Economic policies in Malaysia are dictated by politics — why they fail

Ostensibly, this direct intervention in the private sector to force wages higher will trigger a positive feedback loop — where the higher wages translate into stronger purchasing power, increased demand, more savings and new investments (expansions to meet this demand), more jobs and even higher wages, thus driving economic growth. Great stuff — if only economics were so simple.

Let’s take a step back. This country has had a long discourse on issues of low wages, unaffordable housing, low savings and investments, high cost of living, falling ringgit, unemployment, poor quality of education, growing income-wealth inequality, polarising politics, race, religion and so on.

Almost always, proposed solutions are, for one issue or another, in silos. Yet, as we will show in this article, they are all interrelated. You cannot change one part without affecting another. Fundamental to this is understanding Malaysia’s economic structure, policies, the intended policy decisions — and the unintended consequences.

We will try to lay out all the facts and data, and the root causes of most of our current issues. We hope that our narrative will provide some answers and shed light on the reasonableness of some of these suggestions.

See also: Why y-o-y real wages in the US may be rising, yet its standard of living may have fallen — a statistical mirage

It is a complicated topic, no doubt, with many moving parts. In other words, this will be a long article. Bear with us. To make it easier for readers to digest, we have broken the article into four parts, each a major topic on its own, but all interrelated and critical to the bigger picture — the future of our economy.

Part 1 — Inflation: A subsidised economy by design

We will start with inflation (the Consumer Price Index, or CPI), which is a critical number in understanding the current state of our economy. According to the Department of Statistics Malaysia (DoSM), the CPI grew at an annual compound rate of 1.9% between 2010 and 2022. Surely, this cannot be right.

See also: Education was, is and always will be the great equaliser

We bet this will be your first impression. And we admit, it was also our intuitive reaction every time a new data point was released — that the number was unrealistic. It was too low, especially for those living in urban areas. Just look at the price we are paying for food and groceries — RM50 or even RM100 simply do not get you very far these days. Our expenses are rising so rapidly that many have little left for savings. And house prices keep rising, making home ownership increasingly out of reach — and yet, we have shown that this is largely a myth. (Scan QR Code 1 for our article titled “Home ownership and affordability in Malaysia: Facts and Myths”, published in The Edge on Nov 6, 2023)

The question, then, is: Are we also wrong about our perception of the official CPI numbers? Because if we are not wrong, then it is imperative that the computation for CPI be changed to reflect reality. Unrealistic inflation data has broad and serious consequences for the economy and the people, especially the working class.

For starters, the CPI is a critical number for central bankers, as we have witnessed in the past three years. Most central banks have two primary objectives — to maintain stable prices (CPI/inflation) and optimal employment and economic growth (that is neither too hot nor too cold). The CPI is a key consideration in setting interest rate policy that forms the benchmark for pricing government, business and household borrowings. Obviously, the level of interest rate will have a huge impact on economic growth.

A high interest rate (cost of borrowing) will deter business investments, which will then dampen the country’s future growth potential. Fewer jobs will be created for the people. High interest rates will affect demand for hire-purchase loans and lower affordability for home buyers. That, in turn, reduces demand for cars and housing, construction, building materials, manufacturing and so on — leading to slower economic growth and corporate profits (that could then be reinvested in the economy). Mortgage rates will also determine the asking rents, affecting tenants and their living costs and savings.

And the higher cost of borrowing has repercussions on the public fiscal position, making it harder for governments to sustain budget deficits and, thus, the ability to spend on infrastructure, healthcare, education and other programmes. Forced austerity will, again, lead to weaker economic growth and fewer jobs created. Low interest rates will have the opposite effect. This is why during a recession, central banks typically cut interest rates to stimulate demand and growth.

And for those who subscribe to the Modern Monetary Theory, inflation is really what matters — not fiscal deficit, not money supply, not employment targets — with the key driver being supply considerations and productivity to meet rising demand for a people-oriented economy (read Stephanie Kelton’s book The Deficit Myth).

