Sunday, August 22, 2010

Khairy Jamaluddin : Solve The Root Cause First

(this post, that is taken from Rembau Dot Net, appears as a column in the 16th August weekly edition of The Edge)

I attended a forum at a local university recently discussing Malaysia's competitiveness. On the panel with me were two academics with diametrically opposed political views and the youth chief from Parti Keadilan Rakyat (PKR). I was looking forward to a decent, intellectual discussion on economic policy and the reforms that have been introduced by Dato’ Sri Najib Tun Razak's government in order to lift Malaysia from its 'middle-middle' (middle income, middling achievement) predicament. Of course, this didn't happen.

The forum was held the day after the United Nations Conference on Trade and Development (UNCTAD) released its World Investment Report for 2010. The key take away for many from that report was that Malaysia suffered an 81% drop in foreign direct investments (FDI) inflow in 2009 from the year before. This headline figure was a godsend especially for the opposition. The PKR youth chief made a meal of the report without having any profound grasp of economics. All he needed to do was to plot the 81% drop on a graph to score visual points with the student audience. Unfortunately, much of the rest of the forum descended into political point scoring with my opposition counterpart trying his best to show how much - or little - he knows about finance ("Felda is on the brink of bankruptcy because its cash reserves have dwindled."). But that's for another day.

The point is that the UNCTAD report reduced all nuanced discussions on Malaysia’s economic competitiveness to one annual reduction - albeit a significant one - in FDI and how this is a clear signal that reforms are not working. While the sustained reduction in inward investments over the last few years has been a cause for concern, it is easy to overstate the figure highlighted by the UNCTAD. After bizarrely trying to dispute the figure in the report, the Ministry of International Trade and Industry (MITI) finally got into damage control mode and sought to put the findings into its proper context.

Some of its arguments are valid: the drop in FDI is reflective of substantial reductions in global FDI flows, many advanced economies that make up our traditional sources for FDI have yet to see full economic recovery and a deliberate policy shift by the government to focus on high-technology investments which is still a work in progress. The second point is all the more relevant considering net FDI figures are adjusted for profit repatriation which count as outflows given that some USD 8 billion was sent by multinationals based here to their parent companies that were facing capital constraints during the financial crisis.

Other reasons given can be contested. For instance, much has been said that neighbouring countries with higher FDI numbers like Indonesia and Vietnam are at a lower stage of development hence receive much more investments in infrastructure whereas Malaysia while not yet fully developed doesn't have or need as many big works projects. This lower base argument is not wrong, but it doesn't fully explain why other neighbours like Singapore can attract more FDI over the same period without having to offer big investment opportunities in building highways, power plants and other big-ticket infrastructure items.

There are also problems with the industrial policy argument which excuses away lower FDI because of a deliberate shift from labour-intensive to capital-intensive and now to knowledge-based industries. Because of this strategic transformation, attracting FDI is more competitive and the returns that we get from every dollar that comes in is higher so lower inflow figures may not adequately reflect what we are getting out of it.

But the main issue here is, are we really prepared for the shift or is this a ready made excuse every time FDI numbers plunge y-o-y? If I remember correctly, every time FDI figures don't go our way, we say that its because we are more discerning in terms of investment. Previously, it was moving Malaysia away from labour-intensive sweatshops in our industrial estates to more value-added, capital intensive manufacturing. Now when it appears even capital-intensivity has fallen - capital investment per employee fell to RM507,335 in 2009 from RM620,571 the year before - we speak of the need to move to knowledge-based industries. Shifting the goalposts may sound good and make economic sense, but the feeling out there is that much of it is spin to deflect from lower investments in whatever category.

Another point about the industrial policy argument is whether or not we are ready for this to begin with. Don't get me wrong. We must move up the value chain in order to stay competitive and we cannot rely on cheap industries to continue to propel our economy as tempting as it is to fall back on foreign labour and subsidized utilities just to rack up the numbers. But the shift to capital intensive and knowledge-based industries presupposes the existence of a talent pool that can make the transformation happen. Based on publicly available data, 80% of our productive workforce under 40 only have SPM. Without reforms to the education system under way with a new, revamped option for vocational training, its difficult to see how present human capital inputs can create a viable shift in industrial policy. So, its all well and good having an intent to move up the value chain but when that intent is not matched by the ability to do so, then its all the more telling that maybe we're not getting in the targeted FDI because other destinations are seen as better offering the building blocks required for such industries.

And that really is the crux of the problem at hand. We are not an unattractive investment destination by any objective measure. Even the UNCTAD report which has caused much problems for our policy-makers maintained that Malaysia was one of the top 15 host countries for FDI. But in order to post better numbers and make a meaningful industrial shift in the quality of investments and economic activity we want to attract, we need to face up to some uncomfortable truths.

We need to acknowledge that bureaucratic reforms are still lagging global pace-setters. We need to admit that high-technology infrastructure is still sparsely available with very little consistency of service. And most importantly, we need to own up to the fact that despite having a skilled, multiracial population that is supposed to be proficient in English - at least this is what we tell investors - the reality is far different. The biggest problem that we face today, whether in terms of attracting FDI or maintaining economic competitiveness is the lack of innovation and talent in our workforce. And the root cause of that is how we educate and train young Malaysians. Solve that and we won't have to shift goalposts anymore every time UNCTAD's figures don't go our way.

No comments: