      openness in government expenditure
      from exploitation of natural resources such           programmes. A special focus will be the
      as oil should be transferred as established           re-establishment of an open tender system
      by clear criteria to the producing states.            for all government procurements. This system
                                                            should be transparent at all stages and the
      Strengthening revenue collection                      results of tenders should be made public,
                                                            taking into account confidentiality. The findings
      Revenue leakage is a pervasive problem and            of external audits of public finances should be
      has an impact on overall revenue collection.          disclosed. Where it is feasible, this solution
      The current, largely manual approach to               should be supplemented by greater use of
      revenue collection is archaic, difficult to control   independent external audits.
      and open to abuses. The development and
      implementation of effective technology-based          Sanctions for poor budgetary management
      revenue collection and management system              and failure to observe accepted procedures
      is a high priority of the NEM.                        on expenditures should be balanced by
                                                            recognition of prudent fiscal management
      Improving budget management                           among agencies. Decentralisation of budgets
                                                            and its managements with proper accountability
      The current government budgeting process              and transparency will improve efficiency
      needs to be reviewed and re-designed to meet          and responsiveness among government
      the demands of a high income economy. The             agencies.

132
Review of         federal-state         fiscal     In a networked government, the design
arrangements                                       and delivery of public policies, programmes
                                                   and services will not only involve multiple
A review of the allocation of funds to             government agencies, but also include non-




                                                                                                     CHAPTER 6
states by the federal government should be         governmental stakeholders such as private
undertaken. Allocation based solely on a per       firms, NGOs and other civil society groups. The
capita criterion should be supplemented by         NEAC believes that an effective mechanism
the use of more varied indicators such as          that holds government agencies accountable
poverty levels in the respective states. In        would lead to eradication of corruption and
this exercise, state governments should be         wastage. The quantification of the economic
allowed to provide inputs into how federal         costs of corruption and wastage will raise
funds are allocated to states. This will           public awareness about their debilitating
contribute to improvements in the efficiency       effects on society. The Auditor-General’s
and effectiveness of state expenditure             Office is performing part of that role but the




                                                                                                     How do we get there?
programmes. Assessment of the impact and           perception is that its main task is to produce
results of expenditure programmes must be          an annual report, with limited powers to take
provided by states in return.                      remedial actions. This calls for significant
                                                   acceleration in enforcement and prosecution.
A ‘whole-of-government’ and accountable            In this regard, the Auditor-General’s authority
approach                                           should be expanded to deal more effectively
                                                   with misappropriation and mismanagement
The ‘whole of government’ approach is              of resources within the government.
essential to provide more integrated public
service delivery. The existing ‘top-down’          Developing processes and redesigning
approach should be rebalanced to empower           organisation structures
state and local entities to decide and manage
resources more effectively. Greater local          The role of central agencies in Malaysia
input and authority in economic development        should be reviewed and restructured to
are needed to support regional differences         identify areas where line agencies can be
and needs. With regard to this objective,          further empowered to improve effectiveness
proper mechanisms should be put in place           and efficiency in decision making. Further
to enhance collaboration between the               enlargement of agencies must be avoided and
different levels of government. Greater inter-     any restructuring must focus on streamlining
governmental collaboration will result in faster   and mergers. Distinctive organisational
decision-making and better coordination            processes are required for governance
among government agencies, especially in           to be effective. There is a need to better
resolving complex cross-jurisdictional issues.     align intermediate results with overall policy
Government agencies will be the major              outcomes. The right processes and reporting
contributors to an effective implementation,       requirements should be established for this
monitoring and evaluation process.                 purpose. This approach will help to explain
                                                   the inter-relationships between results and
An integrated public service delivery system       outcomes.
has the elements of a networked government.

