Conference for Competitiveness: Driving Innovation for Competitiveness Malaysia Productivity Council

Driving Towards High Income Economy

Dato Dr Mahani Zainal Abidin Institute of Strategic and International Studies

30 November 2010

Contents
Targets for high income economy The New Economic Model Strategies to achieve high income Expansion of the economy Conclusion

Targets for high income economy

INCOME ECONOMIC WAGE INCREASE GDP/GNI PER CAPITA TEXT DISTRIBUTION GROWTH RATE GDP must grow at GNI per Gini least 6% per Real wage capita to coefficient annum to growth to reach to reduce achieve match preRM48,000 by further to high crisis rates 2020 0.420 in 2015 income economy

PRODUCTIVIT TEXT Y GROWTH

Contribution of TFP to GDP to increase to 38.5% in 2015

Economic growth rate to grow at least 6% per annum

Per Capita Income USD ~$15,000 Value Drivers Enhancing Growth Gradient
ur bo La t en tm es I nv

~$13,500

Enhanced Growth of 6% Expected Growth of 4.5% as is basis

cy en ici Eff

High Income economies

Low range end

Middle and lower Income economies

~$7,000
Current Income

8 Strategic Reforms Initiatives

201 0

202 0
4

GDP and GNI per capita to increase to USD15,000 by 2020

Source: 10th Malaysia Plan, EPU

5
Source: PEMANDU

Real wages must increase and recover the growth rates pre-Asian Financial Crisis
Increase in real wages per annum (%) Pre-crisis Post-crisis 94-97 98-07 ExportOriented Industries (EOI) Average Increase for EOI Electrical and Electronics Petroleum, chemical, rubber, plastic products and real estate Textiles, wearing apparel and leather products Wood products, furniture, paper products, printing and publishing Average Increase for DOI Transport Equipment and other manufactures Food, beverages and tobacco Non-metallic mineral products, basic metal and fabricated metal Total Manufacturing 5.6 6.2 6.0 5.8 2.8 6.8 7.9 6.8 5.9 5.9 1.9 2.5 1.5 -1.3 1.4 1.4 2.5 1.2 0.6 1.8 Source: Malaysia Economic Monitor,2010 6

DomesticOriented Industries (DOI)

The growth in real wages has been significantly reduced post Asian Source: Reshaping Financial CrisisEconomic Geography Report in East
A i

Income inequality need to be reduced to achieve inclusiveness

Growth to be driven by productivity rather than higher capital and labour inputs
GDP % p.a. 4.7 GDP % p.a. 4.2 GDP % p.a. 6.0

100 %
29.0%

=
1.4 34.7%

=
1.5 38.5%

=
2.3

TFP growth GDP Country GDPgrowth growth Ratio Ratio Country TFP growth
Switzerland Switzerland Germany Germany 1.4 1.4 0.6 0.6 1.8 1.8 1.6 1.6 0.8 0.8 1.5 1.5 3.6 3.6 2.4 2.4 2.3 2.3 3.0 3.0 2.1 2.1 4.2 4.2 0.39 0.39 0.25 0.25 0.78 0.78 0.53 0.53 0.38 0.38 0.38 0.38

TFP
33.2%

1.5

30.8%

1.3 24.0%

1.4

Labou r + Capital
37.8% 1.8 34.5%

Japan Japan New Zealand New Zealand

+
1.4 37.5%

+
2.3

USA USA Malaysia Malaysia (2006-2010) (2006-2010)

2001-2005

2006-2010

2011-2015

Ratio of Total Factor Productivity Growth to GDP Growth of selected OECD countries, 2007
Source: OECD and 10th Malaysia Plan

Achieved
Source: 10th Malaysia Plan

Target

Contents
Targets for high income economy The New Economic Model Strategies to achieve high income Expansion of the economy Conclusion

High Income is an element in NEM

Targets USD15,000 - USD20,000 per capita by 2020

HIGH INCOME
GROWTH + WEALTH CREATION

SUSTAINABILITY
Rakyat
Enables all communities to fully benefit from the wealth of the country
Quality of Life

Meets present needs without compromising future generations

FIXING THE FOUNDATIONAL ISSUES

INCLUSIVENESS
NARROWING DISPARITY

10

The NEM consists of 8 Strategic Reform Initiatives (SRI) and 12 National Key Economic Areas (NKEA)