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Inflation is also a key factor in wage negotiations between employers and workers. Annual salary increments are often benchmarked against the CPI. An unrealistically low CPI will translate into slow wage growth, making it hard for people to keep pace with “real” cost of living increases. To maintain living standards, many will save less (leftover from disposable income after expenses). A low saving rate means a smaller pool of domestic money for investments. It could also lead to poverty in retirement and other social issues.

Inaccurate CPI numbers will distort consumption-savings as well as investment decisions. Savings are effectively delayed consumption. It makes sense to save only if the returns on savings are higher than inflation. Otherwise, your purchasing power is eroded, and you should just spend your money today.

Incidentally, every person’s inflation will be slightly different, depending on what one consumes. Therefore, their investing decisions would also be different. If your inflation is high, then you need to find investments with higher returns to compensate for the time factor, all else being equal.

Furthermore, if the official CPI numbers are artificially low, then real interest rates (nominal interest rate less inflation) will also be too low. And this is likely to lead to capital outflows and depreciation of the ringgit. The ringgit has, indeed, been in a longer-term decline against the US dollar and Singapore dollar. Does this mean that our impression is right?

Given the importance of the CPI, we decided to dive a little into its computation and determine for ourselves how realistic the numbers were. We did a simple survey of inflation for several of our own team members, based on their respective spending patterns and actual increases in prices (see Table 1).

As we noted, inflation for everyone is different. People spend on different things in different proportions of disposable income — some spend more on food and housing, others on education or travel and so forth. Even within the same category, the actual things, the brands and quantities we buy, also vary and the price increases differ for each category.

In addition, certain variables may not be accurately measurable, such as “downtrading” — for example, when you get lower quality or a smaller portion of the “same” food over time. On the flip side, how do you value the product improvements and features from technological changes, such as in refrigerators, TVs and smartphones?

After tabulating the figures — surprise, surprise — Asia Analytica’s inflation, on average, is in fact very similar to the official CPI number. Although the price increases in some categories are very high (for instance, food away from home), there are other offsetting expenses, where inflation is low (fuel) and even negative (communications). This means DoSM’s computations are fairly good and robust.

The pandemic was a shock to the world, one on a scale unprecedented in our lifetime. Governments responded as best they could, given their limited knowledge, as the pandemic unfolded. An unintended consequence was the surge in inflation, owing to the combined effects of supply chain disruptions, widespread lockdowns, massive government stimulus and extremely loose monetary policies.

Inflation across the developed world, including in the US, surged to the highest levels since the early 1980s. Singapore recorded its highest inflation since the 2008 global financial crisis. Malaysia’s CPI, however, remained modest by comparison (see Chart 1).

In conclusion, inflation in Malaysia has been low and stayed comparatively low even during periods of extreme economic distortions and despite the ringgit’s decline, which would have raised prices of imported goods and services. The question, then, is why? Because we are a subsidised economy, and this is by design.

Malaysia had intentionally structured the economy to be a low-cost manufacturing base for exports as a national economic policy since the early 1980s (Malaysia Inc Policy in 1981 and Look East Policy in 1982). We kept costs low with extensive subsidy programmes and suppressed wages by importing cheap foreign workers. This economic model worked in the early years, driving growth and elevating per capita income. Unfortunately, we failed to move up the value chain.

And the ballooning subsidy bill is now turning into a huge problem — accounting for 23% of total government operating expenses, leaving less and less funding for inJumphead TONG’S PORTFOLIO frastructure, education, healthcare and such. Clearly, there is an urgent need to reduce the fiscal deficit and government debts — or the ringgit will continue to decline and cost of living will continue to rise. How this is to be done is the question.

Yes, blanket subsidies in the current form are inefficient, with leakages — resulting from factors such as foreigners buying subsidised goods and smuggling them out of the country — costing taxpayers money. But we also fear that subsidy rationalisation — rolling back blanket subsidies in favour of targeted subsidies — under the current plan will result in a much higher CPI than the economy and people can bear. And, no, one-dimensional answers — such as the current attempts to soften inflation by forcing wages higher through the PWP — will certainly fail again.