                                                                                                     133
      6.3.5 SRI 5: Transparent and market-friendly affirmative action


                                  Table 17 - Escaping low income

        Policy Purpose                              Possible Policy Measures
       Reduce income        n	Continue      support programmes for disadvantaged groups
       disparity
                            n	Focus     on the bottom 40% of households and business owners
                            n	Shift   focus towards relative poverty
                                      ●   Continue growth as a means of poverty reduction
                                      ●   “Growth Elasticity of Poverty” – inequality can reduce impact
                                          of growth on poverty

       Create market-       n	Use     transparent procedures and criteria
       friendly
                            n	Use  affirmative action as a means to promote building of capacity and
       affirmative action
                               capability
                            n	Phase   out approaches that contributed to rent seeking and
                               patronage

       Narrow regional      n	Leverage scale with effective development of economic clusters as
       differences             a means of reducing regional inequalities, especially in Sabah and
                               Sarawak
                            n	Enhance    measures to raise income levels through better access and
                               provision of quality social services in education and health, especially
                               in Sabah and Sarawak

       Encourage reward     n	Encourage greater competition in the economy by removing excessive
       on the basis of         protection and accelerating sectoral liberalisation
       performance
                            n	Redesign      affirmative action to take into account merit and needs
                            n	Phase   out approaches that contributed to rent seeking and
                               patronage

       Promote equal        n	Emphasise   equitable and fair opportunities for employment, health
       and fair access to      and education and access to business opportunities
       opportunities
                            n	Apply government savings to wider social safety net for the bottom
                               40% of households prior to subsidy removal
                            n	Create  a Transformation Fund to assist distressed firms during the
                               reform period
                            n	Set  up an Equal Opportunities Commission to deal with possible
                               cases of unfair treatment and discrimination



134
The main purposes of this Strategic Reform          Rent-seeking behaviour is market distorting
Initiative are to reduce income disparities,        and has been a serious, undesirable outcome
continue with market friendly affirmative action    of the past approach to affirmative action.
programmes, narrow regional differences             Rent-seekers do not really create wealth, or




                                                                                                        CHAPTER 6
especially in Sabah and Sarawak, encourage          add to economic growth. Rent-seekers are
reward on the basis of performance and              engaged in unproductive activities and can
promote equitable and fair access to                add sizably to the cost of doing business. The
opportunities.                                      growth of bribery and corruption is closely
                                                    associated with the growth of rent-seeking
Affirmative action and equitable and fair           in the economy.
opportunities
                                                    Affirmative action would still be desirable in
Progress has been made on the affirmative           the light of persistent inequalities. Affirmative




                                                                                                        How do we get there?
action front. The reduction of absolute poverty     action policy expressly considers that the
has been exemplary and commendable,                 relatively economically disadvantaged should
and inter-ethnic economic imbalances                be given the opportunities to overcome their
were substantially addressed. But the               disadvantaged position. The New Economic
implementation of past approaches to                Policy (NEP) was an affirmative action
affirmative action has serious shortcomings         policy. Affirmative action is part of inclusive
and has produced some undesirable outcomes,         growth. But the approach to affirmative
practices and attitudes.                            action must be revised and reformed to
                                                    take into account the effectiveness of past
Although there have been some progress              practices, and make adjustments for the
these successes have been achieved at               flaws and abuses while drawing lessons for
considerable costs. It is now accepted that         strengthening future programmes. Challenges
the past affirmative action programmes have         that have arisen with the new forces of
also inevitably propagated and embedded             change also make it imperative to reform
a distributive and entitlement culture and          the past approach to affirmative action. For
rentier behaviour. Shortages of qualified           example, because wealth means more than
bumiputera and capital have encouraged the          mere equity ownership, having a 30% target
setting up of spurious fronts. Excessive use        for bumiputera equity ownership may not be
of ethnic quotas has encouraged the use of          as meaningful as previously thought.
less qualified recipients and bred inefficiency.
Ethnic-based quotas have been imposed               The principle of the new affirmative action
extensively throughout the economy in the           policy that will be part of inclusive growth
past and currently some still exist. The quotas     under the NEM is that it must be market
for limited companies in certain industries still   friendly, or it must be an affirmative action
require at least 30% bumiputera ownership           policy that is market-based. A market friendly
of share capital. Preferential pricing and          affirmative action would ensure that it does
quotas have led to distortions.                     not violate, or negate, the workings of the