1 8 2

7 3

6 4 5

11

NKEA provides immediately required boost to the identified sectors

2 1

Boosting identified sectors/projects

Malaysia Malaysia Truly Asia Truly Asia Centre Centre (NKEA (NKEA Greater KL Greater KL /KV) /KV) Educity @ Educity @ Iskandar Iskandar (NKEA (NKEA Education Education Boost under Boost under NKEA NKEA (examples) (examples)

Immediate Growth 131 Entry Point Projects (EPP) 60 Business Opportunities (BO)
Integrated Integrated Zone for Zone for Aquaculture Aquaculture (NKEA (NKEA Agriculture) Agriculture)

KL KL International International Financial Financial District District (NKEA (NKEA Financial Financial Services) Services)

TUKAR TUKAR Programme Programme (NKEA (NKEA Wholesale & Wholesale & Retail) Retail)

Eco-nature Eco-nature Integrated Integrated Resort in Resort in Sabah Sabah (NKEA (NKEA Tourism) Tourism)

12

Without SRIs, NKEA projects will not achieve their full potential
GNI per capita (USD) Target 15,000- 17,000

NKEAs
(Growth Drivers)

Current 7,000

2009

NKEA 1

NKEA 2

NKEA 3

NKEA 4

NKEA 5

OTHERS

2020

NKEAs involve Entry Point Projects (EPP) and business opportunities to raise income levels NEM has Strategic Reform Initiatives (SRIs) that are crosscutting to remove barriers and structural deficiencies

SRIs
(Foundational measures)
Re-energising the private sector Developing quality workforce Competitive domestic economy Strengthen the public sector Transparent and Market-Friendly Affirmative Action Building knowledge base infrastructure Enhancing sources of growth Ensuring sustainability of growth

13

Looking closer at SRIs

THE INTERCONNECTEDNESS OF SRIs
INCLUSIVEN ESS SPURRING GROWTH

CREATING A CREATING A COMPETITIVE COMPETITIVE THE 8 SRIs INVESTMENT INVESTMENT ENVIRONMENT ENVIRONMENT
Re-energising Re-energising the the Private Private Sector Sector Creating Creating a a Competitive Competitive Domestic Domestic Economy Economy Building Building the the Knowledge Knowledge Base Base Infrastructure Infrastructure Ensuring Ensuring Sustainability Sustainability of of Growth Growth Enhancing Enhancing the the Sources Sources of of Growth Growth -NKEAs NKEAs

Investments , Competition & Innovation

High Income
Rakyat Quality of Life

Inclusivene Sustainabil ss iy

NEM
The Bottom 40% & the BCIC Labour Market & Upskilling Workforce

DEVELOPING DEVELOPING QUALITY QUALITY WORKFORCE WORKFORCE

Developing Developing Quality Quality Workforce Workforce and and Reducing Dependency on Foreign Reducing Dependency on Foreign Labour Labour

TRANSFORMING TRANSFORMING GOVERNMENT GOVERNMENT

Bureaucratic Reforms & Quality of Civil Servants

Strengthening Strengthening of of the the Public Public Sector Sector and and Fiscal Fiscal Sustainability Sustainability

NARROWING NARROWING DISPARITY DISPARITY

Transparent Transparent and and Market Market Friendly Friendly Affirmative Action Affirmative Action
14

SRI seeks to address our deficiencies which are preventing us from moving forward
Controlled Pricing System Undervaluation of resources results in gross misallocations Corruption High level perception Education Sector Failing to deliver required talent to the economy Lower Income Group (<RM 3,000) is falling behind and not realising its potential contribution Private Sector Short-sighted in business outlook

Talent Insufficient numbers to drive growth

Rent-Seeking and Patronage Pervasive behaviour

Labour Market Overreliance creates distortion and impedes productivity

Public Sector Ineffective and siloed impeding investment

15

Contents
Targets for high income economy The New Economic Model Strategies to achieve high income Expansion of the economy Conclusion

16

Investment need to return as engine of growth

Private & Public investment as share of GDP 1989-2008;% Average annual growth 1991-2006; %

