Posted Date: April 26, 2021In Part One of this article, we unpacked Malaysia's overall achievements and opined that the government is likely to soon revise Shared Prosperity Vision 2030 (SPV2030)'s targets.
Part Two of this article will discuss three key ideas; firstly, how past economic crises have shaped the Malaysian economy and its impact on the country's long-term development planning; secondly, how Malaysia's economic development has fared vis-à-vis other countries; and thirdly, considerations of whether long-term economic planning is still relevant to Malaysia. Part Two of this article concludes that, to remain competitive as a small and open economy, measures aimed at integrating the domestic economy with the rapidly changing global economy should be of the highest priority.
There is no doubt that economic crises, in particular exogenous shocks, have shaped the Malaysian economy and appetite for reforms. As a small and open economy, external events have limited the effectiveness of Malaysia's long-term growth model.
The 1980s Commodity Crisis and the Plaza Accord fueled the shift in Malaysia's development policies leading to transitional growth in the mid-1990s. Aided by external developments, the government's economic liberalisation agenda following the mid-80s crisis led to unprecedented levels of investment and, subsequently, trade.
The Asian Financial Crisis (AFC), Malaysia's most devastating crisis to date, left a long-lasting economic impact. The crisis caused Malaysia to lose its growth momentum. As such, it has remained an uphill battle for the country to regain the necessary drive for prosperity after AFC.
The GFC caused public debt to spike and subsequently coerced Malaysia into undertaking a wide-ranging fiscal consolidation programme. This was key as Malaysia had to balance its longstanding track record of good credit ratings since the AFC. Alas, the COVID-19 pandemic effectively "erased" all fiscal consolidation efforts.
Additionally, as a resource-rich country, there is little incentive to improve Malaysia's economic complexity post-crises.
To compare, in terms of GDP per worker and Total Factor Productivity (TFP), external shocks have appeared to have wedged a wider gap between the Malaysian and US economies. The impact on the labour market from each crisis puts the country in the perpetual catch-up mode with the US economy.
It is important to understand why Malaysia's development ideology is limited. To begin with, the New Economic Policy (NEP) was sensible at a time when there was little global economic convergence. Malaysia's wealth increased by 1990, although some countries appear to have leapfrogged somewhere closer to US level of development. By 2019 – a year prior to the COVID-19 pandemic – globalisation had grown by leaps and bounds with Malaysia continuing to play catch up with other high-income economies.
As such, it is apt to ponder whether long-term economic planning is still relevant in an era of constant disruption. On the one hand, we posit that although economic planning positively influences the behaviour of economic actors in the short term, its impact will diminish with time. Simply put, the longer the duration of the plan, the higher the notion of overestimation on both internal and external imperatives. But on the other hand, economic planning is a political construct. An economic development plan is the political currency of any democratic society including Malaysia.
Therefore, following Part One of this article, we believe that it is sensible to revise SPV2030's targets by mapping out Malaysia's game plan in global economic integration in an explicit manner, at least within the RMK-12 period. This will safeguard Malaysia's competitiveness and relevance in the global economy.
The concluding part of this series will discuss the meaning of economic growth.