                                                                                                        135
      market. Market friendly affirmative action         40% of households. An affirmative action
      should not cause, contribute or perpetuate         policy based on the low income group i.e.
      distortions in the economy. The efficient          giving preferential treatment to the relatively
      functioning of the market should not be            disadvantaged group would be in the interest
      hindered by distortions so that scarce             of distributive justice. It will treat equally
      resources are misallocated.                        those who are in the low income group.
                                                         Affirmative action will consider all ethnic groups
      Growth can be maximised if resources are           equally as long as they qualify for access
      used efficiently. Prices play a role as signals    to resources under affirmative action.
      to where and how resources should be
      utilised to maximise profits. Entry into and       Affirmative action should be seen as a means
      exit from markets should not be constrained.       of equalising opportunities but applicable
      Unsuccessful enterprises must be allowed           to the low income group. A market-friendly
      to fold, if they are no longer competitive         or market-based affirmative action will be
      and the resources are freed for other              implemented progressively. Liberalisation and
      economic activities. Land, labour, capital and     the opening up of sectors to market forces
      entrepreneurship should be allowed to flow         will be implemented in stages. Whenever
      in and out of the economy with minimum             and wherever possible, sectors should be
      restrictions.                                      liberalised as speedily as possible.

      Markets, however, can malfunction even             Policy measures and instruments
      without any form of intervention through
      affirmative action. Monopolies and collusions      The section above on inclusiveness has
      can hinder the efficient functioning of markets.   outlined the strategic thrusts of the NEM on
      Excessive risk taking can lead to crises.          wealth distribution and social justice. For this
      Markets can fail when it is manipulated by         SRI, the NEAC has some suggestions on
      interest groups that seek to maximise their
                                                         specific measures and instruments. These
      own interest at the expense of society. In
                                                         proposals are made on the basis that the
      such cases of market failure government
                                                         broad strategic thrusts are acceptable so
      intervention would be necessary to regulate
                                                         that the specific measures and instruments
      and correct the failures of the market. But
                                                         complement, or supplement, the strategic
      government intervention itself can also worsen
                                                         thrusts. In considering policy instruments it
      market failure and thus has to be kept under
                                                         should be mentioned that the most contentious
      vigilant review. Excessive protection, for
                                                         of the strategic thrusts have to do with the
      reasons other than affirmative action, can
                                                         proposal for greater liberalisation, competition,
      inevitably introduce market distortions.
                                                         the shift towards the bottom 40% low income
                                                         group for distributive purposes, as well as
      The NEM proposes that the revised affirmative
                                                         emphasis on opportunities. In reviewing the
      action policy should be based on the bottom


136
existing measures and instruments, they         increase their income. A value added tax which
can be retained, modified or removed. New       starts at a low level could be a progressive
measures and instruments can be introduced      tax on consumption and less inimical to the




                                                                                                 CHAPTER 6
to replace or supplement the instruments        low income groups. Exchange rate policy
that are in place. The policy measures or       should aim at maintaining an orderly and
instruments can be divided into the following   stable exchange rate. Households dependent
categories:                                     on the export sector for employment and
n	   Macro-economic                             income would be favoured with a depreciating
                                                exchange rate which could boost exports.
n	   Affirmative action programmes and
     Quotas
                                                Affirmative action programmes and quotas.
n	   Prices                                     Quotas have been used extensively in the




                                                                                                 How do we get there?
n	   Subsidies                                  past. The streamlining of quotas will require
n	   Government procurement and tenders         a re-examination of how quotas have been
                                                applied, their transparency and effectiveness.
Macro-economic. Macro-economic policies         The NEM recommends the shifting of
do have an impact on income distribution.       affirmative action programmes to emphasise
In less developed countries, inequality tends   opportunities rather than outcomes. The
to rise during recession because wages are      remaining quotas should be progressively
flexible downwards, social safety nets are      phased out. As for the enrolment quota, a
less developed and there is less labour         hybrid approach may be workable and worth
hoarding. In developed countries, recessions    considering i.e. using the ethnic quota but
tend to have a greater impact on profits        taking into account the need and merit of the
than wages.                                     applicants. If quotas are to be progressively
                                                phased out, their continued use in the interim
Overall, monetary, fiscal and exchange          should be targeted at the bottom 40% low
rate policies should continue to aim for        income group.
stabilising the economy and to sustain
growth. Inflation has more adverse effects      Subsidies. The subsidy bill of the Federal
on the low income groups and the poor           Government is sizable and has been
and cross-country evidence shows that           increasing. A large part of the subsidy goes
inflation can worsen inequality. The poor       to suppressing the impact of international
have not been able to index their income        prices for fuel and petroleum products on
with inflation. Fiscal policy, on the revenue   Malaysian consumers. It has been estimated
side apart from expenditure, can impact on      that subsidies have accounted for more
distribution. Maintaining a progressive tax     than a fifth of operating expenditure. The
regime could check a widening in inequality.    subsidy regime needs to be re-assessed
Tax exemptions for low income groups will       to ensure that it is broadly consistent with


                                                                                                 137
      the financial resources of the government          Institutions for equitable and fair
      and that it is fairly distributed to benefit the   opportunities
      neediest. There are serious leakages in the
      subsidy schemes and subsidies should be            Competition and liberalisation of the economy
      redirected to ensure that the poor are really      under the NEM will reduce the extent of
      the beneficiaries of the subsidies. Some           controls over the functioning of the economy.
      estimates indicate that more than 70% of the       Private enterprise will become less fettered.
      beneficiary of the subsidies for fuel products     Abuses clearly may continue to flourish and
      has been enjoyed by the higher income              must be stemmed. Discrimination in many
      groups. Subsidies should be reformed to            forms will appear and must be explicitly
      benefit the poor.                                  managed. Checks and balances need to be
                                                         introduced in anticipation of a possible rise in
      Government procurement and tenders.                abuses and discrimination. The NEM proposes
      Government procurement and tenders                 that an institution, or agency, be established
      are the two broad policy instruments that          to counteract and check these unwelcome
      have and will continue to have distributive        tendencies in abuses, discrimination and
      implications. A review, therefore, is required     unfair treatment. An Equal Opportunity
      to take into account the shift in approach         Commission (EEC) is proposed with the
      with the adoption of the NEM. Supplies             responsibility of monitoring and considering
      and services are the key items and areas           cases of discrimination and unfair treatment
      for government procurement and they                in the economy to cover both the public and
      account for about 17% of the total operating       private sectors. The Commission will focus
      expenditure of the Federal Government. The         on the implementation of the measures that
      key items for supplies and services include        have been proposed under the NEM.
      repair and maintenance, professional and
      other services, communication and utilities,       Inclusive growth will require a new institutional
      supplies and rentals. The thrust of the            regime. The present institutions and
      tender system should be towards a much             approaches were designed more than 30
      more open system without direct negotiated         years ago to support and administer the
      tenders. Some schemes for tilting tenders          affirmative action programmes but conditions
      towards the bottom 40% will have to be             and ideas have changed. It is timely that a
      considered.                                        serious review of the key institutions that
                                                         have been entrusted with affirmative action is
                                                         undertaken, for the purpose of re-engineering
                                                         and re-designing these institutions to support
                                                         inclusive growth under the NEM.




138
6.3.6 SRI 6: Building the knowledge base and infrastructure

                     Table 18 - Innovating today for a better tomorrow




                                                                                                    CHAPTER 6
  Policy Purpose                              Possible Policy Measures

 Create an            n	   Easing entry and exit of firms as well as high skilled workers
 ecosystem for
                      n	   Revamp the seed and venture capital funds to support budding
 entrepreneurship
                           entrepreneurs

                      n	   Simplify bankruptcy laws pertaining to companies and individuals to
                           promote vibrant entrepreneurship
                      n	   Harness Web-based expertise and industry networks




