10MP: Blast from the Brain Trust

This is a good article from By Lee Wei Lian in the Malaysian Insider.

KUALA LUMPUR, June 12 – The former head of one of Asia’s premier economic think tanks blasted the continued influence of the New Economic Policy (NEP), saying that it is distorting the market and blocking serious reforms.

In a strongly worded presentation at a forum on the 10th Malaysia Plan (10MP) yesterday, Professor Datuk Dr Mohamed Ariff, the former executive director of the Malaysian Institute of Economic Research (MIER) said that the NEP which ended in 1990 appears to have mutated into new policy incarnations including Najib Administration’s New Economic Model (NEM) and is distorting the Malaysian economy.“Malaysia’s markets are highly distorted,” said Ariff at a forum organised by the Malaysian Economic Association. “The distortions are related to the NEP and the NEP remains the backbone of the 10MP document. The NEP looks like it is mutating to the NDP and NEM and stands in the way of bringing about serious reforms.”

Ariff, who is now an MIER distinguished fellow, said that 75 per cent of households earning less than RM2,000 a month were Bumiputera ones.

“I don’t understand — after 40 years of NEP why are 75 per cent of households earning less than 2,000 a month from Bumiputeras. That shows that the NEP is just not working,” he said.

Prime Minister Datuk Seri Najib Razak who is trying to make Malaysia a developed high income nation has found himself under pressure from vocal segments of the Malay population to preserve race based preferential economic policies.

Due to political considerations, Najib has not had a free hand in designing truly competitive economic policies. As a result, the public has been getting mixed messages over economic reforms and remain ambiguous over how much of a role ethnicity will have in the economy especially in areas such as government procurement, education and scholarships.

The 10MP document credits the NEP for reducing income disparity, specifically between the Bumiputeras and the Chinese from 1:2.29 in 1970 to 1:1.38 in 2009 as well as the creation of a Bumiputera professional middle class.

It also includes several NEM recommendations on making race based affirmative action more “market friendly” including stressing genuine economic participation instead of mandatory corporate equity quotas and introducing elements of meritocracy when helping the Bumiputera community.

Asked after the forum if he felt that making NEP type policies more market friendly would help, Ariff replied that the NEP would have to be rejected wholesale.

“It has to be cut off, just like how Alexander cut the Gordian knot,” said Ariff referring to the metaphor for solving an intractable problem with one bold stroke.

Earlier in the forum Ariff also said that for the economy to grow by 6 per cent per year as aimed for in the 10MP, investment would have to grow by 12.8 per cent per annum.

He pointed out that during the 9MP, investment growth was just 2 per cent.

“That (12.8 per cent investment growth) is a tall order,” he said. “I am not sure if we can bring this about.”

He said that while foreign direct investment FDI) levels had fallen due to the global financial crisis, it was particularly striking in the case of Malaysia which experienced just 1 per cent growth in FDI as compared with 10 per cent in China and 9 per cent in Singapore.

“Something is seriously wrong,” he said.

He however said that he liked the 10MP’s emphasis on enhancing the nation’s human resources but said that for that to happen, there needed to be a “revolution” in Malaysia’s education.

The director general of the economic planning unit, Datuk Noriyah Ahmad also spoke on the 10MP at the forum and said that unlike previous plans, the 10MP was a “rolling plan” and allocations would be done every two years to take into account the financial resources of the government.

For the first two years of the 10MP, RM44 billion has been allocated for 2011 and RM47 billion in 2012 and the amount beyond that will be determined later.

Another speaker at the forum, DAP MP Tony Pua said that there were too many contradictions between what Najib has said and what was actually carried out. He cited the case of a lack of open tenders for the development of the new convention centre near Jalan Duta, KL which was given to auto conglomerate Naza Group’s property unit.

“When I asked about it in parliament, the minister said that Naza asked for it first,” said Pua to laughter from the audience.

He also said that the government should focus on cutting down the sizeable subsidies to private corporations rather than just removing subsidies to the man on the street.

He citied the case of government interest free loans to the private water utility company Syabas that he claimed had cost the government RM250 million as it had to borrow the money in order to lend it interest free.

“Why are we hitting the man on the street?” said Pua.

He added that his worry was vested interests would derail the 10MP.

“We have a very nicely written document,” he said. “My fear is that people won’t follow it because of vested interests even though the prime minister says he won’t tolerate rent seeking and patronage. I hope the 10MP and the NEM will be carried out to the dot.”