26 10 2011


In defence of the NEP a letter from the NST

In defence of the NEP, a letter written by DR GAIRUZAZMI M. GHANI which I would like to share with readers:

ECONOMY: Don’t blame the NEP

I REFER to the letter from Tan Sri Ramon Navaratnam, “Economy: Back your case with research” (NST, Aug 11), 11/8/2011), in which he argues that the New Economic Policy (NEP) and its remains are one of the main reasons for the decline in foreign and domestic investment in Malaysia.

He did not, however, furnish data.

Let us then look at compare the figures for of total investment, foreign direct investment (FDI) and economic performance during the NEP period, and compare them balance it with our neighbouring countries to see whether his argument is factually accurate. or not.

The data shows that Malaysia’s economic growth and investment intensity were on  par if not better than its neighbours in the 1970s, 1980s and 1990s.

Malaysia’s gross domestic products (GDP) grew at an average rate of about 7.5 per cent % for the 1970 to 1990 period, similar to its neighbouring countries.

Average investment ratio per GDP was about 26 per cent % for the 1970 to 1990 period, also similar to its neighbours, except Singapore which had an average of 38 per cent. %.

These rates were better than other regions in the world, suggesting that the NEP at worst, had done no harm to the economy, if not improved the economy.

Admittedly, the investment intensity after the Asian financial crisis did drop, but can this be blamed on the NEP?

Investment intensity for all East Asian countries also dropped after the crisis.

Malaysia’s total investment dropped from as high as 43 per cent of the GDP in 1997 to about 20 per cent of the GDP after the crisis.

The same occurred into other countries. The investment level in Singapore, Thailand, South Korea and the Philippines also dropped from as high as 41 per cent to about 20 per cent of the GDP.

These countries did not have the NEP; they had have the luxury of homogeneity. So, how can the NEP be blamed?

In fact, it could be because of the NEP that Malaysia was able to enjoy economic prosperity.

The policy, to a large extent, has brought stability to the country, which is a pre-requisite for inflows of investment and economic growth, which then would improve society’s socio-economic well-being.
Compared to other multi-ethnic countries, Malaysia is in fact performing better than most countries in the region. Navaratnam Ramon has failed to recognise that the high tolerances which have been practised by Malaysians due to the policy had have indirectly led us to perform well in the Human Development Index (HDI), where Malaysia has been categorised as a high development country, much higher than countries that have similar characteristics.

Studies have shown that East Asian countries over-invested during the middle of the 1990s, creating overcapacity in the market; the high levels of investment were not sustainable.

This echoes Paul Krugman’s questioning of the East Asia Miracle. He argued that East Asia’s rapid economic growth in the 1990s was due to too much investment, not increases in productivity.

The inability of East Asian countries, including Malaysia, to return to the mid-1990s levels of investment might be due partly, if not entirely, to over-investment in the region.

The current rate level of investment is at a normal level. Indeed, the world average total investment as a ratio of the GDP was about 24 per cent in 2008, lower than Malaysia’s investment ratio during the NEP period. However, what is important is not how much is invested, but rather, the quality of the investment.

The drastic drop in Malaysia’s FDI relative to other East Asian countries in 2009 has been hyped, but it is an anomaly. The FDI sank to a low US$1.4 billion (RM4.2 billion) due to the global financial crisis and other related factors. It has since recovered.

In fact, the FDI inflows in 2010 last year were the highest ever recorded, surpassing the pre-crisis level of US$D8.6 billion recorded in 2007.

Although the World Bank Malaysian Economic Monitor April 2011 (Figure 1.57, p. 44) report shows that Malaysia is the only country in the region with a decrease of FDI to gross fixed capital formation ratio, it is sensitive to the time period selected.

For instance, the ratio is 18.9 per cent for the 2006 to 2008 period and 12.4 per cent ( for the 1994 to 1996)period.

The phenomenon of brain drain has also been suggested by NavaratnamRamon as a reason for the decline in total investment.

However, the decline in investment is not due to brain drain.

The World Bank suggests that brain drain may be costly to Malaysia’s economy but it also states that “even though brain drain has caused a reduction in the overall labour force…, the skilled labour force remains almost constant and the share of highly-skilled remains virtually the same…

On the positive side, this evidence suggests that the brain drain has not had a significant detrimental effect in reducing the stock of the educated workforce”.

However, it does not mean that the brain drain is good for the economy.

Malaysia needs to retain and attract talent in order to improve the country.

Yes, the NEP has been abused and has its weaknesses, but to blame the NEP for the brain drain or drop in investment is empirically incorrect.

Islamic Economics and Policy Research Unit
International Islamic University

Read in full here.




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