MITIGATING DESTABILISING EXTERNAL ENVIRONMENT AND ENSURING SUSTAINABLE GROWTH
A Memorandum to the Ministry of Finance for the Budget 2004 Dialogue
Submitted By:-
Dato’ Dr. Michael Yeoh, Chief Executive Officer (CEO), Asian Strategy & Leadership Institute (ASLI)
(In his personal capacity)
1. Introduction
1.1 Despite Malaysia's continued progress in its economic recovery with a respectable GDP growth achieved last year and its strong economic fundamentals, the external environment remain uncertain although the Iraq war has been relatively short. However, winning the peace may pose even greater uncertainties and cloud the global economic outlook. Moreover, the outbreak of the Severe Acute Respiratory Syndrome (SARS) is an even greater economic threat in that it has somewhat created a sense of panic or disquiet resulting in fewer people going out and thereby affecting domestic consumption. SARS has been estimated to cause a US$10 billion impact on the economies of the affected Asian nations. Some have described it as the biggest crisis facing the region, with an even greater adverse impact than the 1997 financial crisis, Iraq war, September 11 and the bombing in Bali, for SARS transcends the vicissitudes of the normal business cycle.
1.2 In a recent research report, Mr. Stephen Roach, Chief Economist of Morgan Stanley Dean Witter wrote, "I worry about the quality and sustainability of recovery in an increasingly dysfunctional global economy. It pays to be wary of being lulled into a false sense of complacency".
2. Critical Issues
2.1 As a result of the increasingly more uncertain global economic environment, there are in our opinion three critical issues that need to be addressed:-
a. Firstly, restoring in the short-term business, investor and general public confidence. This includes the need to provide immediate short-term assistance to severely affected sectors such as hotel, travel and tourism operators, related service providers and SME's. This will help mitigate the affects of the SARS outbreak and provide breathing space for the severely affected sectors and sub-sectors to survive.
b. Secondly, sustaining long-term competitiveness of the Malaysian economy. This will necessarily require structural adjustments and policy reforms including bold, imaginative measures that will not leave any sacred cows unturned.
c. Thirdly, transforming Malaysia successfully into a knowledge-based economy which should be our future strategic direction and key thrust in the 21st Century.
2.2 It is our hope that these three critical issues need to be accorded strategic priority in the 2004 Budget. The successful redressal of these key issues, will in our opinion, ensure our sustainable growth both in the short and long term.
3. Strategic Proposals
3.1 First, we believe that the crisis of public and consumer confidence resulting from SARS need to be effectively addressed as the climate of fear and uncertainty has dampened domestic spending, and would have a negative impact on domestic demand. Our culture of rumour-mongering and widespread dissemination of fear has to be curtailed with even more and better information. Openness and ready access to accurate and timely information is essential to kill rumours and fears.
3.2. Second, we propose that immediate short-term measures be put in place quickly to overcome the threat to survival faced by the severely affected sectors:-
(i) Special Soft Loans for hotel owners, travel and tour operators, and SMI's that have been badly affected by SARS be instituted at low-interest rates of 3.5% to 5% for refinancing and working capital requirements.
(ii) To promote greater domestic travel during this critical period with the drastic drop in foreign tourist arrivals, it is proposed a tax relief of RM2,000 per tax payer be allowed for the next 2 years in expenses incurred for domestic travel to promote domestic tourism.
(iii) For the next 12 months, a 3% temporary reduction in EPF contribution rates be allowed. For the employers, this will assist cash-flow. For the employee, it could stimulate domestic spending.
(iv) The EPF should also allow home-owners who have lost their jobs to utilize part of their EPF savings to pay monthly installments for housing and car loans over the next six months period only.
(v) Temporary relief from payment of income tax installments for a six month period for those businesses facing severe cash-flow problems should be considered.
(vi) Banks should allow a temporary moratorium for payment of housing and car loans for workers who have been retrenched for up to six months.
3.3. For the longer term, to enhance our National Competitiveness to ensure sustainable growth, we propose that Budget 2004 focus on three strategic thrusts: Deregulation, Increasing Productivity and Reducing the Cost of Doing Business. To elaborate,
(i) There is a vital and urgent need for the government to develop a Long-term Liberalization Master Plan that will take a comprehensive approach towards deregulation. The Liberalization Master Plan can be part of a wider Reengineering Government initiative to enhance efficiency. The loosening of bureacratic controls on business could have a bigger positive impact on the private sector as a key engine of growth. Every aspect of government regulations should be examined in-depth so that all rules and regulations will ultimately help and not hinder business. Regulations should also be simplified to reduce the incidence of corruption. The liberalization and reengineering government program should focus on achieving SMART Government where the acronym stands for Simple, Moral, Accountable, Responsive and Transparent government.
(ii) The Clients Charters adopted by various ministries, departments and agencies should have clearly enunciated fixed targets to provide approvals for various applications such that after the stated elapsed time approval will be deemed to have been automatically given. Such a move will further enhance the public service delivery.