As we said at the start, we cannot address issues such as low wages and subsidy rationalisation without addressing the structure of our economy, because each is a critical piece of the bigger picture — and they are all interrelated. We must therefore have a holistic solution to address all the issues, in unity. We will elaborate in the rest of the article.

Part 2 — Wages: Low but appropriate, given productivity

Are Malaysians paid low wages? Yes. We have been stuck in the “middle-income trap” since achieving upper-middle-income status in 1996. Nearly three decades on, we have still yet to progress to a high-income country threshold. At the start of 1980, our per capita income was not much different from that of Taiwan and South Korea. Today, we are embarrassingly far, far behind (see Chart 2).

Are Malaysians underpaid? The answer to this question is more complicated. It is a widely held perception that, yes, Malaysians are underpaid, and that incomes are not keeping pace with inflation and the rise in cost of living. We have also read some commentaries that say, because so many Malaysians are working in Singapore at far higher wages, it means we underpay those working in Malaysia. This statement is so idiotic, it does not deserve a response.

The facts, however, tell a different story.

Chart 3 compares wages to cost of living in major cities in the world. According to the data, Malaysians are, by and large, adequately paid (landing right on the line of best fit in the scatter plot) relative to cost of living (the data is collected by the Asia Competitiveness Institute, a research centre at the Lee Kuan Yew School of Public Policy, National University of Singapore).

In addition, houses — the biggest-ticket expense item for most people — are generally affordable for the majority of the population. The data show that home ownership has been trending higher over the past decade, reaching 76.9% in 2019. Again, this is comparable to regional peers (according to the International Monetary Fund [IMF]).

In fact, affordability has improved, with incomes growing faster than house prices, on average, between 2012 and 2022. Chart 4 shows the median house price-to-median household income in five major Asean cities. Kuala Lumpur has the lowest ratio, after Singapore. This means Malaysia is doing better than our Asean neighbours in terms of home affordability, apart from Singapore HDB housing.

(For more charts and data, scan QR Code 1: “Home ownership and affordability in Malaysia: Facts and Myths” and QR Code 2: “The Malaysian housing industry is efficient and competitive — and the government should just focus on social or subsidised housing”, published in The Edge on Nov 6 and Nov 13, 2023, respectively.)

The data also show that Malaysia’s real wage growth over the past 10 years is in line with that of our neighbours, after taking into account CPI (which we have already established, in Part 1 of this article, is a fair reflection of reality) (see Table 2).

To summarise, wage growth is, by and large, keeping up with inflation. Real wage growth is positive. Malaysians are no worse off in terms of cost of living. (We can literally see many of our readers shaking their heads and saying it simply cannot be — and that our analysis is the national average, not any individual cost of living and wages.) The majority can afford to buy a home — wages/income levels are sufficient to qualify for, and pay off, a mortgage. Why, then, the widespread perception that Malaysians are faring worse and worse?

We believe this is due to, at least in part, the “completeness” of our data collection, which often does not give the full picture, and leads to the wrong conclusion (intentionally or otherwise). Also, it is a human tendency to always compare against your richer neighbour and find yourself wanting. It is also populist to pander to what the people already believe. We live in an increasingly polarised society. Populist narratives and storytelling — by mainstream and social media as well as politicians — sell. Having said that, the perception that Malaysia is worse off is not completely wrong and we will explain this a little later.

A popular recent narrative is that wage growth for Malaysians, especially those in the middle 60% group, has been too low for too long. Chart 5 — a sampling of median wages by occupation and their respective wage growth between 2010 and 2019 — represents a typical chart to “prove” this “fact”. It shows that the wage increase for the lowest-paid jobs (bottom 20%) has been the highest (roughly 12% compound annual growth based on our sample), thanks to the government’s minimum wage policy. But the compound wage growth is low for most other occupations, roughly 5% per year on average, before picking up to about 8% per year for the highest-paid positions (top 20%).

This type of statistics — or “voodoo statistics”, well illustrated since 1954 by Darrell Huff in his book How to Lie with Statistics — is then used to justify more direct government interventions, on the basis that, left to the private market, employers are unwilling to pay more.