                                                                                                    How do we get there?
 Promote an           n	   Improve access to specialised skills
 environment for
                      n	   Ensure protection of intellectual property rights
 innovation
                      n	   Incentivise firms to embrace technology and move up the value
                           chain

                      n	   Enforce strict adherence to global standards and benchmarks

                      n	   Fostering R&D links between the institutions of higher learning and
                           the private sector

                      n	   Immediately roll out nationwide fast broadband connectivity

                      n	   Review and consolidate all present government R&D funding

                      n	   Align R&D to national growth objectives particularly in innovative and
                           hi-tech fields

                      n	   Open access to funding to competition among researchers

                      n	   Ensure public procurement supports local innovation

                      n	   Establish KPIs for universities based on commercialisation
 Establish            n	   Set up a technology research powerhouse and centre of excellence
 stronger enabling         run on a commercial basis e.g. ITRI Taiwan cluster model
 institutions
                      n	   Operationalise the National Innovation Model announced by the
                           government in 2007

                      n	   Balance the technology-driven innovation approach with market-
                           led policies such as global procurement through technology
                           intermediaries

                                                                                                    139
      Malaysia has benefited from globalisation,          Upgrade institutions of higher learning
      especially through integration into production
      processes and networks at the global and            To enhance the knowledge base, education
      regional levels. However, in the current            institutions should be allowed to compete for
      economic environment, firms are continuously        the best students, government grants and other
      refining their strategies and restructuring their   academic resources. The present system of
      supply chains through relocation, outsourcing       closely controlled operations by the Ministry
      and in-sourcing. Against this changing              of Education (MOE) and Ministry of Higher
      landscape, Malaysia can no longer rely on           Education (MOHE) should be changed to a
      global firms which will constantly seek and         system with autonomy and accountability.
      relocate their investment to more attractive        The views of the local community should
      markets. Through entrepreneurship, local            be sought and given due consideration to
      firms will increasingly have to drive industrial    improve the quality of schools.
      upgrading by developing their capabilities and
      innovation infrastructure. There is nothing         Autonomy and accountability are also
      automatic about this process. Government            very important for universities. Public
      support can facilitate such upgrading.              universities should have the authority to
                                                          decide on matters pertaining to course
      Moving up the value chain implies a continuous      offerings, student enrolment, staff emolument,
      process of change, innovation and productivity      financial management and daily operations.
      growth. Under the NEM, Malaysia’s economy           Similarly, students should be free to pursue
      will grow by developing new technology,             education at a university of their choice.
      innovating products and processes, and              Accountability would focus on compliance
      designing new management methods.                   with uniform performance indicators set by
                                                          the government. Development of curriculum to
      Infrastructure critical to high value added         meet market needs as well as collaboration
      activities, such as high-speed broadband,           with industries in R&D should feature among
      must be rapidly put in place to facilitate          the performance indicators. However, R&D
      the new production processes that rely on           must be aligned to national growth objectives
      networking to create scale and efficiently          particularly in innovative and hi-tech fields.
      connect supply chains.                              Access to R&D funding must be open freely
                                                          to competition and not be monopolised by
      Still, technology alone is not enough. Other        established research providers. Also, priority
      ‘soft’ innovative capabilities covering the         should be given to research with potential
      social, organisational and cultural aspects are     for commercialisation.
      more difficult to attain but are also critical.
      Malaysia must respond to market trends
      and tap into the global pool of knowledge,
      supported by education and training policies
      embedded in the other SRIs.



140
6.3.7 SRI 7: Enhancing the sources of growth

                     Table 19 - Finding the economic sweet spots




                                                                                                 CHAPTER 6
  Policy Purpose                            Possible Policy Measures
 Create value from    n	Identify   E&E subsectors to build depth and foster new niche
 first mover and         industries, and to capture a greater share as a distributional hub as
 other comparative       intra-regional trade expands
 advantages
                      n	Focus    on palm oil-related downstream industries to develop
                         indigenous technology and innovation or acquire technology to meet
                         new market demands

                      n	Encourage upstream technology innovation to develop higher yielding




                                                                                                 How do we get there?
                         fresh fruit bunches

                      n	Capture   a greater share of the education, medical tourism and
                         ecotourism markets through domestic and regional partnerships

