Malaysia focuses on human resource development

The five-year development plan 11th Malaysia Plan (11MP), which runs from 2016 to 2020, was launched in 2015 and is considered to be the final and decisive step in Malaysia’s long journey to realise its aspirations of becoming an advanced economy. This will mean increasing its GDP per capita to surpass the critical threshold of $15,000. Malaysia boasts an impressive record of sticking to its plan when it comes to wealth creation. Household income per month has increased more than 20-fold from RM264 ($65.35) in 1970 to RM6141 ($1520) at the end of 2014. Some 76.1% of households are homeowners, with 95.1% having access to clean water and 97.6% to electricity supply. Around 27% of Malaysians are now university graduates, compared with 6% in 1980s, with the unemployment rate down from 7.4% in 1970 to around 3% in 2015.

Strategic Thrusts

At different times Malaysia has faced different sets of challenges. In the first half of the 20th century, it was poverty eradication, followed by a transition from an agrarian to a manufacturing economy. The final leg is about creating a diversified service, manufacturing and knowledge-based economy with high value-added industries playing a key role. 11MP outlines six strategic thrusts: inclusivity, well-being of the country, human capital, green growth, infrastructure, and innovation and productivity.

Although these concepts are not entirely new, the main difference is a departure from government-led transformation programmes to addressing social issues such as inclusivity of growth, as well as the cost of living for the middle classes and infrastructure development in rural areas. For instance, the government promised to add 3000 km of paved roads in rural areas and to provide access to water and electricity to 99% of the population by 2020. Some RM13bn ($3.2bn) has been allocated to achieving these multiple 11MP goals.

Economic Path

Launched in the midst of a turbulent global economy, the 11MP has set out a number of bold policy targets to reduce external vulnerabilities by focusing on domestic sources of growth and productivity. In contrast to previous five-year plans, the sharp focus is going to be on human resources with technology and infrastructure playing a supportive role. The plan aims to create 1.5m new jobs, with priority given to knowledge-intensive sectors that improve productivity.

Apart from reaching its macroeconomic goal, the government is working to ensure that by 2020 every household will have access to efficient infrastructure, public amenities, a quality education and health care services, as well as affordable housing. This in turn has fuelled expectations that government expenditure on infrastructure will continue to play a major role in boosting domestic demand and household incomes.

The Global Infrastructure Investment Index (GIII) ranked Malaysia as the second most attractive destination for investment in Asia in 2016. Citing the government’s 11MP strategy, the GIII report expects that by 2020 major projects will be completed, such as the Klang Valley Mass Rapid Transit System, the 2000-km Pan-Borneo Highway and the West Coast Expressway. As part of 11MP the government also hopes to complete the much awaited high-speed rail link that will expedite travel time between Singapore and Kuala Lumpur, which could transform the economy of the whole peninsula.

Reducing External Vulnerability

Though Malaysia will continue to be a trade-oriented economy, 11MP reveals policymakers’ intentions to reduce exposure to external vulnerabilities by boosting domestic sources of growth. As in previous plans the government sets out that expansion should be driven by private investment, which should reach 9.4% per annum. Manufacturing and services in particular are expected to increase their contribution, accounting for 75% of GDP by 2020. At the same time, Malaysia expects export competitiveness to recover, with the current account remaining in surplus at 2.6% of GDP.

Fiscal Consolidation Targets

Arguably the most tangible and ambitious target set out in the plan relates to ongoing fiscal consolidation. Although the government remains the key driver of economic growth momentum, the plan promises a near-balanced budget by 2020 with a fiscal deficit of 0.6%, compared to current level of 3.2%. At the same time, expanding the economy and decreasing borrowing levels should reduce the debt-to-GDP ratio from the current 53.5% to 43.5% by 2020.

The central premise of this turnaround is growing consumption and the introduction of the goods and services tax, which the government expects to bring in an average of RM31.4bn ($7.8bn) ringgit per annum, compared to the RM15.5bn ($3.8bn) collected from sales and services tax during the 10th Malaysia Plan (10MP). This dramatic increase in direct taxes on private consumption will reduce dependency on oil-related income. Contributions from hydrocarbons are expected to fall from 21.5% in 2015 to 15.5% in 2020. In turn, it will make the government budget and its expenditure commitments more immune to external oil price shocks.

Government Expenditure

The overall government operating expenditure is set to rise from RM1.03bn ($255m) to RM1.28bn ($316.8m) over the plan period. Over those five years, development expenditure is set to rise from RM223.6bn ($55.3bn) to RM260bn ($64.4bn), which is evenly split between infrastructure and social and economic sectors. For instance, the number of beds in public and private hospitals is set to rise by 25% to reach 73,000 by 2020, with nine new hospitals to be constructed during this period. The plan also aims to achieve one doctor for every 400 citizens by 2020, with focus on rural areas. Another big push is expected in delivering affordable homes to low-income groups. Data from the country’s Economic Planning Unit show that Malaysia has some 74,300 units built during the 10MP by the private sector. The government wants as many as 653,000 units to be delivered during the 11MP.

Regional Development Drive

With Peninsular Malaysia, particularly the Klang Valley, already reaching its saturation point, the focus of 11MP has been on accelerating growth and productivity in underdeveloped regions such as Sabah and Sarawak, as well as Johor, Kedah, Kelantan, Pahang, Perak and Malacca. The development agenda has shifted from so-called “development corridors” to individual states, which will now enjoy more autonomy in setting their own development priorities.

The strategy of unlocking growth in the region has worked well during the 10MP. The government estimates RM307bn ($76bn) in new investment was committed during that period, of which 57% has already been delivered, contributing some 427,000 new jobs. 11MP is equally ambitious: it targets some RM236bn ($58.4bn) in new investments over the next four years and sees as many as 470,000 new jobs created in development corridors.

Distributing Wealth

As in its previous plans the government of Malaysia is sticking to its policy of promoting an economic empowerment policy for the bumiputera, or native population. Prime Minister Najib Razak has re-emphasised that bumi-putera currently account for 68% of the population, compared to 62% a quarter-century ago. The goal he outlined is to achieve 30% bumiputera equity ownership by 2020. To accelerate the process, the government has decided to allow bumiputera individuals to withdraw a share of their savings from the national pension fund, the Employees Provident Fund, in order to invest in private equity of profitable high-growth companies.

Macroeconomic Strategies

While maintaining a GDP growth target of 5% a year, the Malaysian government is seeking continuity in monetary policy, with average inflation ranging between 2.5% and 3% during 11MP. Monetary policy is set to remain quite accommodative to ensure credit is available to small- and medium-sized enterprises and to larger corporations. Average real growth for private investment is expected to reach 9.4%, with public investment taking a back seat, expanding by just 2.7%. 11MP foresees 6.4% and 3.7% annual increases in private and public consumption, respectively. Meanwhile, Malaysia aspires to retain its competitive position in trade. Average growth for exports is expected to be 4.6%. The 11MP strategy has taken up the slogan “Anchoring growth on people” and intends to keep the unemployment rate at 2.8%. The biggest challenge and opportunity in this endeavour will be boosting productivity in order to deliver the promise of inclusive growth.