Here is the problem — the data provides only a static snapshot of the job market for different occupations at two different points in time (2010 and 2019). What it does not take into account is the person’s wage mobility over this time frame.

For instance, Person A, who starts off as an accounts executive (average monthly salary of RM3,250 in 2010), should gradually move up the corporate ladder, say, initially to senior executive and then to finance manager (average monthly salary of RM10,000 to RM15,000 in 2019) over the 10 years. Clearly, Person A’s wage increase — from RM3,250 to between RM10,000 and RM15,000, to reflect the two promotions — is much higher than the 5% annual increment for the exact same position (of accounts executive). Thus, Person A is doing far better (in terms of monthly income) than the data would suggest.

Unfortunately, there is no official available data tracking wage mobility to determine the wage growth for the “same person”. And wage mobility is higher for the higher-paid jobs, for example, engineers versus garbage collectors. (For a more detailed discussion, scan QR Code 3 for our article titled “Should Malaysia force wages to rise through direct wage policy intervention?” published in The Edge on Oct 2, 2023.)

Similarly, our data-based analysis has proved that the perception of rising unaffordability of home ownership is a myth. The fact that home ownership is trending higher already disproves this belief. And even more so, given that the house price data captured by the National Property Information Centre (Napic) is upwardly biased, owing to the continuous inclusion of new properties into the sampling basket. Data from EdgeProp tracking the “same house” showed an actual decline in the median home price from 2017 to 2022. You could buy the “same house” in 2022 for less than in 2017, while your income would have risen over this period. In other words, affordability has increased.

As we said, the country’s official statistics do not capture the “completeness” of the data — be it in terms of wage mobility, house prices or even income levels. We believe Malaysia has a huge informal economy, and wages/incomes are grossly under-reported. How else would one explain 76.9% home ownership and 2.2-car ownership per household, on average, when only one in five of the entire workforce currently qualifies to pay income tax?

In short, we think Malaysians are not doing as badly as popular narratives suggest. Wages are low because we are a subsidised economy with a comparatively low cost of living (see Chart 3). Remember, the CPI is a key factor in wage negotiations between employers and workers. Annual salary increments are often benchmarked against the CPI. Real wage growth is positive and in line with regional peers.

But it is also a fact that we must break out of the middle-income trap. Our past government policy of suppressing cost is no longer sustainable, given the fiscal deficit. It was never meant to be long-term sustainable.

Wages must grow faster to elevate the country to developed, high-income status and raise living standards. While wage growth is keeping pace with the CPI and cost of living in the country, we are buying more imported goods and services, we are travelling overseas, and our children are going overseas for education. The ringgit’s long-term decline against the US dollar means that all this is costing more. Thus, it is true that the middle-income households especially are struggling — they pay taxes but do not qualify for most government handouts. The only major benefit they get is the fuel subsidy, which is now likely to be taken away. The current subsidy rationalisation plan will raise the CPI and cost of living.

The progressive wage policy attempts to force wages higher by subsidising wage increments (RM200 to RM300 a month per worker) — targeting workers who have a monthly wage of RM1,500 to RM4,999 — for 12 months. Question: How many companies will raise the salaries of workers, knowing that they might lose this subsidy one year on? Can they even cut wages if the PWP programme is subsequently aborted? For all its good intentions, this attempt looks like a practical joke, especially when the budget is only RM30 million. Adding one subsidy here and removing another subsidy there is not a solution. Just let the market operate competitively.

As a side note, Japan recently passed a tax incentive scheme to encourage sustainable wage growth. Companies (depending on size) that raise wages by at least 7% year on year will get 25% to 45% in tax deductions for the increase, and 15% to 25% if the increments are 3% to 7%. This is simple, effective and quick to execute across the board for all companies and involves no fanfare or convoluted half-measures.

(In a subsequent article, we will explain why wages across the world need a one-off upward adjustment. This is why we are seeing rising labour unrest.)