                      n	Promote    climate change mitigating products and services e.g.
                         recyclables

                      n	Promote   products and services that comply with Islamic tenets e.g.
                        finance, pharmaceutical
 Develop greater      n	Integrate education services with industrial development, for example
 integration            a centre of engineering excellence in the E&E cluster
 between products
                      n	Further prioritise the logistics industry, leveraging on roads, ports
                         and ICT infrastructure readily available in Malaysia

                      n	Improve   seamless tourism services by ensuring quality services
                        along the value chain (examples such as the revamp of poor quality
                        taxi services and improving personal safety for travelers)
 Create new           n	Capture greater share as a distributional hub as intra-regional trade
 markets                expands

                      n	Improve    maritime and port services, leveraging on technology

                      n	Move  into alternative energy generation as well as energy saving
                         products and services

                      n	Expand   service-oriented industries to regional markets based on
                         Malaysia’s inherent biodiversity



                                                                                                 141
         Policy Purpose                                    Possible Policy Measures
       Build scale of             n	Promote  corridor-based development around spatially dense poles
       industries and                and adjacent hinterland, especially for electronics
       production
       networks for               n	Encourage    competition between localities
       specialisation             n	Cluster   industries to leverage on integration, scale and connectivity

                                  n	Exploit economies of scale through networking of production and
                                     supply chains leveraging on location - ‘Speed to market’

                                  n	Establish global presence through international acquisitions of
                                     companies in the same field to
       Harness                    n	Adopt an open innovation system to acquire technology and expand
       innovation                    networks
       potential
                                  n	Support   rapid transformation of SMEs with potential for innovation

                                  n	Develop    industries that support sustainable development such as
                                     use of traditional plants and herbs for modern applications
       Integrate real             n	Develop the commodities trading platforms and products for domestic
       sector industries             producers to benefit from financial innovation and expansion
       with financial
       services                   n	    Malaysia as a regional hub for both futures and spot markets for
                                    Offer
                                     commodities

                                  n	Develop   Islamic-based financial products to support domestic
                                     production and risk management of prices and production


      The old emphasis has been for Government                 schemes (e.g. financial and tax breaks) to
      to identify the sources of growth, usually               promote their growth (e.g. education, tourism
      through the 5-year Malaysia Plans and the                and shipping).
      Industrial Master Plans which then provide
      the incentives to drive the growth sectors/              The new emphasis within the framework
      industries. This was the case in developing              to transform the economy would be to
      the commodities and later the manufacturing              strengthen overall competitive capacity of
      sectors, in particular the electronics sub-sector.       the private sector and remove the barriers
      In the late 1980s and over the following                 for private sector to drive sectoral growth.
      two decades, selected services sectors                   The Government’s role would be facilitative,
      were identified as having export potential               ensuring distortions are not created in order
      and again, government introduced incentive               that private sector can allocate resources

142
more efficiently, putting in place the required         biofuel from biomass, cosmetics, organic
enablers to support high value industries               nutraceuticals (food products that provide
and giving special attention when required              health and medical benefits) and bio-




                                                                                                      CHAPTER 6
for specific sectors.                                   degradable plastics.

In the context of the new mode by which            n	   In the E&E sector, early mover advantage
the Government supports sectors/industries              should be leveraged through national
with high growth potential, the approach                approaches to taking advantage of the
would be to identify criteria that will make            skill set and concentration of firms to
sectors/industries as important sources of              further develop high value add segments
growth, as well as the necessary support                within the sector. The transformation
and facilitative arrangements that must be              requires a change from the low and