(iii) It is also proposed that all property transactions be exempted from Foreign Investment Committee (FIC) approvals. Suffice for such transactions to be notified to FIC so that it continues to play its role in monitoring foreign investments. We further propose to send a clear signal that Malaysia continues to remain open for foreign direct investment a high-powered Foreign Investment Advisory Panel be established to be chaired by the Prime Minister personally just like the MSC International Advisory Panel. This proposed new Advisory Council should comprise Chairmen and CEOs of prominent MNC's and Malaysian corporations to sit on it. New ideas on attracting more FDI's can be obtained from this high-level Panel.
(iv) It is further proposed that the Ministry of Finance undertakes a new basis for reporting on FDI's in Malaysia as presently MITI's and MIDA's data on FDI's are only confined to the manufacturing sector. FDI's in the property sector and in services are not captured in MIDA's FDI figures. Hence, a more comprehensive basis of computing FDI's is essential to include non-manufacturing FDI's.
(v) It is further proposed that the threshold of the Industrial Coordination Act (ICA) should be increased to RM10 million to encourage expansion and growth of SMI's.
(vi) Once again, we propose that corporate and personal income tax be reduced to 26% to stimulate business reinvestment and domestic consumption.
(vii) The issue of Perception Management, which has been brought up in previous Budget Dialogues need to be emphasized again. Greater openness will ensure stronger believability in what the government says. A comprehensive National Communications Strategy focusing on Rebranding Malaysia should be proactively implemented.
(viii) There should be a moratorium on increases in rates of utilities for the next 2 years so that the cost of doing business is not increased and is predictable in the short term.
(ix) To ensure Malaysia's long term competitiveness it is proposed that a 10-year Human Resource Master Plan be undertaken to determine the specific competencies and skills that are required based on private sector demand to be matched against total supply of such skill sets. A Human Resource Master Plan is essential to ensure we have adequate supply of trained manpower available.
3.4. Finally, our third set of proposals relate to transforming Malaysia into a knowledge-based economy.
(i) We propose that the cost of telecommunications services, including broad band should be kept low if we are to succeed as a regional ICT hub. A benchmarking study on Malaysia's telecommunications costs viz-a-viz our regional competitors should be undertaken.
(iii) E-businesses should be further insentivized to promote further usage of electronic commerce. This is the most opportune time for a quantum-leap in e-business when traditional buying visits have been cancelled because of SARS.
(iv) To successfully transform into a knowledge-based economy, we also need to incentivitize people with knowledge. A knowledge culture shuold be actively promoted. In this regard, there should be tax relief for those pursuing Advanced Degrees on a part-time basis whilst working so that they can claim tax deduction on tuition fees for approved Masters or Doctorate programmes. Authors of Malaysian books should also be allowed to offset research expenses against royalty income from their books. Tax relief should also be considered for those who translate books from one language to another as they help contribute to the pool of knowledge.
(v) It is also proposed that knowledge management be encouraged in both the public and private sectors. Knowledge management would capture experience at all levels and allow open sharing of knowledge. It has been estimated that 70% of all knowledge is tacit knowledge with only codified knowledge comprising 30% of all knowledge. The challenge is to therefore capture more tacit knowledge so that it can be codified and shared. It is proposed Budget 2004 include incentives to promote greater use of knowledge management and codification of tacit knowledge.
(vi) For the knowledge economy to succeed, there must be an effective mentoring system in place. The k-economy must be the equivalent of a kawan economy where people can freely exchange knowledge and where young people can be effectively mentored. To retain our reservoir of knowledge, the retirement age for knowledge workers should be extended to 60 in both the public and private sectors.
(vii) Finally, greater efforts must be made to bring back the Malaysian Diaspora overseas to share their knowledge gained overseas with local Malaysians. There exists a critical mass of Malaysian expertise overseas and just as India, China and Taiwan have been successful in bringing home their diaspora, we need to make greater efforts to attract home our overseas experts with special personalized incentives that are customized to particular individually with regard to their specific skills or knowledge.
3.5. Malaysia's successful transformation into a knowledge-based economy will also contribute to our long-term competitiveness and help ensure sustainable growth through a greater focus on knowledge as a key factor of production.
4. Conclusion
4.1 The government under the pragmatic and wise leadership of YAB Dato Seri Dr. Mahathir Mohamad has seen us through many crisis in the past. We are confident he can continue to steer us out of these rather uncertain times.
4.2. In conclusion, it is my humble belief that whilst growth rates are important, let us not be over-fixated with growth rates per se. Growth for growth's sake is less important than ensuring we have the right overarching policy framework that proactively addresses the critical issues at hand and boldly pursue structural and policy adjustments wherever and whenever necessary. It does not really matter much if our growth rates are reduced by 1% or 1.5% as long as there remains continued business and investor confidence. We are confident that the National Leadership will be able to do what is necessary to ensure we, as a nation, can overcome the destabilizing and uncertain external environment based on the strong fundamentals which underpin the Malaysian economy.
Dated: 28th April 2003
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