Worse, the current plan for direct wage policy intervention in the private job market, without a holistic plan for an underlying structural reform of the economy, we fear, would have the opposite effect. As we said, Malaysia’s economy was designed to be one of low cost, low skills and low wages and driven by low value-added production for export. Therefore, to reverse low wages, we first need to address our low-cost economic structure.

How do we raise wages sustainably? For one, to grow wages faster (for the same occupations, as in Chart 5) over time, we must raise worker productivity. To improve wage mobility — and opportunities for career advancements — we need to attract high-value investments that create high-paying jobs. And this is provided our people are educated and trained to be able to perform these jobs (more on this later).

But it is not only about raising wages for the people, it is also about whether firms can afford to pay more. There is a difference between companies that are unwilling to pay more and those that are unable to pay more.

The largest companies in the country — the best data we have are for those listed on Bursa Malaysia — have reported an alarming trend of weak sales growth and even worse profit growth in the past 10 years. Forcing wages higher (increasing costs) without a corresponding rise in productivity gains will lead to further loss of competitiveness and even faster profit declines. As it is, Malaysia’s compound annual real wage growth of 2.6% in the past 10 years has exceeded productivity gains of 2.3% per year. Indeed, this is the widest margin compared to countries in the region (see Table 2).

Returns on equity (ROEs) are also in decline. Owners need to make a minimum required return for their capital and risks to stay in business. Otherwise, many might well end in failure and closure or businesses will simply relocate to other countries. To protect falling margins amid rising costs, businesses will resort to layoffs. Investments will decline and unemployment will rise. The result could be disastrous for the nation. We will discuss this further in Part 3.

Therefore, it is critical that public policies address the real underlying causes instead of resorting to populist interventions, which may well result in unintended negative consequences for the country. We talk a lot about attracting high-value investments to create more and higher-paying jobs. The real question is — and we need an honest assessment to answer this — do we have the necessary skills and knowledge (quality and level of education) to fill this demand, to step up productivity and justify higher wages? We will elaborate on this in Part 4.

Part 3 — The economy: Low value, low wages, low costs, low prices, low competition, low investments, low education

We have shown in Parts 1 and 2 that, yes, the absolute level of wages is low. But the low wages are compensated by low inflation and living costs — despite perceptions to the contrary — sustained through extensive state subsidies. And all this is by design — they reflect the structure of Malaysia’s economy, and of past policy decisions and strategies (rightly or otherwise).

The government intentionally planned and meticulously executed policies back in the 1980s — specifically the Malaysia Inc Policy (1981) and Look East Policy (1982) — for economic growth to be driven by low-cost manufacturing for export, as the country moved away from a primary commodities-exporting economy. It is the common strategy for newly emerging and developing countries to compete on production costs. And we were successful in attracting investments from multinational corporations (MNCs), particularly those from Japan and the US, notably in the electrical and electronics (E&E) industry.

After the 1997/98 Asian financial crisis (AFC), the ringgit was fixed at a “crisis-triggered” low level of 3.80 to the US dollar (from 1998 to 2005) — to give companies a comparative advantage and perpetuate this low-cost production structure. (In the 25 years prior to the AFC, the ringgit under “normal conditions” had always hovered around 2.50 to the US dollar.)

Depreciating the ringgit became a “tool” to boost export competitiveness in the global market. It also protected local businesses against competition from imports (by making imports more expensive).

This allowed businesses to make “easy” profits, negating the urgency to invest in R&D, innovate and improve productivity. Malaysia’s spending on R&D (as a percentage of GDP) is well below that of Singapore and South Korea. There was also little transfer of intellectual property from the MNCs.

Ultimately, our protectionist policies hampered the move up the value chain, diverging from developments in countries such as Singapore, Taiwan and South Korea, where competitive pressures drove innovation and economic growth.

Furthermore, government policies enabled a steady supply of cheap low-skilled foreign migrant labour to keep costs low. Foreign labour rose from a low 3.6% of the total workforce in 1990 to 14.8% in 2019. And this data excludes the huge number of illegal migrant workers.