                                                                                                      How do we get there?
put in place and/or the barriers that must              medium technology industries which
be removed for these industries to realise              create low value added products.
their growth potential.                                 Innovation will be a powerful driver to
                                                        deepen the contribution of this sector
In developing further sectors and industries            to growth (Appendix 4). Potential for
which can lead growth, the NEAC believes that           innovation can be enhanced through
Malaysia must harness its natural endowment,            leveraging on the global proliferation of
sectors with comparative advantage, and                 industries in the Penang corridor to drive
industries where Malaysia has developed                 knowledge intensity. Shared services will
early mover advantages as the main sources              facilitate specialisation and productivity.
of high value added growth with spillover               Partnerships will foment innovation and
effects into new areas of activities:                   new products. The incentive structure
                                                        should shift to support SMEs supplying
n	   In developing natural resources, the future        to the large MNCs.
     growth momentum requires a focus on
     the present growth corridors to leverage      n	   There is potential for developing
     economies of scale to drive progress with          commercial agriculture with Government
     an increased focus on high value added             support for insurance schemes within
     natural resource downstream activities             a risk management framework that will
     in product and services. For example,              expand commercial agriculture activities
     in the palm oil sector, a market driven            into innovative planting, harvesting and
     approach will be to acquire technology.            processing technologies, as well as
     The other alternative is a technology              venturing into downstream high value
     driven approach to develop indigenous              new products. Growth industries in
     technology to produce what the market              agriculture would be integrated agriculture
     wants, including healthy fats and oils,            industries (as in aqua-culture) which can


                                                                                                      143
           create value in rural space and build          energy generation as well as promoting
           new skills and capacity to earn higher         climate change mitigating products and
           incomes among rural populations, and           services e.g. recyclables. Our strategic
           have high potential to service the growing     location is conducive for further developing
           international markets.                         the distributional hub potential to capture
                                                          a greater share of expanding intra-regional
      n	   In the services sector, we should              trade in both goods and services.
           harness potential for a higher share
           of the regional market in tourism and          Overall, industries and sectors with high
           education. Manufacturing or commodities        growth potential should include those with
           development should be better integrated        the capacity to become champions and turn
           with education services to support R&D.        Malaysia into a regional hub for specific
           An example is the centre for engineering       goods and services.
           excellence where industrial training in
           electronics firms combined with research       In financial services, Malaysia needs to
           institutes supported by the electronics        optimise its early mover advantage in
           industry can ensure skills growth that         Islamic finance, and exploit the potential
           is in tandem with industry requirements.       to become a dominant global champion by
           Similarly, in health tourism, medical          further expansion of products and services
           colleges can be integrated with hospitals      that comply with Islamic tenets. Better
           to service demand for medical training         coordination among agencies is required for
           from the region and medical services           Malaysia to become a hub for cross-border
           from within and outside the region.            Islamic finance products to support growth
                                                          sectors within the region. This coordination
      Developing scale is important to building           of policies is also important for implementing
      competition and growth. Concentration of            the ASEAN Capital Market Framework
      industries within a region/corridor creates scale   Agreement, where Malaysia already has the
      advantages through multiplier growth effects        skills and scale.
      for all kinds of related and support service
      industries. It is critical that Federal decisions   In the commodities field, Malaysia needs to
      on location place priority on this criterion        exploit the potential for widening the trading
      when approving new investment. In addition,         platform in commodities to give better trading
      industries (such as telecommunication and           and hedging options to commodity firms.
      mobile services) which are able to attract          Partnerships with external parties can be
      foreign interests and operate in regional           exploited to build synergies and widen trading
      markets, should be encouraged to locate             opportunities, including commodity derivatives
      in the corridors. Our endowments support            and other hedging options to reduce risks
      promising expansions into new markets such          as well as costs of doing business.
      as eco-tourism and moving into alternative

144
Support from the financial industry would take      also benefit from concentration of people
the form of a change in credit assessments          and skills. Issues of Federal policy that may
in lending to innovative SMEs, giving less          disadvantage States will need to be addressed.




