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Malaysia continues to surprise World Bank

FOR World Bank senior economist Dr Frederico Gil Sander, emerging markets like Malaysia continue to be attractive in drawing investments, even during the current period of low global energy prices.

During the five years when he looked after the Malaysian portfolio, Sander worked closely with senior officials from the Economic Planning Unit as well as Treasury in Putrajaya.

In the final of a two-part interview with the Business Times, Sander speaks to Rupa Damodaran on areas that need closer attention by the policymakers.

On disappointments: Malaysia needs to focus on its education blueprint, especially on the human capital front, by improving the quality of teachers. The Organisation for Economic Cooperation and Development’s PISA (Programme for International Student Assessment) results for Science and Mathematics proficiency showed that 50 per cent of Malaysian students are “functionally” illiterate.

This is more disconcerting than a weaker ringgit or high household debt. Improve the quality of teachers — that is key to improving education. It is not about the medium of language, as is the subject of ongoing arguments in the country. For Estonia (ranked seven), English is not a language of Science and Mathematics yet the kids there top these tests, as in the case of Finland (ranked six).

There is nothing wrong with schools using Bahasa Malaysia as the medium of instruction but the quality of teaching has to be on par with that in Estonia and Finland or even in the Netherlands (ranked nine), where English as second language is taught at a high quality.

On Malaysians: As a Brazilian, one of the good things I have seen over the past five years is that while Malaysians are critical about their country, there is openness about wanting to improve the World Bank Doing Business rankings, Fitch Rating credit outlook and other competitiveness rankings.

The fact is that Malaysians are trying to look outside and benchmark with outside and this open attitude to improve helps move the country forward. Even in education, while the government has been receiving a lot of flak for the PISA results, that is again in terms of (meeting) international benchmarks. In the short term, there may be some complaints but that helps in the country’s urgency to improve. Investors see this commitment by the government to improve the business climate here.

On the various economic monitors undertaken by the Malaysian government, the one with regard to women in the labour force recognises a significant increase in the participation of women in economic activities. With the growth of the services sector, this has led to the creation of jobs and resulted in more well-educated women joining the workforce. Women being income earners is huge growth dividend with huge multiplier effects for the country, especially in terms of strengthening the domestic demand.

On the 11th Malaysia Plan: The one part of the 11MP that I found exciting is the one on empowering local administration to be closer to the people in terms of delivery of services, similar to practices elsewhere. Malaysia is a “centralised” country, where even waste management in Kuching or Kota Kinabalu is undertaken by the federal government in Putrajaya . If there is a move to empower them to deliver services and be accountable to people in that jurisdiction, then it is a positive force and is promising.

On the Economic Transformation Programme (ETP) and Government Transformation Programme (GTP): It is not a good thing that governments should be facilitating specific sectors as the private sector should decide where to go. In the real world, we should allow the data to tell if it is working or not. What I find difficult is how much of the investment activities are due to the ETP and how much that would have happened anyway due to other factors.

But it is a fact that investments have gone up since the ETP was put in place. The GTP has been quite an interesting experiment in terms of delivery on government services — there is a lot of potential therein. Ultimately, what you need is for “performing” ministries to get a bigger budget allocation.

On investments into Malaysia: The ETP and NKEAs can compound things, especially when some of the investment momentum has to do with the investing environment and global trends. Or there could be other reasons like when Singapore’s restructuring took place, investors looked across the border and it helped that the environment was more welcoming here.

The country should be credited for this. Yes, the ETP has nudged others to look in this direction but Malaysia has outperformed its neighbours like Thailand in terms of economic performance. Again, what drives investments varies from country to country. On a relative basis, Malaysia is still preferred destination for some of these investors.

On surprise readings: There were many areas that surprised the World Bank, such as the investment draw in the fourth quarter of last year and in the first quarter of this year. The investment rate has been stable, generating 20 per cent of gross domestic product. Whether it is due to ETP efforts or Petronas (Petroliam Nasional Bhd), we have seen significant investments.

That is a big deal as you need to invest to bring about future growth for the country. In the fourth quarter of last year, we were surprised with the performance of the mining sector, which saw a huge output mainly because Petronas had been investing all these years. New oilfields came online although global oil prices were down, bringing in more revenue to the country. Investments also picked up in other parts of the economy as well — some related to the business environment, policy initiatives and also global factors. Another unique surprise was in the electrical and electronics (E&E) sector, which showed a downtrend in output when Dell closed its factory but it (the sector) picked up since last year.

We see a consistent positive growth of eight to nine per cent, which is relatively high. What this tells me — from the national accounts — is that it is true that the value-added of the E&E sector has increased even if nominal exports may have dropped.

On improving the quality of public spending: The fiscal policy needs to be sustainable; for instance, having deficit reduction as one of the government’s initiatives. Otherwise it will “hit” you some way or other. In some countries, it manifests as inflation and some central banks would have to hike interest rates. The record has been good so far in Malaysia since fiscal deficit has been declining since 2010. The government deserves credit for cutting subsidies and putting the GST in place but work is not done.

In the last few years, a lot of spending has been on emoluments, pensions, gratuities and operating expenditure, which does not have clear links to output or performance. Outcome-based budget (OBB) is a great system that tries to bring development expenditure and operating expenditure together. It is a tool to allocate resources for best performing outputs. For instance, if it is a national priority like early childhood education, the OBB should direct more resources in that area.

Moving towards the medium- term framework of realising the fiscal deficit target in 2020, strategic allocation is important to be implemented at ministry levels in the coming years. Right now, ministries do not know their budgetary allocation in say, 2017, as the allocation is based on last year’s number (year-to-year budget). A resource envelope should instead be given ahead so that the ministry can have consistency in their planning.

In Malaysia, the fiscal adjustments are moderate as they have not affected the growth of the economy. At a growth pace of five to six per cent without any fiscal adjustments to address the deficit, markets would punish you, ratings would be downgraded and there would be difficulty for the central bank’s monetary policy as the economy would be overheated.

Reference : http://www.nst.com.my/node/97315