The availability of cheap foreign labour effectively suppressed wage/salary growth for all Malaysian workers. To maintain balance, cost of living is also kept low, with extensive subsidies, including for fuel, utilities and food staples.

Over time, the companies themselves became overly reliant on this high volume, low cost production structure — occupying the lowskill, low value-added manufacturing market segment that has limited pricing power in the global market. Even the gains in competitiveness from currency depreciation get whittled down over time (because the imported cost component keeps increasing). Lack of innovation and proprietary intellectual property means you have limited pricing power to pass on these higher costs.

Eventually, competitive pressure from newer emerging countries (such as China in the past and Vietnam today), with even larger pools of cheaper labour and lower operating costs, led to falling selling prices (in the global market) and profit margins.

In the domestic market, it was also harder for companies to raise selling prices. In failing to move up the value chain and being heavily reliant on cheap foreign labour, domestic wages and purchasing power — while reflecting a low CPI and cost of living — were suppressed.

We think these factors played a big role in the poor financial performance of the largest companies in the country (those listed on Bursa). Based on publicly available data, these companies collectively reported an anaemic annual compound revenue growth of just 3.4% in the last decade (between 2012 and 2023) — and even slower profit growth. Profit before tax rose only 0.6% annually during this period, while net profit grew 0.2% per year (see Chart 6).

When profit growth is lower than sales growth, it means margins are being compressed. Compounding the impact of poor pricing power is a confluence of factors, including the cost of rent-seeking, excessive licensing requirements and regulatory compliances, leakages and corruption, inefficiencies, monopolies and oligopolies, lack of investments in R&D leading to slow innovation and productivity gains and so on.

Let us call a spade a spade. The cost of doing business in Malaysia, from the little hawkers to the billion-ringgit contracts, comes with an implied “cost of sharing”.

The point is, when your largest companies cannot even register a compound earnings growth of 1% a year for the last 10 years, you must have a fundamental and structural economic problem.

ROEs fell sharply between 2012 and 2019, prior to distortions during the pandemic years, and were well below the average ROE of US-listed companies (see Charts 6 and 7). (Smaller, unlisted Malaysian companies appear to be growing faster, according to data on the government’s tax collection [there is very limited data on these companies], but from a much smaller base.)

When owners cannot earn the required returns for their capital and risks, they will not reinvest. If companies cannot grow their profits, they cannot pay their workers more. Forcing wages higher will just erode margins and profits, leaving less to reinvest, to improve productivity and increase employment. It is not difficult to understand. This is the most important issue Malaysia needs to address. How to overcome this?

Part 4 — A holistic approach: Free the economy, stop state capture, central planning and government interventions

Malaysia’s low wages reflect the structure of our economy, which has been shaped by decades of public policies. There is no question that wages must rise for the people to raise their standard of living. But sustainable wage growth must be in lockstep with labour productivity gains. Simply forcing wages higher is not a solution. Companies must also be able to afford the higher wages. And to do so — to improve profits and efficiency — there must be real structural reforms. Not just soundbites.

Having a five-year economic plan with lofty ambitions is useless unless it is underpinned by policies to that effect, just as Malaysia’s current economic structure is shaped by past government policies. Failure to achieve previous targets — for instance, to reach high-income status — is not simply a failure in execution. It is the absence of policies to drive change from a low-cost economic structure to a higher value-added, knowledge-based economy. Case in point: the education policy, or lack thereof.

Human capital is the single most important, fundamental part of the wealth of a nation. This subject was well researched and articulated by 2023 Economics Nobel prize winner Claudia Goldin in her book The Race between Education and Technology. It was the US’ embrace of free and universal education of its population through the better part of the 20th century — decades ahead of richer European countries at the time — that propelled its technological dynamism, rapid economic growth and greater income equality to become the richest nation in the world. We will return to this in the near future.

Earlier in this article, we asked for an honest assessment of this question — do we have the necessary skills and knowledge (quality and level of education) to step up productivity and justify higher wages?