                                                                                                      CHAPTER 6
emphasis to asset- as well as collateral-based      This issue is dependent on policy decisions
lending by shifting to partial guarantees.          affecting growth and employment being based
The financial sector must build capacity to         primarily on economic considerations. A host of
evaluate companies’ performance through             measures to improve efficiency in government
the use of project and cash flow credit             agencies and adopting transparency rules and
assessment. Action now is required for              processes in the government regulations will
financial institutions to become sophisticated      be required. A move to benchmark against
and to help drive economic growth. Similarly,       international standards for all delivery of
priority funding for technology and green tech      products and services will raise quality and
firms requires financial institutions to build      prices of exports. Setting up a Complaints




                                                                                                      How do we get there?
the right capability to evaluate and finance        and Dispute Settlement bureau for investors
new green technology related investment.            can provide an avenue for quick resolution
                                                    of problems faced in setting up businesses
In implementing the strategies to realise the       in Malaysia. Above all, a comprehensive
growth potential of sectors and industries, there   review of regulations, their consolidation and
are major cross-cutting barriers that must be       elimination of inconsistent regulations at both
removed. Major ones include a 360-degree            the general and sector-specific level, will
policy shift from decentralisation to locational    go a long way to enhance growth sectors
concentration for scale. Related services           and industries.




                                                                                                      145
      6.3.8 SRI 8: Ensuring sustainability of growth

                          Table 20 - The future is bright. The future is Malaysia

        Policy Purpose                               Possible Policy Measures
       Preserve natural       n	Use appropriate pricing, regulatory and strategic policies to manage
       resources                non-renewable resources sustainably
                              n	Encourage    all sectors to embrace ‘green technology’ in production and
                                processes
                              n	Develop    a comprehensive energy policy
       Leverage on            n	Increase   focus on downstream high value added production and
       comparative              services
       advantages for
                              n	Develop    a comprehensive energy policy
       high value added
       products and
       services
       Meet                   n	Reduce     carbon footprint in line with government commitment
       international
                              n	Enforce   clean air and water standards in utilising natural resource i.e.
       commitments
                                 pollution mitigation
       Facilitate             n	Develop  banking capacity to assess credit approvals for green
       bank lending              investment using non-collateral based criteria
       and financing
                              n	Liberalise    entry of foreign experts specialising in financial analysis of
       for ‘green
                                 viability of green technology projects
       investment’
                              n	Support  green technology investment with greater emphasis on
                                 venture capital funds
       Ensure sound           n	Use  appropriate pricing, regulatory and strategic policies to manage
       public finances           non-renewable resources sustainably

                              n	Reduce   wastage and avoid cost overrun by better controlling
                                 expenditure

                              n	Establish    open, efficient and transparent government procurement
                                 process

                              n	Adopt   international best practices on fiscal transparency




146
The NEM places strong emphasis on              The government should adopt international
preserving our natural resources and safe-     best practices in budget management
guarding the interest of future generations.   and fiscal transparency. Public finance




                                                                                                CHAPTER 6
While progress and development is all          management should be undertaken within
important, government must not overlook        a medium-term budgeting framework to
the value of careful usage of its natural      underpin sustainability.
resources by applying appropriate pricing,
regulatory and strategic policies to manage    A green technology platform must be supported
non-renewable resources sustainably.           by financial facilities to fund investment
                                               in this area. Malaysian banks must move
A green economy platform policy for            away from collateral-based credit. For that
development must be set by the government.     to happen, Malaysian financial institutions




                                                                                                How do we get there?
In line with the government commitment in      need to develop capacity and educate their
Copenhagen to reduce Malaysia’s carbon         credit officers to evaluate such investment
footprint, a comprehensive energy policy is    proposals. Given the complexity of these
to be introduced. At the same time, greater    projects and the technical expertise required,
efforts are needed to put in place pollution   partnership and collaboration with external
mitigation practices, enforce clean air and    parties could be an interim arrangement
water standards, as well as maximise           until a critical mass of local expertise is
the stewardship of our scarce natural          developed.
resources.
                                               Malaysia also has the comparative advantage
Fiscal discipline is needed for sound          for developing home grown green technology.
and sustainable public finances. Healthy       A comprehensive energy policy should include
government finances contribute directly        venture capital support for green technology
to maintaining macroeconomic balance           and for bringing in experts that can develop
and facilitating financial stability. Fiscal   local expertise in this area. Malaysia has
reform programmes, including measures          opportunities to be a centre for development
initiated under the GTP, should continue       of environmentally sustainable products and
to improve services and reduce the size of     services.
the government.




                                                                                                147

				
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