Pre-crisis 1991-1997

Post-crisis 2000-2006

14

9 6 7 7 3

Private consumption

Governmen t expenditure

Investment

17

High paying jobs need to be created

100% 100%
37% 57% Low Income Jobs

1.7 million new jobs by 2020 in Greater KL / Klang Valley 63% will be in the middle and high income bracket 79% require vocational/ certificate and above One third require degree qualification and above
Source: PEMANDU

63% 43%

Middle and High Income Jobs

3.3 million new jobs by 2020 under the ETP, of which:

2009

2020

NKEA initiatives will create additional 3.3 million jobs, of which 63% will be in middle and high income segment compared to the current 43%

18

To fill in these jobs, more skilled workers in the labour market is needed
1.7 million new jobs by 2020 in Greater KL / Klang Valley 63% will be in the middle and high income bracket 79% require vocational/ certificate and above One third require degree qualification and above
Source: PEMANDU

350,000 foreign 2 Need to shift from talent is dependency on low targeted skilled foreign worker under to contribution by talent high skilled foreign attraction in NKEA worker Greater KL 3 The quality of our labour force need to be at par with

3.3 million new jobs by 2020 under the ETP, of which:

other high income countries

Country Malaysia (2009) Singapor e Republic of Korea Finland United States Australia United Kingdom Hong Kong Labour Labourforce forcewith with tertiary education, tertiary education, % %2007 2007 Skilled Skilledlabour labour force, force, % %2008 2008 Labour Labourproductivity productivity (US$ (US$PPP PPP000 000per per employee) 2009 employee) 2009

23.4 23.4 35.9 35.9 35.0 35.0 34.8 34.8 34.1 34.1 32.7 32.7 31.9 31.9 25.6 25.6
OECD Average = 27.4

28.0 28.0 51.0 51.0 29.3 29.3 43.8 43.8 36.3 36.3 42.9 42.9 42.5 42.5 36.0 36.0
OECD Average = 37.6

26.6 26.6 60.8 60.8 52.9 52.9 66.5 66.5 92.9 92.9 71.7 71.7 67.2 67.2 78.6 78.6
OECD Average = 64.8

New jobs require higher educated workforce

19

The economy must be driven by technology and innovation

GNI per capita (USD)

Number of researchers 2006

GNI per capita (USD)

R&D articles 2006

75,000
Norway

75,000
Norway

60,000
Denmark USA

60,000
Denmark Sweden Japan

45,000
Italy Spain S. Korea Slovenia Czech Republic Malaysia

45,000

Canada Germany UK Australia

Sweden Australia Canada Italy

USA UK Germany Japan

30,000

Singapore

30,000

Singapore Spain Slovenia Czech Republic Malaysia S. Korea

15,000

15,000

0 0 1,000 2,000 3,000 4,000 5,000 6,000

No. of researchers in R&D (per million people)

0
0 10,000 20,000 50,000 210,000 No. of scientific & technical journal articles

20

High productivity will lead to high income while remaining globally competitive

1 At 2000 constant prices Source: 10th Malaysia Plan

21

Contents
Targets for high income economy The New Economic Model Strategies to achieve high income Expansion of the economy Conclusion

22

Expansion of the economy will come from both existing and new sources
Existing Sectors / Industries New Sources of Growth More exports in terms of volume and value add Expansion of economic activity High Economic Growth & High Income

NKEA industries are our sources of growth, but we cannot just look at projects without building the underlying comparative/competitiv e advantage

Competition in the global market is no longer based on price but on productivity, quality and services

Expansion of economic activity will create spillovers which will further spur private consumption and investment

Our target is to achieve minimum 6% GDP growth per annum for the next 9 years

23

Utilise on trade agreements to increase exports

Utilise on trade agreements

Multilateral

Regional

Bilateral

24

Contents
Targets for high income economy The New Economic Model Strategies to achieve high income Expansion of the economy Conclusion

25

High Income Economy needs transformation

z Improvement in economic governance to increase efficiency and investment. z Expanding economic activities will create jobs (high paying ones). z Benefits will be felt if there is productivity improvement compensated by higher pay. z Educational improvement at all levels higher education, technical and skilled work. z Targets for TFP improvement?
26

Thank You