The pressing need for education system reforms has been talked about for years and years. Yet, nothing much has changed in terms of actual efforts to arrest the continual decline in the quality of public education in Malaysia.

Is the country underinvesting in education? Likely. Government spending on education (as a percentage of GDP) fell from 6% in 2000 to 4.5% in 2020. The percentage of Malaysians with at least upper-secondary education was 62.6% in 2019, compared to 74.5% in Singapore and 76.4% in South Korea. The percentage of population with at least a diploma was a mere 22.6% in 2019, compared with 57.2% in Singapore and 40.3% in South Korea. To be sure, Singapore and South Korea spend a lot more on education per population. This is probably a function of their higher GDP.

What is worse than not spending enough is the effectiveness of money spent. Case in point: Malaysia spends, on average, US$2,037 per population (aged five to 19) on education, much higher than the US$1,250 in Thailand and US$520 in Indonesia. Yet, our percentages of 15-year-old students reaching Levels 5 and 6 proficiency in the Programme for International Student Assessment (PISA) mathematics, science and reading assessments are little different from both countries (see Table 3).

Are our students inherently not as smart? Not possible. Are we teaching the wrong things the wrong way? Quite likely. Malaysian students fare poorly in PISA scores for mathematics, science and reading — worse, we are backsliding. (PISA assesses whether students can apply the skills/knowledge they have learnt to solve “real world” problems. The emphasis is on critical thinking, not just memorisation of facts) (see Table 4).

According to the latest available DoSM statistics, there are 187,000 unemployed graduates. Based on a 2017 survey, 47% of total graduates are working in non-graduate jobs with comparatively low wages. Is there a lack of jobs for graduates? It is no secret, however, that companies have difficulty hiring. This suggests the issue is skill mismatch in the job market and also in the quality of graduates.

Is the quality of local teachers inferior, leading to poor-quality students? Likely. Singapore, for instance, has very stringent qualification requirements, assessment tests and training periods for candidates before they become a full-fledged teacher. Potential candidates must be in the top 30% of their cohort and demonstrate an interest in children and education when applying for the Post Graduate Diploma in Education (PGDE) administered by the Ministry of Education. In Malaysia, candidates who scored 5As and above in their SPM results may apply to the Teachers’ Training College (Institut Perguruan Malaysia).

Here’s the rub. Contrary to our falling scores in internationally recognised assessments (such as PISA), Malaysian students are doing better in local exams! For instance, the percentage of students passing the SPM has been rising, as are those scoring all As (see Table 5). For political expediency, it is easier to intentionally lower the thresholds for local exams.

Instead of directly addressing the very well-known issue of deteriorating quality of our public education system, successive governments have, in effect, been lowering the quality thresholds in public schools — and, worse, they have chosen to “outsource” education to the private sector.

But private education is expensive, particularly with the secular ringgit depreciation, and this is increasingly weighing on middle-income households. It perpetuates the income-wealth inequality in the country — those who can afford quality (private) education will enjoy much higher wages compared to those who cannot. There is no doubt that access to quality education is essential to equality of opportunity.

And as the world becomes more and more technology-driven, a digital economy requires an educated workforce with the flexibility and adaptability to keep pace with the rapidly changing skill demands.

It is not enough that policies only address the issues of how to attract high value-added investments. The people must be able to fill the demand and raise the potential of future economic growth. And unless the country can raise wages sustainably, through higher productivity gains, the brain drain will continue — competition for talent is global.

Conclusion

So, yes, ultimately we must increase investments and R&D, create more knowledge-based jobs, raise wages and savings, reduce the income-wealth inequality, reduce subsidies for a more efficient economy and pare the fiscal deficit and government debts. To sustainably achieve these objectives, however, we must have a holistic strategy to address all the underlying structural impediments. What is popular does not mean it is right. And equally, what is right is often not popular.

