How to build economic resilience? (Original)

How to build economic resilience

Contemporary politics has a tendency to be short-termist and populist, narrative-setting is often aiming at the next general election (and gaining power) talking about mostly current issues.  However, many fundamental policy concerns cannot have a quick fix without understanding the complexity of the issues and the underlying causes. Patchwork, disjointed and inconsistent policies are not helpful instead it could have unintended consequences and create new issues.

Voters should expect and challenge the political parties to come up with long term policies focussing on next generations. Political parties should be competing based on policies and visions which could be the source of aspiration appealing to the voters. Why blame the voters for not turning up to vote if they have lost faith in party politics and they don’t see a point that would make any difference?

Talking about economic policy, surely politicians cannot avoid mentioning current affairs such as high inflation and household expenditure on food items like chicken and eggs. Few political parties are offering sound solutions and vision to build economic resilience for generations to come. These cannot be done without first understanding the trends and factors at play.

Economic resilience should mean a futureproof and sustainable development of the economy, where future generations are living in a healthy economic state which is productive, adaptive, reasonably self-reliant and satisfied, while economic resources could be still abundant and managed well. To showcase futureproof, one should at least look into the next generation, say by 2040 or 2050, or beyond.

We have to first recognise that the resources on this planet are finite. Keep emphasising on GDP growth is simply unsustainable. It is easy to jack up the current GDP, if the governments just want it for the short term gain and need: just extract more from nature and sell them, be it oil and gas, or chop down more trees in the forest for timber logging or cash crop plantation or the so-called development projects. These are some state governments’ favourite means for revenue generation. Besides, GDP also conceals the equity issue of economic benefits distributed to all layers of society (ie. wealth inequality), and the negative externalities some projects would bring.

If we are serious about building economic resilience, we need a non-extractive economic model. Tim Jackson’s ‘Prosperity without growth’ published 13 years ago is still largely relevant to advise the governments today about sustainable development.

However, there are still some useful components in the GDP from the 3 measurement approaches:

i) Value-added economic activities

ii) compensation of employees (the labour income component)

iii) Consumption and Investment

 

So, to build economic resilience, the government has to determine and ensure:

i) Labour force and participation rate, as well as productivity stay at reasonable level

ii) Retain best human resources and talents. Skills and knowledge are vital to value-added economic activities where innovation offers a premium

iii) Proper and prudent investment from public and private sectors, including how to manage resources

What are the basic assumptions and challenges from the current standpoints?

i) Changing demography

Falling birth rates and total fertility rates in Malaysia is a given fact, that means the country is on the path to an aging society. This would have a big impact on the labour force and social care.

By 2040, population age 65 and above would triple to that of 2010, at 14.5%; median age in population increases to 38.3 years old (12 years older than that of 2010); dependency ratio becomes 49.5 per 100 working population, that means almost 2 working adults have to take care of 1 dependent (child or senior citizen), physically and financially.

By then we might face the problems of Japan today: aging society means more resources for healthcare and social welfare as well as urban (re-)design. The burden of the shrinking working population is higher, given the dependency ratio. Without prudent planning to adapt to the new realities, there won’t be a happy and harmonious society.

 

ii) Abundance of our natural resources would be depleted by the rate of extractive economy today.

Simply put, what do we leave for future generations, if we kill most of the geese that lay eggs today? Some said it is a ‘resource curse’ for Malaysia but it doesn’t have to be that way - Look at how Norway manages their resources and invests for the future, even UAE has diversified their economy.

More often than not, when some governments talk about balancing economic development needs and environmental protection, they tend to overlook the importance of the environment for the local and wider affected communities, and do not consider the externalities such as health and social costs.

If public interest is not put in the heart of planning but just looking at what the developers want and can provide, there would produce many bad plannings that reduce the economic resilience and liveability of the local community. Does one still wonder why urbanisation is gaining pace in Malaysia and people are migrating to Klang Valley and major cities for living?

Even our abundance in natural resources and biodiversity has a limit for human greed in the extractive economy model. Some ecological damages done in the name of economic development today will have a huge price to pay in terms of climate change and natural disaster. Referring to the most recent Baling flood, forest land clearing for Musang King durian plantation just some years ago is alleged to be the main culprit. Now some Penangites and Kedahans do not even have tap water access, who pays for this?

Some economic activities such as land reclamation and highway construction projects in the states like Penang and Selangor would have equity issues too, the so-called gain in economic benefits is at the expense of fishermen, farmers and local residents. What would be the economic resilience for the local communities, if that means they lost their livelihood or job security, clean water and air and subsequently compromise their health and safety?

If we go on with the current rates of extractive economic activities for the short term gains today, this would be the recipe for more disasters in the foreseeable  future.

 

iii) Continuous brain drain of best local talents, unable to attract global talents and Malaysian diaspora to return

If politics and socioeconomics go business-as-usual, the current young and future generations of Malaysians might lose faith in the country, and decide to leave for greener pastures.

