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Asia Times
13 April 2002

Malaysia still on a shaky economic platform

By Anil Netto

PENANG - Malaysia's official economic growth forecast for this year remains at 3.5 percent after a dismal performance last year, which saw growth of just 0.4 percent.

The stock market has picked up after some restructuring of companies and the departure of a few well-connected individuals who were seen as weighing down on corporate confidence. All positive signs, but the question remains: Have the reforms and restructuring been enough?

Although a modest recovery is expected, it is unlikely that countries such as Malaysia will see anything like the sustained 8 percent growth rates witnessed in the late 1980s and early 1990s. Given that the United States is a major trading partner, much will depend on how the US economy performs. America's recent economic performance may have been surprisingly strong, but it is too early to say whether it can be sustained at the present pace. There is even a possibility of a recession there. One thing seems fairly certain: the US recovery is unlikely to match the growth it achieved during Asia's recovery from the 1997 financial crisis.

Of crucial significance to countries like Malaysia is the performance in the US information technology sector, as the bulk of Malaysia's electronic exports go to the US. Thus, gloom has greeted the announcement of first-quarter figures of firms such as telecoms giant Nortel Networks, which revealed first-quarter earnings below expectations. "Customers were showing more resolve than originally anticipated to minimize spending in the near term," said the Nortel chief executive in a statement.

The bad news from Nortel came on the heels of IBM's admission that its first-quarter revenue would fall 35 percent to about US$18.5 billion from $21 billion a year ago. Such tech results are likely to dampen optimism for an early recovery in IT (information technology) export-dependent nations such as Malaysia. In addition, only modest growth is expected in Europe, while Japan, another major trading partner for Malaysia, is not likely to experience any turnaround for the next couple of years.

While key macro-economic indicators appear to have bottomed out in Malaysia, much will depend on whether there have been sufficient corporate and structural reforms to bolster Malaysia's vulnerability to any future shocks. Indeed, the sort of fiscal pump-priming Malaysia has resorted to can only go so far to compensate for the sharp drop in applications for new foreign direct investment. Much will depend on the qualitative nature and the spin-off effects of the pump-priming rather than the actual amount spent - mostly on infrastructure like roads, schools and hospitals. With a fiscal deficit of 5.5 percent of gross domestic product (GDP) last year, the room for more such fiscal boosts appears limited.

Crucially, Malaysia has to bridge the technology gap if it wants to continue to attract new high-end investment. But for decades its students have not been encouraged to think critically or creatively. Rather, education has focused on rote-learning and cramming for examinations. At a time when the IT export markets have not fully recovered, Malaysia badly needs to nurture its own home-grown brains in a creative and free environment. Such local talent is needed to develop its own indigenous tech industries and nudge its commodities-based industries into further downstream processing.

But with curbs in universities on critical thinking, on student activism and on academic freedom, and with other repressive laws still in place, creative minds remain in bondage. The latest impediment on independent thought is an "oath of loyalty" that academics and undergraduates alike have to make to the authorities.

While economic planners have taken steps to boost domestic demand, not enough has been done to revamp Malaysia's education system to provide a solid base for a self-sustaining economy.

Despite the encouraging macro-economic fundamentals, another key outstanding issue continues to nag analysts: the lack of transparency and accountability in the restructuring of large firms, particularly the politically well-connected ones.

A World Bank report noted somewhat tactfully that "Until now, the corporate restructuring and corporate governance efforts have been relatively successful in respect of small, mid-sized and even some larger indebted enterprises, but progress on the large and politically connected corporate groups has been elusive."

The government had taken steps to take over some of the larger, more problematic cases: Malaysian Airline System Bhd (MAS), construction giant United Engineers (Malaysia) Bhd, and light-rail transit operator Project Usahasama Transit Ringan Automatik Sdn Bhd (Putra). Another firm where investigations into allegations of mismanagement and corruption have plodded along for years is the steel giant Perwaja, which has racked up billions in outstanding debts and losses.

While restructuring may be under way in some of these firms, those responsible for mismanagement or, worse, corruption, have rarely been brought to book. Similarly, little is heard of the prominent individuals and firms that have defaulted on bank loans (now classified as non-performing loans) despite the excellent work done by the state agencies tasked with sorting out the bad loans mess.

Though policy makers may deny it, the privatization policy is in a shambles, with a series of privatized firms being subsidized, restructured, or rescued by the government - leading to charges of "privatization of profits and socialization of losses". In addition, consumers have complained of higher prices for highway tolls and telephone charges.