Policies must aim to, concurrently, depoliticise and improve the public education system, halt the brain drain, minimise the culture of entitlement and promote equality of opportunity as well as entrepreneurship. Let small enterprises thrive. Make investments more attractive by opening the economy to free market competition (both local and foreign); reduce restrictions and licensing as well as excessive regulatory approvals; remove rent-seeking, monopolies and oligopolies; and improve efficiency at state enterprises, government-linked companies and government-linked investment companies, and the effectiveness of the institutions. South Korea achieved economic success by focusing on education, technology, export-led growth, effective governance and strategic policies.

Much of what is articulated in this article is not revolutionary. Many of the issues plaguing the economy — and even the solutions — are known. As we have explained, the state of Malaysia’s economy today is largely by design. The fact of the matter is, for more than five decades, public policies, starting with the New Economic Policy (NEP) in 1971, have been shaped by realpolitik.

The “need” to create and protect “local champions” led to decisions such as capital controls and a sharp devaluation of the ringgit during the AFC — decisions that have had a long-lasting negative impact on the economy. The “trickle-down” economic policies that favour a select group of businessmen and corporations fostered a nexus between politicians and these business elites, resulting in rampant rent-seeking, which is an effective tax on, and leakage in, the economy.

State capture — defined as a type of systemic political corruption in which private interests wield undue influence on the state’s decision-making process, shaping policies, laws and rules to their own advantage — is now prevalent in the Malaysian economy. It is stifling competition, entrepreneurship and innovation, and accelerating the brain drain.

Until we can honestly acknowledge and address the realpolitik that has been dictating economic policies and come up with a new set of policies to drive the “new economy” — and, yes, we understand that doing so requires great courage — tackling problems such as wages or removing subsidies to improve fiscal deficits in silos will ultimately fail. Let us have a national discussion, an honest debate, on how we can move up the value chain.

We now have an opportunity to start anew — the digital economy. A “digital first” strategy to build a digital economy based on free-market principles, where the best and brightest can succeed without leaving the country, is needed. Make all public services available digitally, and future services available online first before physical. This is not just about data centres (where few jobs are created) but the ecosystem of solutions, platforms, interfaces, Internet of Things devices, data analytics, artificial intelligence and cybersecurity measures.

With a new Minister of Digital (Transformation) who is an accomplished lawyer, it is time to legislate laws that promote, not restrict, competition and that build an ecosystem for many, not a select few, where all public data is accessible to any business to build new business models with open API (application programming interface), and not be restricted to one or a few to create rent-seekers, where digital infrastructure is public goods, not a private monopoly or oligopoly.

The plans and necessary laws have been drafted in the final report (dated July 8, 2021) of the legislative and regulatory framework committee of the Digital Council (chaired by myself and Tan Sri Jamaludin Ibrahim, along with representatives from the relevant ministries and agencies, including the Malaysian Communications and Multimedia Commission, Attorney General’s Chambers, Bank Negara Malaysia, Malaysia Digital Economy Corporation Sdn Bhd, Malaysian Administrative Modernisation and Management Planning Unit, Malaysia Office of the Chief Government Security Officer and National Registration Department), including the Omnibus Act for data sharing in the public sector, Digital ID and Digital Signatures, classification of data residency and data sovereignty, and Private Data Protection Act (PDPA) amendments. The aim was to create a framework to guide laws for the digital economy that promote innovation and entrepreneurship, increase digital adoption by building trust, and encourage private sector participation and investments. We hope the honourable minister will carefully read through the report and implement the necessary.

The Malaysian Portfolio performed exceptionally well in the week ended Jan 17, gaining 7.1%, far outperforming the benchmark FBM KLCI, which rose 0.3%. The gains were driven, primarily, by Insas (+31.1%) and REDtone Digital Holdings (+9.9%). We remain positive on the outlook for Insas, which is trading at a steep discount to its intrinsic value. As such, we disposed of all our shares in Malayan Banking and reinvested the proceeds in Insas-WC (-8.9%), for its additional leverage. Other notable losers last week included Mapletree Pan Asia Commercial Trust N2IU

N2IU

MAPLETREE PAN ASIA COMMERCIAL TRUST

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(-3.4%) and DBS Group Holdings (-1.3%). Total portfolio returns now stand at 191.6% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 18.5%, by a long, long way.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.