First, unequal opportunities, non-supportive and non-enabling environments for the career growth of some local talents. In the era of global movement of talent and capital, patriotism or loyalty to one’s country holds little currency, hardly being the deciding factor to hold back one’s ambition and aspiration for better life and personal fulfillment.

Why then unequal opportunities? This has to go back to the policies, or more aptly, the politics of race and religion. Just look at the academics in the public education institutions, can we blame someone who decided to leave due to the career ceiling determined by skin colour and political inclination?

Some opportunities simply do not exist here, due to limited or insufficient amount of skilled talents in Malaysia. The situation does not encourage some high value-added and innovative economic activities coming to or created in Malaysia.

If we do not address the issues of social equity and fairness at the overarching policy level and political narrative, if we do not stem the trends of the declining standards or failure in education systems at producing skilled and creative talents, if we do not take care of our environment and make the cities and country a better place to live - without the fear of man-made natural disaster backlashes, with good public infrastructure such as public transport and housing support - why do we think we can hold these talents in this country and expect them contributing to our economy?

In short, losing a significant number of human talents in the form of brain-drain is no-brainer to building economic resilience in Malaysia.

In addition, the current education policies seem focussing too much on tertiary education and academic credentials, while many economic activities actually need more skilled labour. There is a great mismatch here, quite some evidence, analysis reports and articles are out there to show this is right now the case in Malaysia, and so for the past decade. If our education system still does not put enough attention and emphasis on technical and soft skills training, this will continue to bite us.

In fact, this could be one principal reason why we are still reliant heavily on foreign labour. Paradoxically, some Malaysians are willing to do the same hard labour works in Singapore, but not happy to do this here in Malaysia. Why? The pay has been effectively suppressed by the foreign labour policy. Also, Malaysia has one of the lowest compensation of employees proportion in the GDP in the region, only 35.9% of the national GDP went to labour income in 2019, which is seriously low. Something is wrong with the capitalist system here in Malaysia, because even Singapore can do 5% better in GDP for the workers’ share.

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Policy matters. One might be tempted to do things for short term needs, but could leave a huge hole for the future. One such example is the EPF withdrawal policy during the pandemic period, where the government seemed to indirectly encourage the persons in need to withdraw their hard earned savings from their EPF account, this action has a significant impact on their own economic resilience. The statistics are shocking: about half of EPF members under the age of 55 (6.1 million) now had less than RM10,000 in savings in their retirement funds, among them 2.6 million had even less than RM1,000! Great concern now is for the government to improve the social protection system.

So, based on the trends analysis I shared above, what could be the forward thinking and futureproof policies for economic resilience?

Given the lesson learnt in the case of EPF withdrawal, one should not get too carried away by the current problems such as high inflation rate, high living cost and household expenses. Policymakers are urged not to trigger any knee-jerk policy which adds on greater future cost.

In fact, the current economic issues are not unique to Malaysia but a global phenomenon due to several external factors resulting from the Russian invasion of Ukraine and the economic sanctions. However, the people in the street feel the pinch and pain, the political parties cannot ignore these voices and not talk about these issues. But to get it right for future long term policies, one cannot be populist. One has to go back to the basics which are actually not very economic centric.

 

i) Sustainable development and democratic participation

The governments the voters elected have the greater responsibility to manage our wealth properly and prudently. We need to have some safeguards to prevent the wealth being plundered for short term gains.

The governments have to be reminded that the natural resources are our assets as well as our future wealth we need to invest in and keep hold of. These resources which we are blessed to have, are shared between the past, current and future generations. We should make them work for us in the long term, and not squander them in the current generation. Extractive economy has to stop, and the planners have to carefully consider many future costs of extraction. Every tree especially in the ecological sensitive areas has a value much greater than just the current timber price.

The government has to consider social equity in development too, not hoodwinked by the developers' proposed huge potential economic benefit numbers which may not be realised. The benefits of the development project have to be clearly demonstrated passing down to the local people, more so for the affected communities.

‘Leave no one behind’ cannot be just a slogan. Thus, the government needs to adopt a more democratic community-based development model, where the locals have a say to determine what goes in their community.

 

ii)  Fair and equitable social policies & social-inclusive politics

The old politics are a divisive one - they differentiate people by skin colour and creed - they do that for their own self-political interest to retain or regain power. This kind of communal politics in Malaysia is well-trodden, it works time and time again. It does not need much policy research or thinking, politicians know just how to appeal and fan sentiments for their ‘own kind’.

It is definitely unsustainable and toxic for the social fabric of multiethnic and multicultural society like in Malaysia. The more social-destructive consequence is driving out those who feel unfairly discriminated against. This may leave some with a deep lasting impression. Whenever a Malaysian diaspora has a grudge on that perception, they will not return for a long stay contributing to the economy. No matter what amount of good food or beautiful sightseeing places they can get on their summer vacation when they are back home, this would not change their mind.

Can the current new and established political parties rise to the challenge and break the mould of racial and religious politics, promote diversity and social inclusion as the main narrative?

It may be true that the current prevalent social outlook and values among the majority average population have been increasingly tilted towards a more conservative political view. The right wing politics and their narratives are surely destabilising the fundamentals for economic resilience in terms of the concern on human talents. It simply does not help with stemming the brain-drain. Thus there is an urgent need to reverse the trends and build a more inclusive political narrative.

Here I would recommend reading the Manifesto Rakyat chapter on Economic Justice, especially the proposal coming from Dr. Lee Hwok Aun on ‘a cohesive Malaysian society based on equality and fairness’.

Besides that, if the country could harness and maximise the women’s participation in the labour force on par with the men’s counterpart, we should expect an addition of about 3.5 million women contributing directly to the economy. The current situation is, about one third of women stay out of the labour force once they step into the age group 30-34, mostly presumed due to family duty or responsibility. So, if the political parties are serious about wooing half of the voter base who are women, they should compete with supportive and enabling policies to empower women going back to the workplace, such as setting up more affordable childcare centres. This would mean significantly and resonate with many working women. Malaysia’s female participation rate of labour force is one of the lowest in the region in 2021 (55.5%), perhaps we should look up and learn from our regional champion Vietnam (70%).

iii) Increase government revenue by progressive taxes, invest in future and manage prudently

The government has to prepare for the long term future, which many political parties in the contemporary world seem to forget, because short-term populist policies seem always rewarding.

To build economic resilience for the changing demography, one has to think about investment in urban design of the cities, preventive health and future healthcare, preserving and managing the natural resources, building critical thinking, creative minds and skills in education, ensuring self-reliant and sustainable agriculture, as well as designing meaningful and supportive social protection programmes for social harmony.

The government has to reverse the debt-driven economy as this is unsustainable. However, raising revenue for the government so that they could have more financial power on social programme interventions and creating the impacts, is always a big challenge.

We should realise that the wealth inequality in Malaysia is not small, and our taxation policy is not progressive enough to maximise the opportunity to collect significantly more revenue. The global trend of red-sea competition driving down the corporate tax and neoliberal narrative in reducing government taxes especially the direct taxes such as income tax, these are not helpful. They also have become a populist stance, hurting the government revenue, resulting in the government constantly looking for indirect tax income (such as consumption-based tax like GST) to expand the revenue base. Even if re-introduce the GST, one has to recognise it is regressive in nature. Though the tax can still be designed better to make it more progressive, it is probably just one way to increase the tax revenue, and it may not be welcomed by the general population now who are still struggling with low wages and high living expenses.

However, if the government enjoys social trust and public confidence in managing the economy and social programmes, it is actually not uncommon in many countries to have higher taxation but also higher social solidarity and equality. It is not impossible, but for a start, our society has to reverse the ‘smaller government’ narrative, make democratic governance useful to address or solve people’s daily life problems. If the governments could be proven relevant in improving people’s lives, this builds the case for them needing more resources for social purposes and socioeconomic justice for all.

Lim Chee Han

19.7.2022

P/s: Received feedback from my good friend Shaua Fui, it is a good discussion. She asked if 'corruption' has been missing from the list of policy recommendations. She certainly has a good point, pointing at the elephant in the room. To me, corruption is definitely, always one of the top reform agendas on many fronts, surely that could reduce economic resilience of the country, especially the ordinary citizens and residents. 

Why? Corruption would only benefit the parties which are involved, and the bigger cases would exacerbate the wealth inequality of the country due to the benefits going to the well-connected capitalists (businessmen) and politicians at the top tier of power. They are usually somebody at the top 0.1% of the population. Those big development projects which went through corruption, would probably pass on more externality costs to the general public, it might compromise on quality, health and safety measures too. 

Similarly, tax evasion would also have the effect of reducing government revenue. While the general public would expect the wealthier class shouldering more financial responsibility for public expenses (as what we call 'progressive taxation'), instead they have actually more options for tax exemption and/or found other loopholes so that they can  avoid tax.

Shaua Fui also correctly pointed out about the prevalent narrative for the global economy, and the interconnectedness of the local economy, if our country can find our ways of doing or organising our economy better suited to the local needs and culture? I would agree with her that the kind of neoliberal values and beliefs which are based on the free market, free trade, more de-regulations and free flow of capital, labour and even data, are fundamentally flawed and may not be beneficial to our own people and country. Without recognising that global (corporate) economic power is unequal, neoliberal practices would make those global giant corporations even extract more wealth from the local population without the latter realising it. So, civil society has to play a part in safeguarding the national interest, not letting any government ‘sell’ us out to (big) corporations no matter local or MNC.

That's why I am annoyed by MITI always want to showoff FDI numbers if it is in favour, no one talk/scrutinise about what kind of FDIs are brought in, if these are good things for the local people. also, big global corporations when they come in, will reduce (not increase) the competition among our local companies (they may not survive), thus they could become more anti-competition, opposite to what the neoliberals preach for.